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As filed with the Securities and Exchange Commission on February 8, 2000
Registration No. 333-94791
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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MAGNA ENTERTAINMENT CORP.
(formerly MI Entertainment Corp.)
(Exact name of Registrant as specified in its charter)
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Delaware 7999 98-0208374
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
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285 West Huntington Drive
Arcadia, California 91007
(626) 574-7233
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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DAVID A. MITCHELL
285 West Huntington Drive
Arcadia, California 91007
(626) 574-7233
(Address, including zip code, and telephone number, including area code, of
agent for service)
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Copies to:
SCOTT M. FREEMAN
Sidley & Austin
875 Third Avenue
New York, NY 10022
(212) 906-2000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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EXPLANATORY NOTE
The Registration Statement covers three distributions of the registrant's
Class A Subordinate Voting Stock:
. the distribution of these shares by Magna International Inc. to holders
of its Class A Subordinate Voting Shares and Class B Shares by way of
special dividend (the "Spin-Off Distribution");
. the distribution on a delayed or continuous basis of these shares upon
the redemption or exchange of exchangeable shares of a Canadian
subsidiary of the registrant to be distributed by Magna to some of its
Canadian shareholders as part of the special dividend referred to above
(the "Redemption Distribution"); and
. the distribution on a delayed or continuous basis of these shares by
some of the registrant's shareholders (the "Selling Shareholders
Distribution").
The Registration Statement contains two forms of prospectus: one to be used
in connection with the Spin-Off Distribution and Selling Shareholders
Distribution in the United States (the "U.S. Distribution") and one to be used
concurrently in connection with the Spin-Off Distribution and the Redemption
Distribution in Canada (the "Canadian Distribution"). The U.S. Prospectus and
Canadian Prospectus are identical except for the front cover page and certain
other pages, and except that the Canadian Propectus includes a "Certificate of
the Company and Promoter" and "Certificate of MEC Holdings (Canada) Inc.". The
form of the U.S. Prospectus is included herein and is followed by the front
cover page and other pages and certificates to be used in the Canadian
Prospectus. Each of the alternate pages for the Canadian Prospectus included
herein is labeled "Alternate Page for Canadian Prospectus".
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (SUBJECT TO COMPLETION OR AMENDMENT)
DATED FEBRUARY 8, 2000
Magna Entertainment Corp.
Class A Subordinate Voting Stock
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This prospectus relates to the distribution of approximately 20% of our
current equity in the form of shares of our Class A Subordinate Voting Stock.
If you hold Magna Class A Subordinate Voting Shares or Magna Class B Shares on
. , 2000, you will automatically receive one-fifth of one share of our Class A
Subordinate Voting Stock for every Magna share you hold on . , 2000. If you
are not resident in Canada, we may withhold some of our shares which would
otherwise be distributed to you in order to comply with Canadian tax laws.
Magna shareholders resident in Canada will, unless they elect otherwise,
receive shares of our Canadian subsidiary, MEC Holdings (Canada) Inc., in
satisfaction of their entitlement to receive shares of our Class A Subordinate
Voting Stock. These shares are exchangeable at any time for, and together with
certain ancillary rights are economically equivalent to, shares of our Class A
Subordinate Voting Stock. We refer to these shares as Exchangeable Shares and
we refer to MEC Holdings (Canada) Inc. as Exchangeco.
We have applied 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 "MIEC". The Toronto Stock Exchange has conditionally
approved the listing of our Class A Subordinate Voting Stock and the
Exchangeable Shares under the symbols "MIE.A" and "MEH", respectively, subject
to the fulfillment by us of the requirements of The Toronto Stock Exchange on
or before May 8, 2000.
IN REVIEWING THIS PROSPECTUS, 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 AND THE EXCHANGEABLE SHARES THAT
THIS PROSPECTUS DESCRIBES IN DETAIL UNDER THE HEADING "RISK FACTORS" BEGINNING
ON PAGE 12.
STOCKHOLDER APPROVAL IS NOT REQUIRED FOR THE DISTRIBUTION OR ANY OF THE OTHER
TRANSACTIONS THAT THIS PROSPECTUS DESCRIBES. WE ARE NOT ASKING YOU FOR A PROXY
AND WE REQUEST THAT YOU NOT SEND ONE TO US.
This prospectus 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 prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is February . , 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Heading Page No.
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<S> <C>
Special Note Regarding Forward-Looking Information................... 2
Questions and Answers About the Distribution......................... 3
Summary.............................................................. 8
Risk Factors......................................................... 12
Distributing Company................................................. 19
The Special Dividend................................................. 19
Our Business......................................................... 22
Our Strategy......................................................... 29
Industry Overview.................................................... 31
Selected Financial and Operating Information......................... 35
Management's Discussion and Analysis of Financial Condition and
Operating Results................................................... 37
Quantitative and Qualitative Disclosures About Market Risk........... 46
Consolidated Capitalization.......................................... 47
Reorganization....................................................... 48
Recent Acquisitions.................................................. 51
Certain Income Tax Considerations.................................... 52
Directors and Executive Officers..................................... 60
Security Ownership of Certain Beneficial Owners and Management....... 64
Certain Relationships and Related Transactions....................... 65
Legal Proceedings.................................................... 67
Trading History and Dividend Record and Policy....................... 67
Description of Our Securities........................................ 67
Description of Exchangeable Shares................................... 71
Selling Shareholders................................................. 78
Plan of Distribution................................................. 78
Legal Matters........................................................ 79
Auditors, Transfer Agent and Registrar............................... 79
Promoter............................................................. 79
Financial Statements................................................. F-1
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included herein constitute "forward-looking statements"
within the meaning of the United States Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on assumptions and
analyses made by us in light of our experience and our perception of historical
trends, current conditions and expected future developments as well as other
factors we believe are appropriate in the circumstances. However, whether
actual results and developments will conform with our expectations and
predictions is subject to a number of risks and uncertainties, including but
not limited to those described below under "Risk Factors". Consequently, all
the forward-looking statements made in this prospectus are fully qualified by
this special note, and there can be no assurance that the actual results or
developments anticipated by us will be realized, or even if realized, that they
will have the expected consequences to, or effects on, us. See "Risk Factors"
below for a description of the most significant risks and uncertainties of our
business.
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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. Magna also holds
Exchangeable Shares. On or about . , 2000, Magna will distribute to holders
of its Class A Subordinate Voting Shares and Class B Shares of record on
. , 2000, by way of special dividend, approximately 15.7 million shares
comprised of our Class A Subordinate Voting Stock and Exchangeable Shares.
Subject to Canadian federal income tax withholding requirements in respect
of shareholders not resident in Canada, Magna will concurrently distribute
to its shareholders of record on . , 2000, its regular quarterly cash
dividend of $ . per Magna share. Magna will not continue to hold any of our
Class A Subordinate Voting Stock, but may continue to hold Exchangeable
Shares.
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) and either Magna Entertainment Corp. (NASDAQ: MIEC; TSE: MIE.A) or
Exchangeco (TSE: MEH).
Q: WHAT WILL I RECEIVE WHEN THE SPECIAL DIVIDEND IS DISTRIBUTED?
A: Subject to Canadian federal income tax withholding requirements in respect
of shareholders not resident in Canada, you will receive one-fifth of one
share of our Class A Subordinate Voting Stock for each Magna Class A
Subordinate Voting Share and Magna Class B Share that you own of record on
. , 2000, rounded down to the nearest whole share, plus an amount of cash
equal to the value of any fractional interest. If you are a Magna
shareholder resident in Canada, you will, unless you elect otherwise,
receive one-fifth of one Exchangeable Share for each Magna Class A
Subordinate Voting Share and Magna's Class B Share that you own of record on
. , 2000, rounded down to the nearest whole share, plus an amount of cash
equal to the value of any fractional interest. 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 leisure and retail-based real estate
projects on the land surrounding some of our racetracks, possibly in
conjunction with business partners and subject to regulatory requirements.
In addition, we will continue to own a real estate portfolio which includes
a gated residential community currently under development, a 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 these two golf courses, including direct operation or leasing to third
party operators, as well as sale and leaseback transactions or outright
sale. We intend gradually to sell the balance of our real estate portfolio
in order to provide capital to be used in our business; accordingly, we will
take steps including servicing this land and obtaining zoning approval to
enhance the value of these 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.
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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.
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 shares of our Class A Subordinate Voting Stock and the
Exchangeable 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 as a result of the separation.
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE DISTRIBUTION?
A: If you are a registered or beneficial shareholder of Magna resident in the
United States, you do not need to do anything to participate in the
distribution. 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. If you are a registered or beneficial shareholder of Magna
resident in Canada and you wish to receive Exchangeable Shares instead of
our Class A Subordinate Voting Stock you do not need to do anything to
participate in the distribution. If you are a registered shareholder of
Magna resident in Canada and you do not wish to receive Exchangeable Shares
instead of shares of our Class A Subordinate Voting Stock, please let the
distribution agent know by following the instructions for doing so enclosed
with this prospectus no later than . , 2000. If you are a beneficial
shareholder of Magna resident in Canada and you do not wish to receive
Exchangeable Shares instead of Class A Subordinate Voting Stock, you should
advise the registered holder of your Magna shares no later than . , 2000.
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 or Exchangeable
Shares to a book-entry account established to hold the stock for you,
subject to Canadian federal income tax withholding requirements in respect
of shareholders not resident in Canada. This credit will occur on the
distribution date. After the distribution date, the distribution agent will
mail you a statement of your ownership of our Class A Subordinate Voting
Stock or the Exchangeable Shares. Following the distribution, you may retain
your shares of our Class A Subordinate Voting Stock or the Exchangeable
Shares 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 Class A Subordinate
Voting Stock or the Exchangeable Shares 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
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manner in which you receive our Class A Subordinate Voting Stock or the
Exchangeable Shares 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 or Exchangeable Shares into
your own name to be held in book-entry form.
Q: WHAT ABOUT FRACTIONAL SHARES?
A: If you are the registered holder of a number of Magna Class A Subordinate
Voting Shares or Magna Class B Shares not evenly divisible by five, you
will receive cash equal to the fair market value (as determined by Magna)
of the fractional share of our Class A Subordinate Voting Stock or the
Exchangeable Shares you would have otherwise been entitled to receive in
addition to any whole shares of our Class A Subordinate Voting Stock or the
Exchangeable Shares you are entitled to receive. Magna will determine the
fair market value of these fractional shares on the basis of the 10-day
weighted average trading price of our Class A Subordinate Voting Stock in
the "if, as and when issued" market prior to the distribution date.
Q: ON WHICH STOCK EXCHANGE WILL SHARES OF YOUR CLASS A SUBORDINATE VOTING
STOCK AND THE EXCHANGEABLE SHARES TRADE?
A: We have applied to The Nasdaq Stock Market, Inc. to approve our Class A
Subordinate Voting Stock for quotation and listing on the Nasdaq National
Market under the trading symbol "MIEC". The Toronto Stock Exchange has
conditionally approved the listing of our Class A Subordinate Voting Stock
and the Exchangeable Shares under the trading symbols "MIE.A" and "MEH",
respectively, subject to the fulfillment by us of the requirements of The
Toronto Stock Exchange on or before May 8, 2000.
Q: WHEN WILL I BE ABLE TO BUY AND SELL YOUR CLASS A SUBORDINATE VOTING STOCK
AND THE EXCHANGEABLE SHARES?
A: Regular trading of our Class A Subordinate Voting Stock is expected to
begin on NASDAQ and The Toronto Stock Exchange on the distribution date.
Prior to that, our Class A Subordinate Voting Stock is expected to trade on
NASDAQ and The Toronto Stock Exchange on an if, as and when issued basis
under the trading symbols " . " and "MIE.W", respectively, beginning on the
date that is two trading days before the record date. Regular trading of
the Exchangeable Shares is expected to begin on The Toronto Stock Exchange
on the distribution date. Prior to that the Exchangeable Shares are
expected to trade on The Toronto Stock Exchange on an if, as and when
issued basis under the trading symbol "MEH.W", beginning on the date that
is two trading days before the record date.
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 on a regular basis through
the distribution date and that its Class A Subordinate Voting Shares and
Class B Shares will trade on The Toronto Stock Exchange on an "ex-dividend"
basis beginning on the date that is two trading days before the record
date. Any Magna Class A Subordinate Voting Share sold on a regular basis on
the New York Stock Exchange beginning on the date that is two trading days
before the record date and ending on the distribution date will be
accompanied by an attached due bill representing your shares of our Class A
Subordinate Voting Stock to be distributed in the distribution.
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Q: WILL MY DIVIDENDS CHANGE AS A RESULT OF THE DISTRIBUTION?
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 average of our after-
tax profits for that 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 and
the Exchangeable Shares will be treated as a taxable dividend for purposes
of Canadian and United States federal income taxation. Canadian resident
shareholders will be subject to tax on the fair market value of the
distribution (which will include the fair market value of the shares of our
Class A Subordinate Voting Stock or the Exchangeable Shares, as the case may
be, the amount of cash in lieu of fractional shares and the amount of the
concurrent Magna regular quarterly cash dividend). Accordingly, Canadian
resident shareholders may be liable for tax under the Income Tax Act
(Canada) without having received a cash payment sufficient to satisfy that
tax liability.
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
may in some circumstances 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 Magna regular
quarterly cash dividend and, if necessary, withholding some portion of the
shares of our Class A Subordinate Voting Stock otherwise distributable.
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. 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. Accordingly, 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 after
the distribution it intends to convert some shares of our Class B Stock to
shares of our Class A Subordinate Voting Stock and dispose of these 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 but continuing to retain control. This may occur through a
combination of: (i) secondary sales by Magna of shares of our Class A
Subordinate Voting 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.
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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 in Austria for Magna-sponsored
corporate and charitable events and business development purposes. Upon
completion of our golf course in Aurora, Ontario, 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: WHY ARE YOU OFFERING CANADIAN SHAREHOLDERS THE ALTERNATIVE OF RECEIVING
EXCHANGEABLE SHARES OF YOUR CANADIAN SUBSIDIARY?
A: Some Canadian resident shareholders of Magna may be subject to restrictions
on their ability to hold foreign property under the Income Tax Act (Canada),
and may not wish to receive shares of our Class A Subordinate Voting Stock
in the distribution. By providing Canadian holders with the alternative of
receiving Exchangeable Shares issued by Exchangeco instead of our Class A
Subordinate Voting Stock, they will have the opportunity of receiving shares
of a Canadian issuer that are not foreign property under the Income Tax Act
(Canada), provided the Exchangeable Shares are listed on a prescribed stock
exchange in Canada, which includes The Toronto Stock Exchange. The
Exchangeable Shares, together with ancillary rights, are economically
equivalent to shares of our Class A Subordinate Voting Stock. If not
previously converted by the holders, the Exchangeable Shares may be redeemed
by Exchangeco for an equal number of shares of our Class A Subordinate
Voting Stock on or after October 1, 2001.
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 prospectus or any other document to which this prospectus
refers, you should contact the Secretary of Magna at 337 Magna Drive,
Aurora, Ontario, Canada L4G 7K1, telephone: (905) 726-7022. This prospectus
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 for U.S. shareholders, and on the System for
Electronic Document Analysis and Retrieval (SEDAR), which can be accessed at
www.sedar.com for Canadian shareholders.
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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 prospectus.
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 and leisure and
retail-based real estate projects on the land surrounding some of our
racetracks. In addition, we own a real estate portfolio which includes a gated
residential community currently under development, a golf course, a golf course
currently under development and other real estate. We may sell the balance of
our real estate portfolio in order to provide capital to be used in our
business.
We operate five horse racetracks and have entered into an agreement to
acquire one further racetrack. 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. A
percentage of the pooled wagers on these races is retained by us.
We own and operate some of the premier horse racing facilities in North
America and produce one of the horse racing industry's best simulcast products.
Based on standard industry measures including total amount wagered, average
daily attendance, average daily amount wagered, average daily on-track amount
wagered and average daily off-track amount wagered, we believe that Santa Anita
Park, Gulfstream Park and Golden Fields are three of the top racetracks in
North America. See "Our Business" for a more detailed description of our
business and assets.
Our Strategy
There are four related components of our corporate strategy: (1) continuing
our consolidation and enhancement of racetracks; (2) combining our simulcast
horse racing products and marketing the signal under our own brand name; (3)
using our competitive position in the horse racing industry and 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.
See "Our Strategy" below for a more detailed discussion of our strategy.
There are a number of risks inherent in our 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 of shares of our
Class A Subordinate Voting Stock and the Exchangeable
Shares to holders of its Class A Subordinate Voting
Shares and Class B Shares.
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Securities and Cash to
be Distributed.......... Magna will distribute, to holders of its Class A
Subordinate Voting Shares and Class B Shares of
record on the record date, approximately 15.7 million
shares comprised of our Class A Subordinate Voting
Stock and Exchangeable Shares. Subject to Canadian
federal income tax withholding requirements in
respect of shareholders not resident in Canada, Magna
will concurrently distribute its regular quarterly
cash dividend of $ . per Magna share. Shareholders
of Magna who are residents of Canada will, unless
they elect otherwise, receive Exchangeable Shares in
satisfaction of their right to receive shares of our
Class A Subordinate Voting Stock.
Distribution Ratio...... You will receive one-fifth of one share of our Class
A Subordinate Voting Stock or of an Exchangeable
Share 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............. . , 2000 (5:00 p.m., New York time).
Distribution Date....... . , 2000 (4:59 p.m., New York time).
Trading Market and There has been no market for our Class A Subordinate
Symbol.................. Voting Stock or the Exchangeable Shares. We have
applied to NASDAQ to approve our Class A Subordinate
Voting Stock for quotation and trading under the
symbol "MIEC". The Toronto Stock Exchange has
conditionally approved the listing of our Class A
Subordinate Voting Stock (symbol "MIE.A") and the
Exchangeable Shares (symbol "MEH"), subject to the
fulfillment by us of the requirements of the Toronto
Stock Exchange on or before May 8, 2000.
Certain Income Tax
Considerations.......... You should carefully read the information under the
heading "Certain Income Tax Considerations" which
qualifies the information set out below.
Canadian residents: The distribution will be treated
for Canadian tax purposes as a taxable dividend
received from a taxable Canadian corporation.
Accordingly, Canadian resident shareholders may be
liable for tax under the Income Tax Act (Canada)
without having received a cash payment sufficient to
satisfy that tax liability.
Non-residents of Canada: The distribution will be
treated as a dividend for Canadian and United States
federal income tax purposes. A non-resident of Canada
who receives the distribution will be subject to
Canadian withholding tax.
Risk Factors............ You should carefully consider the matters discussed
under the heading "Risk Factors" beginning on page 12
of this prospectus.
9
<PAGE>
Selected Financial and Operating Information
The following table sets forth our selected consolidated and pro forma
consolidated financial data as at and for the periods indicated. The selected
consolidated financial data as at and for the nine months ended September 30,
1999 have been derived from our Unaudited Consolidated Financial Statements as
at and for the nine months ended September 30, 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
nine months ended September 30, 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 nine months ended September 30, 1999 have been derived
from and should be read in conjunction with our Pro Forma Consolidated
Financial Statements as at and for the nine months ended September 30, 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 prospectus.
Income Statement Data(1)
<TABLE>
<CAPTION>
Pro Forma
Nine Months Pro Forma Nine Months Five Months
Ended Year Ended Ended Ended Years Ended July 31,
September 30, December 31, September 30, December 31, ------------------------------------------
1999 1998 1999 1998 1998 1997 1996 1995 1994
------------- ------------ ------------- ------------ ------- ------- ------- ------- ------
(in thousands of U.S. dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack............ $127,584 $149,585 $58,954 $ 3,952 $ -- $ -- $ -- $ -- $ --
Real estate.......... 12,167 21,239 12,167 6,597 20,486 15,276 2,460 1,166 121
-------- -------- ------- ------- ------- ------- ------- ------- ------
Total revenue........ 139,751 170,824 71,121 10,549 20,486 15,276 2,460 1,166 121
Costs and Expenses
Racetrack costs and
expenses............ 98,451 126,278 46,292 3,625 -- -- -- -- --
Real estate costs and
expenses............ 12,496 27,355 12,496 8,462 25,864 13,879 4,613 2,713 277
Depreciation and
amortization........ 12,912 18,852 4,676 1,649 1,852 1,824 330 21 22
Interest expense
(income), net....... 717 1,615 264 1,221 1,380 955 (59) (26) 156
-------- -------- ------- ------- ------- ------- ------- ------- ------
Income (loss) before
income taxes........ 15,175 (3,276) 7,393 (4,408) (8,610) (1,382) (2,424) (1,542) (334)
======== ======== ======= ======= ======= ======= ======= ======= ======
Net income (loss).... $ 7,621 $ (5,739) $ 3,000 $(4,231) $(8,610) $(1,382) $(2,424) $(1,542) (334)
======== ======== ======= ======= ======= ======= ======= ======= ======
Earnings (loss) per
share of Class A
Subordinate Voting,
Class B and
Exchangeable Stock
Basic and
diluted(2).......... $ 0.10 $ (0.07) $ 0.04 $ (0.05) $ (0.11) $ (0.02) $ (0.03) $ (0.02) $(0.00)
======== ======== ======= ======= ======= ======= ======= ======= ======
Average number of
shares Class A
Subordinate Voting,
Class B and
Exchangeable 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 78,535
======== ======== ======= ======= ======= ======= ======= ======= ======
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles or U.S. GAAP, which differ in some respects
from accounting principles generally accepted in Canada or Canadian GAAP.
For a discussion of the principal
10
<PAGE>
differences between U.S. GAAP and Canadian GAAP, see Note 15, "Canadian
Generally Accepted Accounting Principles", to our Audited Consolidated
Financial Statements.
(2) On November 5, 1999, Magna completed the reorganization described in this
prospectus. 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 1,662,890 shares of our Class A
Subordinate Voting Stock were issued and outstanding. On December 30, 1999,
14,823,187 shares of our Class B Stock held by Magna were repurchased by us
for $110,000,000. On this date, $110,000,000 was invested by Magna in
Exchangeco in return for 14,823,187 Exchangeable Shares. Our historical
basic and diluted earnings (loss) per share has been calculated assuming
that 78,535,328 shares of our Class B Stock and Exchangeable Shares 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 63,712,141
shares of our Class B Stock, plus 14,823,187 Exchangeable Shares
exchangeable into 14,823,187 shares of our Class A Subordinate Voting Stock
and 1,662,890 shares of our Class A Subordinate Voting Stock 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,
September 30, September 30, December 31, -----------------------------------------
1999 1999 1998 1998 1997 1996 1995 1994
------------- ------------- ------------ -------- -------- ------- ------- -------
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 63,158 $ 23,544 $ 17,503 $ 295 $ 220 $ 133 $ 521 $ 1,338
Note receivable from
Magna................... -- 146,862 -- -- -- -- -- --
Total assets............. 736,716 693,455 364,142 184,802 113,175 76,219 51,636 28,770
Total debt(2)............ 47,423 65,333 32,335 19,495 18,938 22,614 12 --
Magna's net
investment/shareholder's
equity.................. 553,570 545,888 302,502 158,275 87,917 49,985 48,166 27,226
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. GAAP which
differ in some respects from Canadian GAAP. For a discussion of the
principal differences between U.S. GAAP and Canadian GAAP, see Note 15,
"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 that section for details of the terms of the
reorganization.
11
<PAGE>
RISK FACTORS
In reviewing this prospectus, 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
business, financial condition or results of operations.
If any of the following risks actually occur, our business, financial
condition and results of operations could be materially and adversely affected.
In this case, the trading price of shares of our Class A Subordinate Voting
Stock and the Exchangeable Shares could decline substantially, and you may lose
all or part of the value of the shares of our Class A Subordinate Voting Stock
or the Exchangeable Shares being distributed to you.
General risks regarding our business
We have a history of losses and we anticipate losses in the near future on
some of our racetracks
We have only recently been incorporated and we have a very short history of
operations and earnings and therefore we have little historical information on
which to base future projections. We have experienced cumulative consolidated
net losses since inception totaling approximately $14.8 million for periods up
to September 30, 1999. Santa Anita Park, Golden Gate Fields, Remington Park and
Thistledown racetrack have historically operated at a loss and may do so in the
future.
We do not plan to pay dividends until fiscal year 2004, if at all
We have not paid any dividends to date, we do not plan to pay any dividends
until our fiscal year commencing January 1, 2004 and we cannot give any
assurance that we will be in a position to pay dividends then, or thereafter.
See "Description of Our Securities--Corporate Constitution" for a more detailed
description of our dividend policy.
Our business and our expansion plans may be materially adversely affected
if we do not retain our key personnel
We will be highly dependent on the services of members of our senior
management, most of whom have only recently been hired by us and therefore have
not established a track record of working together successfully. We also depend
on the local management of our racetracks and other operating units. The loss
of the services of any of these individuals could adversely affect our
leadership and direction, which may impede the implementation of our strategy.
Our stock price may be volatile
Shares of our Class A Subordinate Voting Stock and the Exchangeable Shares
have not previously traded. The price of shares of our Class A Subordinate
Voting Stock and the Exchangeable Shares may be volatile in the future,
particularly shortly after the distribution, when some of Magna's institutional
shareholders may sell their holdings of our Class A Subordinate Voting Stock or
Exchangeable Shares because they:
. 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.
In addition, the following factors may have a significant effect on the
market price of our Class A Subordinate Voting Stock and Exchangeable Shares:
fluctuations in our operating profits; the announcement of new wagering and
gaming opportunities by us or our competitors; the passage of legislation
affecting horse racing or gaming; developments affecting the horse racing or
gaming industries generally; sales of substantial
12
<PAGE>
amounts of our Class A Subordinate Voting Stock or Exchangeable Shares; and
sales by Magna of our Class A Subordinate Voting Stock held by it, as a result
of its stated intention to reduce its majority equity position in us. Moreover,
publicly-held horse racing and gaming companies have experienced price and
trading volume fluctuations that are often unrelated to these companies'
financial condition and results of operations. A shift away from investor
interest in gaming companies in general could have a material adverse effect on
the market price of our Class A Subordinate Voting Stock and the Exchangeable
Shares, regardless of our financial condition and results of operations.
We may not be able to obtain financing or may only be able to obtain it on
unfavorable terms which may affect the viability of our expansion projects
or make them more costly
We may require additional financing in order to expand our operations. It is
possible that this financing will not be available or, if available, will not
be available on terms which are favorable to us. In addition, Magna has made a
commitment to its shareholders that it will not, 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" for a more detailed description
of our relationship with Magna.
Our relationship with Magna is not at "arm's length" and therefore Magna
may influence us to make decisions that are not in the best interests of
our other stockholders
Our relationship with Magna is not at arm's length. Upon completion of the
distribution, Magna will own all our Class B Stock and some Exchangeable
Shares, but 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 or will enter into arrangements with us so as
to ensure their access to the Fontana Sports and Aurora 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,
but Magna could prematurely terminate them or amend them. The early
termination, amendment or non-renewal of these access arrangements could have a
material adverse effect on our financial condition and results of operations.
We have also granted Magna a right of first refusal to purchase these golf
courses if we decide to sell them. We are currently considering a variety of
options with respect to these golf courses, including direct operation or
leasing to third party operators, as well as sale and leaseback transactions
which would require that Magna not exercise its right of first refusal or
outright sale.
Gaming Risks
Our gaming activities are dependent on government approvals which, if not
granted, could adversely affect our existing business or our growth
Our existing live racing, pari-mutuel wagering and other operations are
contingent upon the continued governmental approval of these operations as
forms of legalized gaming. All our current and proposed operations are subject
to extensive regulations 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.
13
<PAGE>
As of the date of this prospectus, 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 the number of races we conduct and could have a material
adverse effect on our business, financial condition and results of operations.
In addition, we currently devote significant financial and management resources
to complying with the various governmental regulations to which our operations
are subject. Any significant increase in governmental regulation could
materially adversely affect our business, financial condition and results of
operations.
Moreover, any future expansion of our gaming operations will likely require
additional licenses, registrations, permits and approvals. The licensing
process can be both lengthy and costly and there is no assurance of success.
For example, we recently entered into an agreement to acquire the assets
comprising Great Lakes Downs racetrack. This acquisition is subject to a number
of regulatory proceedings, including licensing approvals from the Office of the
Racing Commissioner of the Michigan Department of Agriculture. Although we
anticipate obtaining all required regulatory approvals by mid-February 2000, we
cannot assure you that all of these 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 or bases located in eight states. The Los Angeles County District
Attorney has recently challenged the ability of California residents to conduct
account wagering through these hubs or bases. Our expansion opportunities in
this area may be limited unless more states change their laws to permit
telephone account and interactive television-based betting. Wagering over the
Internet is also subject to extensive legal restriction. The United States
Congress is currently considering enacting the Internet Gambling Prohibition
Act, also known as the "Kyl Bill", which would amend the Interstate Wire Act to
make it clear that persons engaged in the United States in the business of
betting or wagering through the Internet as well as casual bettors who
knowingly use a communication facility for betting or gambling over the
Internet can be fined or imprisoned. Internet service providers would be
required to block-out gambling sites and would be subject to state and federal
authority. The Kyl Bill would permit telephone account, interactive television
and Internet-based account wagering on horse racing, but not other sports. A
similar piece of legislation was recently introduced in the House of
Representatives by Rep. Bob Goodlatte (R. Va.). We cannot predict the final
disposition of either piece of legislation.
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 to conduct a comprehensive study of the social and
economic effects of the gambling industry in the United States. This commission
reviewed existing federal, state and local policy and practices with respect to
the legalization or prohibition of gambling activities with the aim of
formulating and proposing changes in these policies and practices and
recommending legislation and administrative actions for these proposed changes.
The National Gambling Impact Study Commission 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 National Gambling Impact Study Commission 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 into homes through such mediums as
account wagering;
. banning betting on all collegiate and amateur athletic events; and
14
<PAGE>
. refusing the introduction of casino-style gambling into pari-mutuel
facilities for the primary purpose of saving a pari-mutuel facility that
the market has determined no longer serves the community or for the
purpose of competing with other forms of gaming.
The recommendations made by the National Gambling Impact Study Commission
could result in the enactment of new laws and/or the adoption of new
regulations which would materially adversely impact the gambling industry in
general and thus would materially adversely affect our growth prospects. We are
unable, at this time, to determine the ultimate disposition of the National
Gambling Impact Study Commission's recommendations.
We face significant competition from operators of other racetracks and
other forms of gaming which could decrease the amount wagered at our
facilities and adversely affect our profitability
We face significant competition in each of the jurisdictions in which we
have gaming operations and this competition is expected to intensify as new
gaming operators enter our markets and existing competitors expand their
operations and consolidate management of multiple racetracks. One of our
competitors, Churchill Downs Inc., may have substantially greater name
recognition and financial resources. We also compete for customers with other
sports, entertainment and gaming operators, including competitors like Caesars
World, 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
profitability may be materially adversely affected.
In addition, Florida tax laws currently discourage the three Miami-area
racetracks, Gulfstream Park, Hialeah Park and Calder Race Course, from
scheduling concurrent races. We expect that a new tax structure will eliminate
this deterrent in 2001. As a result, Gulfstream Park racetrack may face direct
competition from other Miami-area racetracks in the future. This competition
could have a material adverse effect on the profitability of Gulfstream Park,
which could reduce our overall profitability.
State and provincial lotteries benefit from numerous distribution channels,
including supermarkets and convenience stores, as well as from frequent and
extensive advertising campaigns. We do not have the same access to the gaming
public or the advertising resources available to state and provincial
lotteries.
Declining on-track attendance and increasing competition in simulcasting
may adversely affect our financial results
There has been a general decline in the number of people attending and
wagering at live horse races at North American racetracks due to a number of
factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks, 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 as well as increased competition in the simulcast wagering market
could lead to a decrease in the amount wagered at our facilities and may have a
material adverse effect on the overall profitability of our horse racing
operations.
We currently face significant competition from Internet and on-line
wagering which may reduce our profitability
Although we currently do not operate any Internet or online gaming services,
we currently face competition from operators of those gaming services. Internet
and online gaming services allow their customers to wager on a wide variety of
sporting events from home. Unlike Internet and on-line gaming operators, our
business requires significant and on-going capital expenditures in order to
continue operations and in order to expand. We currently cannot offer the
diverse gaming options offered by Internet and on-line gaming operators
15
<PAGE>
and face significantly greater costs in operating our business. Our inability
to compete successfully with these operators could limit our market share and
growth and may have a material adverse effect on our profitability.
Expansion of gaming conducted by California native American tribes will
lead to increased competition in our industry which may negatively impact
our growth and profitability
In November 1998, California voters passed Proposition 5, a ballot
initiative that would have allowed native American tribes to conduct various
gaming activities including pari-mutuel wagering, gambling, some types of card
games, and lotteries. On August 23, 1999, the California Supreme Court
overturned Proposition 5 on the basis that the initiative violated the state
constitution. The California state government recently reached agreements with
California native American tribes to permit a doubling of the number of gaming
machines currently operated by these tribes, as well as the introduction of
slot machines and poker and blackjack tables on California native reserves. The
governor of California, the state legislature and these native American tribes
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 will lead to increased competition and may have a material
adverse effect on the profitabilty of Santa Anita Park, Golden Gate Fields and
our future growth in California.
If a U.S. federal gaming tax is introduced, our financial results may be
adversely affected
From time to time, U.S. legislators have proposed the imposition of a U.S.
federal tax on gross gambling revenues. The imposition of this type of tax
could have a material adverse effect on our net income and therefore our
overall financial condition.
Our profitability may be adversely affected if we are unable to integrate
recent racetrack acquisitions, which comprise all our horse racing
operations, and to complete and integrate future acquisitions
Our racetrack operations have been acquired very recently. The acquisition
of Santa Anita Park was completed in December 1998 and the acquisition of
Gulfstream Park was completed in September 1999. The acquisition of Remington
Park and Thistledown Racetrack was completed in November 1999 and the
acquisition of Golden Gate Fields was completed in December 1999. In addition,
we expect to complete the acquisition of Great Lakes Downs in mid-February
2000. These operations have been operating independently in the past under
different management. Integrating these recently acquired businesses into our
operations will require a significant dedication of management resources and an
expansion of our information systems. This dedication may distract us from our
day-to-day operations which could result in less efficient and more costly
operations as well as a failure of our management to focus on other important
issues.
We also plan to continue pursuing acquisition opportunities and we may issue
our Class A Subordinate Voting Stock as full or partial consideration in
connection with these acquisitions. Our future profitability will depend to
some degree upon the ability of our management to identify, complete and
integrate commercially viable acquisitions. We cannot give any assurance to you
that we will successfully complete and integrate the new acquisitions.
Furthermore, to the extent that we issue any shares of our Class A Subordinate
Voting Stock in connection with any of these acquisitions, the percentage of
our voting stock that you own will decrease.
If we do not successfully integrate our new or future acquisitions, or if
this integration consumes a significant amount of our management's time, then
these acquisitions may adversely affect our efficiency and therefore our
profitability.
If we are unable to negotiate a satisfactory union contract by July 24,
2000, some of our employees may commence a strike which may lead to lost
revenues and could have a material adverse effect on our business
As of December 31, 1999, we employed approximately 1,500 employees,
approximately 800 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
16
<PAGE>
on July 24, 2000. Although we expect that we will be able to negotiate a new
union contract with Local 280 through the collective bargaining process, we
cannot guarantee that we will be able to negotiate a satisfactory contract. If
we are unable to negotiate a satisfactory union contract, some of our employees
may commence a strike and any strike, if commenced, may lead to lost revenues
and therefore have a material adverse effect on our financial condition and
results of operations.
Our operating results may be impacted by inclement weather and may
fluctuate seasonally
We experience significant fluctuations in quarterly and annual operating
results due to seasonality. We have a limited number of live racing days at
each of our racetracks and the number of live racing days varies from year to
year. The number of live racing days we have directly affects our operating
results. A significant decrease in the number of live races could have a
material adverse effect on our business, financial condition and results of
operations. 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 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 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 the profitability of our horse racing operations.
An earthquake in California could affect our operations at Santa Anita Park
and Golden Gate Fields, which could adversely impact our cash flow from
these racetracks
Two of our primary assets, Santa Anita Park and Golden Gate Fields, are
located in California and are therefore subject to earthquake risks. Since the
structures at our California racetracks are low-rise buildings, the risk of
earthquake damage is not considered to be high and, as a result, we do not
currently maintain earthquake insurance on these structures. We currently
maintain fire insurance for fire risks, including those resulting from
earthquakes, subject to policy limits and deductibles. There can be no
assurance that earthquakes or the fires often caused by earthquakes will not
seriously damage our California racetracks and related properties or that the
recoverable amount of insurance proceeds will be sufficient to cover
reconstruction costs and other losses suffered fully. If an uninsured or
underinsured loss occurs, we could lose anticipated income and cash flows from
our California racetracks.
Real Estate Ownership and Development Risks
Owning and developing real estate may involve significant ongoing
expenditures or losses that could adversely affect our results of
operations
All real estate investments are subject to risks including: general economic
conditions, such as the availability and cost of financing; local real estate
conditions, such as an over-supply of residential, office, retail space or
warehousing or a reduction in demand for real estate in the area; governmental
regulation, including taxation of property and environmental legislation; and
the attractiveness of properties to potential purchasers or tenants. Each
segment of the real estate industry is capital intensive and sensitive to
interest rates. Further significant expenditures, including property taxes,
mortgage payments, maintenance costs, insurance costs and related charges, must
be made throughout the period of ownership of real property and during the
period of making improvements to the property. Further, governments can, under
eminent domain laws, take real property for less than an owner might otherwise
agree.
If interest rates or other real estate costs escalate, this could adversely
affect our ability to finance our expansion projects and also our
profitability.
17
<PAGE>
We may not be able to sell some of our real estate when we need to or at
the price we want, which could adversely affect our financial condition
At times, it may be difficult for us to dispose of some types of real
estate. The costs of holding real estate are high and, during a recession, we
may be faced with ongoing expenditures with little prospect of earning revenue
on our real estate properties. If we have inadequate cash reserves, we may have
to dispose of properties at prices which are substantially below the price we
desire, and in some cases, below the price we originally paid for the
properties.
We require government approvals for some of our properties which may take a
long time to obtain or which may not be granted, either of which could
adversely affect our existing business or our growth
Some of our properties will require zoning and other approvals from local
government agencies. For example, our applications for re-zoning land in
Aurora, Canada and Ebreichsdorf, Austria are currently being considered. The
process of obtaining these approvals may take many months and there can be no
assurance that we will obtain the necessary approvals for either of those lands
or any other lands. Furthermore, in the case of the land held by us in Aurora,
Canada, the transfer of this land to us is conditional on obtaining severance
and other approvals. We cannot give any assurance that we will obtain these
approvals and we cannot give any assurance that we will ultimately acquire this
land. Holding costs accrue while regulatory approvals are being sought and
delays can render a project economically unfeasible. If we do not obtain any of
these approvals our plans, growth and profitability could be affected.
We may not be able to complete expansion projects successfully, which would
materially affect our growth and our results of operations
We intend to develop our racetracks further and possibly expand our gaming
activities. Numerous factors, including regulatory and financial constraints,
could cause us to alter, delay or abandon our existing plans. If we proceed to
develop new facilities or enhance our existing facilities, we face numerous
risks that could require substantial changes to our plans, including time
frames or projected budgets. These risks 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 "Our Business--
Horse Racing and Pari-Mutuel Wagering--Santa Anita Park" for a description of
these upgrades. The disruption caused by these upgrades reduced the total
amount wagered at Santa Anita Park's simulcast wagering facilities and
attendance at The Oak Tree Meet in 1999. Even if completed, our expansion
projects may not be successful, which would affect our growth and could have a
material adverse effect on our long term financial projections.
We face strict environmental regulation and may be subject to liability for
environmental damage that we did not cause, which could adversely affect
our financial results
Various environmental laws and regulations in the United States, Canada and
Europe impose liability on us as a current or previous owner and manager of
real property, for the cost of maintenance, removal and remediation of
hazardous materials released or deposited on or in properties now or previously
owned or managed by us or disposed of in other locations. Our ability to sell
properties with contamination or hazardous or toxic substances or borrow using
that property as collateral may also be adversely affected. We cannot give you
any assurance that all circumstances giving rise to exposure under
environmental laws are currently known to us. Changes to environmental laws and
regulations, resulting in more stringent terms of compliance, could expose us
to additional liabilities and ongoing expenses.
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DISTRIBUTING COMPANY
Our parent company, Magna, is one of the most diversified automotive
suppliers in the world and designs, develops and manufactures automotive
systems, assemblies and components and engineers and assembles complete
vehicles, primarily for sale to original equipment manufacturers of cars and
light trucks in North America, Europe, Mexico, South America and Asia. Magna's
products include:
. exterior decorative systems;
. interior products including complete seats, instrument and door panel
systems and sound insulation;
. formed and welded metal parts and assemblies;
. sunroofs;
. mirrors;
. latching systems and window regulator systems;
. electro-mechanical devices and assemblies;
. a variety of plastic parts, including body panels and fascias through
Decoma International Inc.;
. various engine, powertrain and fueling and cooling components through
Tesma International Inc.; and
. complete vehicle engineering and assembly.
Magna has over 58,000 employees in 164 manufacturing operations and 30
product development and engineering centers in 19 countries.
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 shares of our Class A Subordinate Voting Stock and
Exchangeable Shares 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
. 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
. , 2000 to holders of Magna's Class A Subordinate Voting Shares and Class B
Shares of record on . , 2000, a special dividend payable in our Class A
Subordinate Voting Stock or Exchangeable Shares, on the basis of one-fifth of
one share of our Class A Subordinate Voting Stock or Exchangeable Share for
each Magna Class A Subordinate Voting Share or Magna
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Class B Share held. Magna expects to distribute approximately 15.7 million
shares comprised of our Class A Subordinate Voting Stock and the Exchangeable
Shares. Subject to Canadian federal income tax withholding requirements in
respect of shareholders not resident in Canada, 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 and the
Exchangeable Shares. Magna's distribution agent will credit the shares of our
Class A Subordinate Voting Stock and the Exchangeable Shares distributed on the
distribution date to book-entry accounts established for all record holders of
our Class A Subordinate Voting Stock and the Exchangeable Shares. Following the
distribution, the distribution agent will mail an account statement to each
holder of Magna Class A Subordinate Voting Shares or Class B Shares stating the
number of shares of our Class A Subordinate Voting Stock or the Exchangeable
Shares distributed to that holder in the distribution. After the distribution,
registered holders of our Class A Subordinate Voting Stock or the Exchangeable
Shares 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 or the Exchangeable Shares 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 or the
Exchangeable Shares. Magna anticipates that stockbrokers and banks generally
will credit their customers' accounts with shares of our Class A Subordinate
Voting Stock or the Exchangeable Shares on the distribution date.
Subject to Canadian federal income tax withholding requirements in respect
of non-residents of Canada, you will receive one-fifth of one share of our
Class A Subordinate Voting Stock or of an Exchangeable Share 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, provided that no fractional
interests are to be distributed to any shareholder of record. If you are the
registered holder of a number of Magna Class A Subordinate Voting Shares or
Magna Class B Shares not evenly divisible by five, you will receive cash equal
to the fair market value (as determined by Magna) of the fractional share of
our Class A Subordinate Voting Stock you would have otherwise been entitled to
receive in addition to any whole shares of Class A Subordinate Voting Stock you
are entitled to receive. Magna will determine the fair market value of these
fractional shares on the basis of the 10-day weighted average trading price of
our Class A Subordinate Voting Stock in the "if, as and when issued" market
prior to the distribution date.
Magna shareholders resident in Canada may elect to receive Exchangeable
Shares of Exchangeco in satisfaction of their entitlement to receive shares of
our Class A Subordinate Voting Stock. Each Exchangeable Share may be exchanged
by the holder at any time for, and, together with certain ancillary rights, is
the economic equivalent of, a share of our Class A Subordinate Voting Stock. To
understand how to exchange the Exchangeable Shares, see "Description of the
Exchangeable Shares". Registered holders of Magna shares resident in Canada
will be deemed to have elected to receive Exchangeable Shares in satisfaction
of their entitlement to receive shares of our Class A Subordinate Voting Stock
unless they specifically advise the distribution agent to the contrary prior to
. , 2000 by following the instructions for doing so enclosed with this
prospectus.
We will not receive any proceeds from this distribution.
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
distribution. See "Certain Income Tax Considerations--Certain Canadian Federal
Income Tax Considerations" for a more detailed discussion of this withholding
tax. The fair market value of the distribution will include the fair market
value of the shares of our Class A Subordinate Voting Stock, the amount of cash
in lieu of fractional shares and the amount of the regular quarterly cash
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dividend. Magna will determine the fair market value of our Class A Subordinate
Voting Stock at the time of distribution on the basis of the 10-day weighted
average trading price in the "if, as and when issued" market prior to the
distribution date. In order to satisfy this withholding tax liability, Magna
will withhold from non-residents of Canada the appropriate amount of the
regular quarterly cash dividend otherwise payable which it intends to pay
concurrently with the special dividend and, if necessary, will also withhold
some portion of the shares of our Class A Subordinate Voting Stock otherwise
distributable. We will withhold the number of shares having a fair market value
at the time the distribution is paid, as determined by Magna in the manner
described above, equal to any shortfall in the amount that Magna is required to
remit to Revenue Canada in respect of its withholding tax obligation relating
to the distribution, after taking into account the amount of cash withheld from
the concurrent regular quarterly cash dividend otherwise payable. In any event,
the number of withheld shares will not exceed 25% of the shares of our Class A
Subordinate Voting Stock that would otherwise be distributed to a non-resident
holder. Magna will remit to Revenue Canada, on behalf of that non-resident
holder, the appropriate amount of cash withheld from the concurrent regular
quarterly cash dividend together with an amount of cash equal to the fair
market value of any withheld shares.
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OUR BUSINESS
We acquire, develop and operate horse racetracks and related pari-mutuel
wagering operations. As a complement to our horse racing business, we are
exploring the development of media sports wagering operations, including
telephone account, interactive television and Internet-based wagering, as well
as leisure and real estate projects on the land surrounding some of our
racetracks, possibly in conjunction with business partners and subject to
regulatory requirements. In addition, we own a real estate portfolio which
includes a gated residential project under development, a golf course and
related recreational facilities, another golf course under development and
other real estate. We are currently considering a variety of options with
respect to these two golf courses, including direct operation or leasing to
third party operators, as well as sale and leaseback transactions (which would
require that Magna not exercise its right of first refusal) or outright sale.
We intend gradually to sell the balance of our real estate portfolio in order
to provide capital to be used in our business; accordingly, we will take steps
including servicing our land and obtaining zoning approval to enhance the value
of these 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
prospectus.
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 or simulcasts received or imported by
the simulcast wagering facilities located at the racetracks. These wagers are
collectively referred to as on-track wagering. Pari-mutuel wagering on horse
racing also occurs at wagering establishments on horse races being conducted at
tracks elsewhere. This type of wagering is referred to as 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.
Horse Racing and Pari-Mutuel Wagering
We operate five horse racetracks and have entered into an agreement to
acquire one further racetrack. 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, Gulfstream Park near Miami, Florida, Golden Gate Fields, near San
Francisco, California, Thistledown Racetrack near Cleveland, Ohio and Remington
Park in Oklahoma City, Oklahoma. We also own San Luis Rey Downs, a horse
training track located outside of San Diego, California. We have acquired all
these racetracks since December 1998. We have also entered into an agreement to
buy the assets and assume approximately $9.3 million of liabilities of Great
Lakes Downs, Inc. and Great Lakes Downs Cafe, Inc., which operate the Great
Lakes Downs racetrack in Muskegon, Michigan, subject to obtaining the necessary
regulatory and other approvals. We expect to complete this acquisition in mid-
February 2000.
We own and operate some of the premier horse racing facilities in North
America and one of the horse racing industry's best simulcast products. For
example, Santa Anita Park has hosted the Breeders' Cup twice since the
inception of the Breeders' Cup in 1984 and Gulfstream Park has hosted it three
times, the most recent being on November 6, 1999. Furthermore, by many standard
industry measures including total handle or total amount wagered, average daily
attendance, average daily handle, average daily on-track handle and
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average daily off-track handle, we believe that Santa Anita Park, Gulfstream
Park and Golden Gate Fields are three of the top racetracks in North America.
Santa Anita Park
Santa Anita Park is one of the premier horse racetracks in North America.
Santa Anita Park was the site of the Breeders' Cup in both 1986 and 1993. Santa
Anita Park is situated on approximately 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 that
year. In addition, Santa Anita Park's simulcast program generates significant
demand from other racetracks and off-track wagering establishments, generating
an average of approximately $7.0 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 December 1999, we completed an extensive capital renovation program at
Santa Anita Park in order to enhance our patrons' entertainment experience. The
improvements to Santa Anita Park include: the construction of a fully enclosed
750 seat restaurant and bar that will be used for racing and group functions
throughout the year; the installation of a large format light emitting diode or
LED screen in the infield track area for racing patrons and for use by the
restaurant and bar to promote non-racing events, including the Super Bowl, the
World Cup and other similar events; improvements to the Winners' Circle and
trackside apron to provide patrons with better views of the track; upgrades to
the grandstand to current seismic code requirements; completion of fire safety
installations as required by the Fire Marshall; and the initiation of
improvements to the entrance way and parking lot of the racetrack. These
renovations cost approximately $45.0 million. We are also considering a number
of other upgrades to further strengthen Santa Anita Park's ability to attract
top horses, trainers and jockeys and to enable us to expand the market for
Santa Anita Park's simulcast signal.
We are also currently considering a variety of themed entertainment and
retail-based development proposals for approximately 85 acres of available land
at Santa Anita Park, some of which could be developed in conjunction with
business partners. This development would be intended to further enhance the
total
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entertainment experience at Santa Anita Park, attract new patrons from diverse
demographic backgrounds and strengthen the loyalty of existing patrons. These
proposals are only in their preliminary stages, as any development of this
nature would require the preparation of detailed feasibility studies and
business plans and extensive consideration by our management of all relevant
issues. If any proposal turns out to be commercially viable after a detailed
review, additional time would be required to obtain the necessary regulatory
approvals, negotiate with potential business partners and obtain the necessary
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 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.
Golden Gate Fields
Golden Gate Fields racetrack is one of the premier horse racing and pari-
mutuel wagering facilities in North America in terms of total handle. Golden
Gate Fields is located on approximately 181 acres of land in the Cities of
Albany and Berkeley, California, approximately 8 miles from downtown Oakland
and approximately 11 miles from San Francisco. Golden Gate Fields' racing
season consists of two meets, one of which runs for 60 days from late March to
mid-June each year and the other of which runs for approximately 45 days from
mid-November of each year to mid-January of the following year. This racing
schedule complements Santa Anita Park's racing schedule by adding racing days
between the end of The Oak Tree Meet and the beginning of The Santa Anita Meet.
Golden Gate Fields had one of the ten highest total handles of all North
American racetracks in 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 recently commenced exporting Golden
Gate Fields' simulcast program to Australia and the Dominican
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Republic. 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.
Thistledown Racetrack
Thistledown Racetrack is located on approximately 125 acres in North
Randall, Ohio, approximately 10 miles southeast of downtown Cleveland.
Thistledown has one of the longest racing seasons of all North American
racetracks, consisting of 187 racing days each year between mid-March and early
December, encompassing the Summit, Thistledown, Randall and Cranwood meets. In
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
combined package under our own brand name. We expect that this will enhance the
quality of horse racing offered at Thistledown and result in an increase in the
number of off-track sites Thistledown's racing signal is exported to and growth
in Thistledown's handle, especially as we expand our distribution channels.
Thistledown's facilities include a grandstand with a total capacity of
approximately 16,000 patrons, a luxury suite for corporate and group events, a
one-mile oval track, stalls for approximately 1,500 horses and parking for
approximately 6,000 cars. Thistledown also owns the rights to an additional 57
racing days plus a further 30 winter racing days which it uses entirely to host
simulcasting at other Ohio racetracks in exchange for a percentage of the
handle on these races.
Remington Park Racetrack
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 combining 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 20,000 patrons, 21 luxury suites for corporate and group
events, a one-mile dirt track, a seven-eighths mile turf course, stalls for
approximately 1,300 horses and parking facilities sufficient to accommodate
approximately 8,000 cars. The property on which Remington Park is located is
leased from Oklahoma Zoological Trust under a lease which extends through 2013,
with options to renew for five 10-year periods.
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
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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.
Great Lakes Downs Acquisition
We have entered into an Asset Purchase Agreement dated as of December 24,
1999 with Great Lakes Downs, Inc. and Great Lakes Downs Cafe, Inc. to acquire
the assets and assume approximately $9.3 million of liabilities of Great Lakes
Downs racetrack in Muskegon, Michigan for a purchase price of approximately
$1.7 million, payable by the issuance of 267,416 shares of our Class A
Subordinate Voting Stock.
Great Lakes Downs is situated on approximately 85 acres in Muskegon,
Michigan, approximately 35 miles from Grand Rapids. Great Lakes Downs, which
commenced operations in January 1999, offers a total of 134 live racing days
beginning in late April and ending in early November of each year. In 1999,
Great Lakes Downs generated a total handle of approximately $55 million.
Simulcasts from Great Lakes Downs are exported to approximately 45 other
racetracks in the United States. We anticipate that as the simulcast signal
from Great Lakes Downs is combined with the simulcast signals from our other
racetracks, Great Lakes Downs will become a good regional track in terms of
handle. Great Lakes Downs' facilities include a grandstand with capacity for
approximately 7,500 patrons, a 5/8 mile dirt track, stalls for approximately
920 horses and parking facilities sufficient to accommodate approximately 2,000
cars.
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 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. See "Risk Factors--Gaming Risks--Our gaming activities are
dependent on government approvals which if not granted could adversely affect
our existing business and our growth" for a discussion of the risks inherent in
expansion into media sports wagering.
Telephone Account Wagering
We are currently considering the establishment of a telephone account
wagering operation, possibly in conjunction with business partners and subject
to regulatory approval. Once established, this type of system would involve
patrons opening an account with us or our strategic partner and depositing
funds into this account through the use of debit or credit cards. Patrons would
then place wagers over the telephone on horse races offered at our racetracks
and on horse races simulcast by other racetracks to our simulcast wagering
facilities. Wagers placed by patrons 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 telephone
account wagering hub or base must be established in any one of eight states in
which telephone account wagering is permitted, which are Connecticut, Kentucky,
Maryland, Nevada, New York, Ohio, Oregon and Pennsylvania. Once an operator has
obtained the required licenses and established a hub, the operator may accept
wagers from patrons living in these eight states and in other states.
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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 device
connected to a television, to wager on the live horse races being shown in the
program. In order to place wagers, patrons must deposit money with the
sponsoring racetrack through the use of debit or credit cards. We would derive
revenue from our patrons' subscriptions and our share of the wagers placed on
the races broadcast.
Interactive television-based wagering would allow us to increase the market
for our simulcast product by utilizing an important distribution channel for
this product. We currently have the non-exclusive right to broadcast races from
Santa Anita Park and Golden Gate Fields, although races from Gulfstream Park
are subject to an exclusive contract with TV Games Network until 2003.
Commencing in 2003, we will have the exclusive right to broadcast races from
Santa Anita Park, Gulfstream Park and Golden Gate Fields, three of the most
sought-after racing signals in North America. Interactive television-based
wagering would significantly enhance our ability to cross promote our live
horse racing and we expect it would enable us to attract new patrons to horse
racing and cultivate their loyalty. We would aim to show full racing cards and
to develop an appealing, convenient and easy-to-use format which would provide
a fresh new look for horse racing. Furthermore, we would aim to broadcast the
programming we develop for interactive television-based wagering through a
variety of sources, including satellite television, cable television and the
Internet. As our operations expand, we would apply the experience we gain in
interactive television-based wagering on horse races in expanding to wagering
in other sports.
Due to the growth of the Internet as a medium of both communication and
commerce, we are exploring the possibility of establishing an Internet-based
gaming service, possibly in conjunction with a strategic partner and subject to
regulatory approval. Establishing this type of service would enable us to
increase the market for our simulcast product by maximizing the opportunities
presented by the Internet as a distribution channel for our live horse racing
product. It would also enable us to achieve economies of scale since the
programming we would aim to broadcast on the Internet would be the same as that
produced for our interactive television-based wagering. As with interactive
television-based wagering, we would expect to develop a competitive position on
the strength of our live horse racing product and we would expect this
competitive position to strengthen by 2003 when we will have the exclusive
right to broadcast races from Santa Anita Park, Gulfstream Park and Golden Gate
Fields. As our operations expand, we would likely be able to apply the
experience we gain in Internet-based wagering on horse races to other sports.
Real Estate Portfolio
We currently own a portfolio of real estate properties in North America and
Europe, including a gated residential community currently under development, a
golf course and related recreational facilities, another golf course under
development and other real estate. We intend gradually to sell the balance of
our real estate portfolio in order to provide capital to be used in our horse
racing business; accordingly, we will take steps including servicing this land
and obtaining zoning approval to enhance the value of these properties and
increase the revenues from resale.
Our real estate portfolio includes land currently being developed in Austria
and undeveloped and partially developed land in both Austria and Canada. We are
currently developing a gated residential community, known as Fontana, situated
amidst the Fontana Sports golf course and related recreational facilities owned
and operated by us. This residential development consists of approximately 50
acres 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.
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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 a second
golf course which is being completed in Aurora, Canada. Fontana Sports is a
semi-private sports facility adjacent to the Fontana residential community.
The Fontana Sports facility includes an 18-hole golf course, tennis club,
fitness facility and a restaurant. The Aurora golf course 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 the Aurora golf course. The Aurora golf course is
scheduled to officially open in May 2001. We expect that amenities will
include a clubhouse with a restaurant, a members' lounge, a spa and a pro
shop. Our parent company, Magna, is currently paying us an annual access fee
of $2.7 million pursuant to an arrangement effective as of March 1, 1999 to
access the Fontana Sports facility for Magna-sponsored corporate and
charitable events as well as for business development purposes. Upon
completion of the Aurora golf course, Magna will pay us an annual access fee
to use the Aurora golf course for Magna-sponsored corporate and charitable
events and business development purposes. These access arrangements are
scheduled to expire five years after their effective dates. We have also
granted Magna a right of first refusal to purchase these golf courses, if we
decide to sell them. We are 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.
For further information regarding our relationship with Magna, 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 these adjacent and proximate lands will be significantly enhanced through
the presence of these golf courses.
Finally, we own a portfolio of other real estate in Austria, Canada and the
United States. We are currently servicing, improving and seeking zoning 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 10 to the
Consolidated Financial Statements.
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OUR STRATEGY
There are four related components of our strategy: (1) continuing our
consolidation and enhancement of racetracks; (2) combining our simulcast horse
racing products and marketing the signal under our own brand name; (3) using
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, Gulfstream Park, Golden Gate
Fields, Thistledown Racetrack and Remington Park, and the acquisition of Great
Lakes Downs 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,
electronic advertising and marketing space on an Internet website, Internet
distribution channel and interactive television channel.
In addition, we have made enhancements to the facilities at Santa Anita
Park, including construction of a 750 seat restaurant and bar, installation of
a large format LED screen in the infield track area, upgrades to the grandstand
and trackside apron and improvements to the Winners' Circle. We are also
examining further upgrades at some of our other 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. Combining 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. The 1999 racing
schedule of our racetracks consisted of 293 race days and the 2000 racing
schedule of our racetracks will consist of approximately 326 race days
broadcast from six racetracks including three of the top ten U.S. racetracks,
in terms of total handle. Over the next few years, we intend to combine the
signals from our racetracks, and possibly also signals from racetracks not
owned by us, and market this combined simulcast product through a single signal
marketed under our own brand name. This combining of signals would offer off-
track wagering facilities importing our signals greater convenience and lower
operating costs and would offer our wagering patrons more convenient access to
our complete simulcast product. We expect that this would also increase the
exposure of, and the wagers at, our smaller racetracks, thereby increasing the
revenues available to us to further enhance the quality of the horse racing we
offer at these tracks through more attractive purses and enhanced facilities.
Combining these signals 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 would also enable us to cultivate a
loyal customer base for both our live racing and simulcast product.
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3. Using 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 use 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 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 this
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 land surrounding some of our racetracks, possibly
in conjunction with business partners. These 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 we expect would increase customer
attendance at our horse racetracks. These developments would be intended to
create total entertainment destinations centered on our horse racetracks and
could enhance the status of our 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 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 decline in the 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 these 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 racetracks 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 these developments.
Since live attendance at horse racetracks 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
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management of some of the premier racetracks in the United States. We own and
operate Santa Anita Park, Gulfstream Park, Golden Gate Fields, Thistledown
Racetrack and Remington Park, and we have entered into an agreement to acquire
the assets and assume approximately $9.3 million of liabilities of Great Lakes
Downs. Similarly, our principal competitor, Churchill Downs Inc., operates a
number of racetracks, including: Churchill Downs Racetrack in Louisville,
Kentucky, home of the Kentucky Derby; 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 racetracks and seek to acquire the rights
to simulcast races conducted at other racetracks.
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. These 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 combine the signals from races at
their various racetracks and sell these combined signals as a package to off-
track wagering facilities. This has the effect of generating greater revenues
for these racetracks, thus enabling larger purses and higher quality racing to
be offered, even at the smaller racetracks owned by these 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 horse racing. Similarly,
alternative sources of entertainment, including attendance at or wagering on
professional sports events, also create competition by diverting gaming
revenues to these other forms of activity.
Government Regulation
Horse racing is a highly regulated industry. Individual states control the
operations of racetracks located within these 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 these 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 details like the presence and placement of
specific race officials, including 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.
Further, under the authority provided by these statutes, eight
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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, the Oklahoma Horse Racing Commission, the Ohio State Racing
Commission and, upon completion of the acquisition of the assets of Great Lakes
Downs, the Office of the Racing Commissioner of the Michigan Department of
Agriculture. As part of this regulation, licenses to conduct live horse racing
and to participate in simulcast wagering must be obtained annually and there is
no assurance that these licenses will be granted.
In California, The California Horse Racing Board is responsible for
regulating the form of wagering, the length and conduct of meets and the
distribution of the pari-mutuel wagers within the limits set by the California
legislature. The California Horse Racing Board has annually licensed one of our
subsidiaries, Los Angeles Turf Club, Incorporated, and Oak Tree Racing
Association to conduct racing meets at Santa Anita Park. At present, the
California Horse Racing Board has not licensed other thoroughbred racetracks in
Southern California to conduct racing during these meets. However, night
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 Racing Association, 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,
Gulfstream Park, Hialeah Park and Calder Race Course, from applying for race
dates outside of their traditional racing season. Currently, the race dates for
these 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. This 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.
In Michigan, the Office of the Racing Commissioner approves annual licenses
for thoroughbred, standardbred and quarter horse races. There are currently no
other thoroughbred racetracks in Michigan other than Great Lakes Downs.
However, the Office of the Racing Commissioner has licensed harness racing
tracks in Michigan.
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 National Gambling Impact Study
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Commission'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 this type of wagering is legal, establish accounts
for patrons who pay their wagers through debit or credit cards and receive
wagers from these patrons. States permitting telephone account wagering allow
telephone account wagering facilities to accept wagers placed by patrons
residing in those 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 dependent on government approvals which if not
granted could adversely affect our existing business and our growth".
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 National
Gambling Impact Study Commission's June 1999 report estimates that there are
over 250 on-line casinos, 64 lotteries, 20 bingo games and 139 sports wagering
services offering gambling over the Internet. 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 dependent on government
approvals which if not granted could adversely affect our existing business and
our growth".
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SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth our selected consolidated and pro forma
consolidated financial data as at and for the periods indicated. The selected
consolidated financial data as at and for the nine months ended September 30,
1999 have been derived from our Unaudited Consolidated Financial Statements as
at and for the nine months ended September 30, 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
nine months ended September 30, 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 nine months ended September 30, 1999 have been derived
from and should be read in conjunction with our Pro Forma Consolidated
Financial Statements as at and for the nine months ended September 30, 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 prospectus.
Income Statement Data(1)
<TABLE>
<CAPTION>
Pro Forma
Nine Months Pro Forma Nine Months Five Months
Ended Year Ended Ended Ended Years Ended July 31,
September 30, December 31, September 30, December 31, ------------------------------------------
1999 1998 1999 1998 1998 1997 1996 1995 1994
------------- ------------ ------------- ------------ ------- ------- ------- ------- ------
(in thousands of U.S. dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack............ $127,584 $149,585 $58,954 $ 3,952 $ -- $ -- $ -- $ -- $ --
Real estate.......... 12,167 21,239 12,167 6,597 20,486 15,276 2,460 1,166 121
-------- -------- ------- ------- ------- ------- ------- ------- ------
Total revenue........ 139,751 170,824 71,121 10,549 20,486 15,276 2,460 1,166 121
Costs and Expenses
Racetrack costs and
expenses............ 98,451 126,278 46,292 3,625 -- -- -- -- --
Real estate costs and
expenses............ 12,496 27,355 12,496 8,462 25,864 13,879 4,613 2,713 277
Depreciation and
amortization........ 12,912 18,852 4,676 1,649 1,852 1,824 330 21 22
Interest expense
(income), net....... 717 1,615 264 1,221 1,380 955 (59) (26) 156
-------- -------- ------- ------- ------- ------- ------- ------- ------
Income (loss) before
income taxes........ 15,175 (3,276) 7,393 (4,408) (8,610) (1,382) (2,424) (1,542) (334)
======== ======== ======= ======= ======= ======= ======= ======= ======
Net income (loss).... $ 7,621 $ (5,739) $ 3,000 $(4,231) $(8,610) $(1,382) $(2,424) $(1,542) (334)
======== ======== ======= ======= ======= ======= ======= ======= ======
Earnings (loss) per
share of Class A
Subordinate Voting,
Class B and
Exchangeable Stock
Basic and
diluted(2).......... $ 0.10 $ (0.07) $ 0.04 $ (0.05) $ (0.11) $ (0.02) $ (0.03) $ (0.02) $(0.00)
======== ======== ======= ======= ======= ======= ======= ======= ======
Average number of
shares of Class A
Subordinate Voting,
Class B and
Exchangeable 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 78,535
======== ======== ======= ======= ======= ======= ======= ======= ======
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP, which differ in some respects
from accounting principles generally accepted in Canada,
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or Canadian GAAP. For a discussion of the principal differences between U.S.
GAAP and Canadian GAAP, see Note 15, "Canadian Generally Accepted Accounting
Principles", to our Audited Consolidated Financial Statements.
(2) On November 5, 1999, Magna completed the reorganization described in this
prospectus. 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 1,662,890 shares of our Class A
Subordinate Voting Stock were issued and outstanding. On December 30, 1999,
14,823,187 shares of our Class B Stock held by Magna were repurchased by us
for $110,000,000. On this date, $110,000,000 was invested by Magna in
Exchangeco in return for 14,823,187 Exchangeable Shares. Our historical
basic and diluted earnings (loss) per share has been calculated assuming
that 78,535,328 shares of our Class B Stock and Exchangeable Shares 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 63,712,141
shares of our Class B Stock, plus 14,823,187 Exchangeable Shares
exchangeable into 14,823,187 shares of our Class A Subordinate Voting Stock
and 1,662,890 shares of our Class A Subordinate Voting Stock 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,
September 30, September 30, December 31, -----------------------------------------
1999 1999 1998 1998 1997 1996 1995 1994
------------- ------------- ------------ -------- -------- ------- ------- -------
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 63,158 $ 23,544 $ 17,503 $ 295 $ 220 $ 133 $ 521 $ 1,338
Note receivable from
Magna................... -- 146,862 -- -- -- -- -- --
Total assets............. 736,716 693,455 364,142 184,802 113,175 76,219 51,636 28,770
Total debt(2)............ 43,423 65,333 32,335 19,495 18,938 22,614 12 --
Magna's net
investment/shareholder's
equity.................. 553,570 545,888 302,502 158,275 87,917 49,985 48,166 27,226
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. GAAP which
differ in some respects from Canadian GAAP. For a discussion of the
principal differences between U.S. GAAP and Canadian GAAP, see Note 15,
"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 that section for details of the terms of the
reorganization.
36
<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 prospectus. 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 prospectus.
Overview
We operate horse racetracks and wagering operations and media sports
wagering operations, and are currently considering developing telephone
account, interactive television and Internet-based wagering operations, as well
as leisure and retail-based real estate projects on the land surrounding some
of our racetracks. We also own a real estate portfolio which includes a gated
residential community currently under development, a golf course and related
recreational facilities, a golf course under development and other real estate.
We are considering a number of options with respect to the two golf courses,
including direct operation or leasing to third party operators, as well as sale
and leaseback transactions or outright sale. We intend gradually to sell the
balance of our real estate portfolio in order to provide capital to be used in
our business.
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.
On September 1, 1999, 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 held on November 6, 1999. Gulfstream Park is
located in the cities of Hallandale and Aventura, Florida, between Miami and
Fort Lauderdale and operates through early January to mid-March of each year.
On November 12, 1999, we acquired the Thistledown and Remington Park
racetracks in North Randall, Ohio and Oklahoma City, Oklahoma, respectively.
Thistledown has one of the longest racing seasons of all North American
racetracks, consisting of 187 racing days each year between mid-March and early
December of each year. Remington Park offers both a 40-day Quarter Horse meet
from mid-April to mid-June and an 82-day Thoroughbred Horse meet from mid-
August to early December of each year.
On December 10, 1999, we acquired the Golden Gate Fields racetrack in Albany
and Berkeley, California, approximately 8 miles from downtown Oakland and
approximately 11 miles from San Francisco. Golden Gate Field's racing season
consists of two meets, one of which runs from late March to mid-June and the
other of which runs from mid-November to mid-January of each year.
Finally, we have entered into an agreement with Great Lakes Downs, Inc. and
Great Lakes Downs Cafe, Inc. to acquire the assets and assume approximately
$9.3 million of liabilities of Great Lakes Downs racetrack in Muskegon,
Michigan for a purchase price of $1.7 million, payable by the issuance of
267,416 shares of our Class A Subordinate Voting Stock. Great Lakes Downs,
which began operations in January 1999, offers a total of 134 live racing days
beginning in April and ending in November of each year. We expect to complete
this acquisition in mid-February 2000.
We refer you to our Pro Forma Consolidated Financial Statements which
consolidate on a pro forma basis the acquisitions of Santa Anita Park,
Gulfstream Park, Thistledown, Remington Park and Golden Gate Fields
37
<PAGE>
with our operations as at and for the nine months ended September 30, 1999 and
the twelve months ended December 31, 1998. On a pro forma basis, our revenues
increased by $68.6 million and our net income increased by $4.6 million for the
nine months ended September 30, 1999 resulting in total pro forma consolidated
revenues of $139.8 million and net income of $7.6 million. On a pro forma
basis, our revenues increased by $145.6 million and our net loss was reduced by
$4.7 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
$5.7 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 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 occur.
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 there as well as at those racetracks on televised racing signals or
simulcasts received or imported by the simulcast wagering facilities located at
the racetracks. Pari-mutuel wagering on horse racing also occurs at wagering
establishments on horse races being conducted at tracks elsewhere. Our
racetracks have simulcast wagering facilities to complement our live horse
racing by enabling our patrons to wager on horse races being held at other
racetracks when there is no live racing occurring at our racetracks. We also
generate non-wagering revenues consisting primarily of food and beverages,
programs, admissions, parking, 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, Fontana Sports, which is
part of the Fontana residential development property and is in operation, and a
second golf course in Aurora, Canada which is currently under construction. We
are currently considering a variety of options with respect to these golf
courses, including direct operation or leasing to third party operators, as
well as sale and leaseback transactions, which would require that Magna not
exercise its right of first refusal, or outright sale. 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.
Results of operations
Nine month periods ended September 30, 1999 and 1998
Racetrack operations
Revenues from our racetrack operations were $59.0 million for the nine month
period ended September 30, 1999. Santa Anita Park and San Luis Rey Downs
contributed revenues of $58.5 million and $0.5 million, respectively. No
revenues were earned at Gulfstream Park during the nine month period ended
September 30, 1999, since the racetrack's operations are only reflected in our
consolidated results from the date
38
<PAGE>
of acquisition, September 1, 1999, and no racing occurred in the month of
September 1999. We earned no revenues from our racetrack operations in the
comparable 1998 period as Santa Anita Park, San Luis Rey Downs and Gulfstream
Park were acquired in December 1998, May 1999 and September 1999,
respectively.
In the current period, our share of total pari-mutuel wagering revenues for
Santa Anita Park was $40.2 million and non-wagering revenues at Santa Anita
Park were $18.3 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, including 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 27% of the stock of SCOTWINC.
The distribution of pari-mutuel wagering for the nine months ended
September 30, 1999 is summarized below (in millions except number of live race
days):
<TABLE>
<CAPTION>
Nine months ended
September 30, 1999
------------------
<S> <C>
Total live race day handle................................... $857.2
======
Number of live race days..................................... 81
======
Our share of live race day handle............................ $ 35.9
Our share of non-live race day handle and other.............. 4.3
------
Total pari-mutuel wagering revenue........................... $ 40.2
======
</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 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.
39
<PAGE>
Racetrack costs and expenses were $46.3 million. Santa Anita Park,
Gulfstream and San Luis Rey Downs incurred costs and expenses of $45.3 million,
$0.5 million and $0.5 million, respectively. The major components of Santa
Anita Park costs and expenses were payroll costs ($27.2 million) and marketing
and advertising costs ($5.0 million) representing approximately 70% of our
total costs. Gulfstream Park costs and expenses were minimal during the nine
month period ended September 30, 1999, since the racetrack's costs are only
reflected in our consolidated results from the date of acquisition, September
1, 1999, and no racing occurred in the month of September 1999. With the
acquisition of Gulfstream Park, Thistledown, Remington Park and Golden Gate
Fields, we intend to continue to implement our 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 $12.2 million for the nine
month period ended September 30, 1999 compared to $17.2 million for the nine
month period ended September 30, 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 $1.6 million related to
Magna's access fee agreement with Fontana Sports which commenced March 1, 1999.
We also generated increased rental revenues on some properties acquired during
the comparative period. Revenues from our remaining real estate operations were
substantially unchanged.
Real estate costs and expenses were $12.5 million for the nine month period
ended September 30, 1999 compared to $21.9 million for the nine month period
ended September 30, 1998. The reduction is attributable to the decrease in
housing activity at the Fontana residential development. In addition, we
incurred costs in the nine month period ended September 30, 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 nine month period ended September 30, 1999 were
substantially reduced.
Costs and expenses of our remaining real estate operations were
substantially unchanged.
Depreciation and amortization
Depreciation and amortization increased by $2.9 million to $4.7 million for
the nine month period ended September 30, 1999, primarily as a result of
depreciation related to our acquisitions of Santa Anita Park on December 10,
1998, San Luis Rey Downs on May 1, 1999 and Gulfstream Park on September 1,
1999 and a full nine months of depreciation on properties acquired in calendar
1998. As of September 30, 1999, some properties have been classified as
available for sale and depreciation has ceased on these properties.
Interest expense, net
Our net interest expense decreased by $0.9 million to $0.3 million for the
nine month period ended September 30, 1999 compared to the nine month period
ended September 30, 1998, primarily as a result of higher interest income. The
increase in interest income is attributable to intercompany interest earned on
our note receivable from Magna.
Income tax provision
We recorded an income tax provision of $4.4 million on pre-tax income of
$7.4 million for the nine month period ended September 30, 1999 compared to nil
on a pre-tax loss of $7.6 million for the nine month period
40
<PAGE>
ended September 30, 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 Meet did not commence until December 26,
1998. We earned no revenues from our racetrack operations in the comparable
1997 period as Santa Anita Park was acquired in December 1998.
Our share of pari-mutuel wagering was $2.5 million and non-wagering revenues
were $1.4 million. The distribution of pari-mutuel wagering for the last five
racing days of 1998 is summarized below (in millions except number of live race
days):
<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 costs and expenses were $3.6 million, all of which related to our
operation of Santa Anita Park. The major components of the Santa Anita Park's
costs and expenses were payroll costs ($1.8 million) and marketing and
advertising costs ($0.3 million) representing approximately 58% of our total
costs.
Real estate operations
Revenues from our real estate operations were $6.6 million for the five
month period ended December 31, 1998 compared to $5.8 million for the five
month period ended December 31, 1997. The increase in revenues is primarily
attributable to rental revenues earned on recently acquired properties.
Revenues from the Fontana residential development, Fontana Sports and other
real estate operations were substantially unchanged between the periods.
Real estate costs and expenses were $8.5 million for the five month period
ended December 31, 1998 compared to $7.0 million for the five-month period
ended December 31, 1997. The increase in costs and expenses is attributable to
a change in the mix between apartment and housing sales at the Fontana
residential development. The costs and expenses of our remaining real estate
operations were substantially unchanged between the periods.
Depreciation and amortization
Depreciation and amortization increased by $0.9 million to $1.6 million for
the five month period ended December 31, 1998, primarily as a result of
depreciation related to our acquisition of Santa Anita Park on December 10,
1998 and a full five months of depreciation on properties acquired in calendar
1998.
Interest expense, net
Our net 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
41
<PAGE>
expense is primarily attributable to an increase in interest bearing borrowings
from Magna to finance the acquisition of Santa Anita Park. These borrowings
were converted to equity in 1999.
Income tax 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 some of these losses have been utilized by Magna and are not
available to us and valuation allowances have been recorded against the
remaining tax loss carryforward benefits.
Years ended July 31, 1998 and 1997
Real estate operations
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 costs and expenses were $25.9 million for the year ended July
31, 1998 compared to $13.9 million for the year ended July 31, 1997. The
increase relates to costs and expenses at the Fontana 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, net
Our net 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 some of these losses have been utilized by Magna and are not
available to us and valuation allowances have been recorded against the
remaining tax loss carryforward benefits.
Years ended July 31, 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.
42
<PAGE>
Real estate costs and expenses 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 and expenses 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, net
Our net 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 some of these losses have been utilized by Magna and are not
available to us and valuation allowances have been recorded against the
remaining tax loss carryforward benefits.
Liquidity and Capital Resources
With the exception of the nine month period ended September 30, 1999, we
have generated negative cash flow from operations since inception. 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.
Given the above-described commitment by Magna to its shareholders, we will
be required to fund our own operations.
At September 30, 1999, we had cash and cash equivalents (including our note
receivable from Magna less our note payable to Magna) net of debt, of $105.1
million and total shareholder's equity of $545.9 million.
On November 12, 1999, we acquired the Thistledown and Remington Park
racetracks for a total purchase price of $24.0 million. Of the total purchase
price, $19.5 million was paid in cash and $4.5 million was paid through the
issuance of 650,695 shares of our Class A Subordinate Voting Stock.
On December 10, 1999, we also acquired the Golden Gate Fields racetrack for
a total purchase price of $87.0 million. Of the total purchase price, $60.0
million was paid in cash, $7.0 million was paid through the issuance of
1,012,195 shares of our Class A Subordinate Voting Stock and $20.0 million was
paid 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.
After giving pro forma effect, as of September 30, 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 $15.7
million and total shareholder's equity of $553.6 million.
43
<PAGE>
On December 22, 1999, we successfully completed the negotiation of two
credit facilities for two of our subsidiaries, The Santa Anita Companies, Inc.
and the Los Angeles Turf Club, Inc. These credit facilities consist of a $63.0
million three year term loan facility and a $10.0 million revolving operating
line of credit, both of which would bear interest at rates ranging between the
U.S. Prime Rate and LIBOR plus 2.2% per annum.
As of September 30, 1999, our real estate portfolio totals $441.8 million.
Included in this amount are properties available for sale totaling $81.2
million and properties under or held for development totaling $173.3 million,
components of which could be made available for sale. In addition, revenue
producing properties total $168.1 million and include the Fontana Sports
facilities and horse racing facilities at Santa Anita Park, Gulfstream Park,
and San Luis Rey Downs. 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 $20.0 million during the
remaining three months of 1999. Most of the capital expenditures relate to
completion of the capital renovation program at Santa Anita Park and completion
of the Aurora golf course.
We believe that our current cash resources, together with cash flow from
operations from our racetrack activities, cash available under the credit
facilities described above 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. If additional funds are raised or
future acquisitions are effected by issuing our shares, you will experience
dilution of your interest. There is no assurance that adequate debt and/or
equity financing will be available to us as needed or, if available, on terms
acceptable to us. If adequate financing is not available, our business,
financial condition and results of operations could be materially adversely
effected.
Operating activities
Cash provided by (used in) operations was $1.2 million, $(1.3) million,
$(7.9) million, $(3.9) million and $(3.6) million for the nine month period
ended September 30, 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 nine month period ended September 30, 1999 is a result of
cash generated by our Santa Anita Park operations of $6.1 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 $269.0 million, $136.7 million, $72.6
million, $43.6 million and $25.1 million for the nine month period ended
September 30, 1999, the five month period ended December 31, 1998, and the
years ended July 31, 1998, 1997, and 1996, respectively.
During the nine month period ended September 30, 1999, $87.6 million was
used for business acquisitions, consisting of $81.2 million to acquire
Gulfstream Park and $6.4 million to acquire the real estate assets of San Luis
Rey Downs, and $33.7 was spent on real estate property additions which include
spending on the capital renovation program at Santa Anita Park. In addition,
$146.9 million was loaned to Magna and is reflected as a note receivable as at
September 30, 1999. The note is due on demand and bears interest at the U.S.
Prime Rate less 1% per annum. 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 million was spent on real estate property additions which
include land and related development spending in connection with the Aurora
golf course project. During the year ended July 31, 1998, $72.5 million 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
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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.
Financing activities
Cash provided by financing activities was $273.8 million, $155.2 million,
$80.6 million, $47.6 million and $28.4 million for the nine month period ended
September 30, 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. On
September 1, 1999, Magna invested an additional $250.0 million in cash, by way
of equity contribution, in the Company. Of this amount, $146.9 million was
loaned back to Magna as described above. Also during the nine month period
ended September 30, 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), short term debt of $6.8
million assumed on the acquisition of Gulfstream Park, and mortgages with
various Austrian banks and local governments totaling $5.9 million at September
30, 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
short term debt assumed on the acquisition of Gulfstream Park is repayable on
February 16, 2000. 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 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 combining of simulcast signals from
all of our racetracks. The combining 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 these tracks.
We intend to market our combined simulcast product through a single signal
marketed under the Magna 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 golf course by
May 2001. We expect that the Aurora 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. Our ability to sell these properties will be
enhanced by a number of factors including the current positive economic climate
which is producing strong levels of economic activity and job creation and low
interest rates both generally and in the regions in which we hold that real
estate. In addition, we believe the location of that real estate enhances our
ability to sell. However, notwithstanding the above, there can be no assurance
that we will be successful in our efforts to sell these properties.
For further information as to our business outlook, see "Our Strategy" in
this prospectus.
Year 2000 Issue
Some computer software and microprocessors use two digits rather than four
digits to define the applicable year. Any computer programs that have date-
sensitive software and microprocessors may recognize a date using "00" as a
year other than the year 2000. This phenomenon, referred to as the "Year 2000
Issue", could
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cause a disruption of our operations, including among other things,
interruptions in pari-mutuel wagering at some time in the future, even though
January 1, 2000 has already passed.
The total cost of our remediation to address the Year 2000 Issue is
currently estimated to have been $1.388 million, of which $1.338 million was
capitalized and the remainder expensed. Of these amounts, $1.142 million was
incurred through September 30, 1999, of which $1.122 million was capitalized
and the remainder was expensed. Substantially all of the remaining expenditures
were made prior to December 31, 1999. Further, of the total amount, $0.5
million was incurred by some of the operations prior to their acquisition by
us.
We believe that every reasonable effort has been made to resolve the Year
2000 Issue and to mitigate its potential effects on our business. Based on our
current assessment, we believe that the Year 2000 Issue has not, and will not
have a material adverse impact on our results of operations and financial
condition but, given the inherent complexities of the issue, there can be no
assurance of this.
Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, "Accounting for Derivative Instruments",
referred to as "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, including 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 September 30, 1999 and January 15, 2000. 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 prospectus.
<TABLE>
<CAPTION>
Actual Pro Forma Actual
September 30, September 30, January 15,
1999 1999 2000
------------- ------------- -----------
(in thousands of U.S. dollars)
<S> <C> <C> <C>
Short-term debt
Bank indebtedness................ $ 7,774 $ 7,774 $ 7,360
Note payable to Magna............ 35,240 -- --
Long-term debt due within one
year............................ 10,157(1) 10,157 19,119(1)(2)
Long-term debt..................... 12,162(1) 29,492(2) 19,506(1)(2)
Shareholder's Equity
Magna's net investment........... 545,888 -- --
Share capital.................... -- 553,570 553,570(3)
-------- -------- --------
Total capitalization............... $611,221 $600,993 $599,555
======== ======== ========
</TABLE>
- --------
(1) Our actual Long-term debt including amounts due within one year, consists
of: (i) a line of credit denominated in Austrian Schillings bearing
interest at VIBOR plus 0.625% per annum, of which $9,346,000 and $8,735,000
was drawn as at September 30, 1999 and January 15, 2000, respectively;
(ii) bank term line of credit bearing interest at LIBOR plus 1.25% per
annum, in respect of which $6,800,000 was owed at September 30, 1999 and
January 15, 2000; (iii) 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 $5,896,000 and $5,491,000 was owed at
September 30, 1999 and January 15, 2000, respectively; and (iv) a term loan
bearing interest at a fixed rate of 4% per annum, in respect of which
$277,000 and $228,000 was owed at September 30, 1999 and January 15, 2000,
respectively.
(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%.
(3) Excluding net income earned or losses incurred or change in currency
translation adjustment, all from September 30, 1999.
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REORGANIZATION
On November 5, 1999, Magna completed a reorganization of our corporate
structure, under which Magna's North American and European non-automotive
businesses and real estate assets were transferred to us, including the
following:
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 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
settled some intercompany indebtedness through 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. On December
30, 1999, 14,823,187 shares of our Class B Stock held by Magna were repurchased
by us for $110,000,000. On this date, $110,000,000 was invested by Magna in
Exchangeco in return for 14,823,187 Exchangeable Shares.
On December 30, 1999, there were 63,712,141 shares of our Class B Stock,
1,662,890 shares of our Class A Subordinate Voting Stock and 14,823,187
Exchangeable Shares outstanding. In connection with our agreement to acquire
the assets and assume approximately $9.3 million of liabilities of Great Lakes
Downs racetrack, we have agreed to issue a total of 267,416 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 share provisions for our
Class A Subordinate Voting Stock and Class B Stock and reclassify and further
subdivide our outstanding stock into shares of Class B Stock. Our certificate
of incorporation was further amended on January 26, 2000 to change our name to
Magna Entertainment Corp. Our 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 91007.
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The following chart shows our organizational structure and that of our
material subsidiaries as of February 7, 2000, each of which is directly or
indirectly wholly-owned, together with the jurisdiction of incorporation of
each of the entities shown thereon.
<TABLE>
<CAPTION>
Magna Entertainment Corp.
(Delaware)
Horse Racing and Pari-Mutuel Real Estate
Wagering Operations
<S> <C>
The Santa Anita Companies, Inc. MEC Land Holdings (USA) Inc.
(Delaware) (Delaware)
Los Angeles Turf Club, MEC Holdings (Canada) Inc.
Inc. "Exchangeco"
(California) (Ontario)
Gulfstream Park Racing
Association, Inc. MI Entertainment Holding GmbH
(Florida) (Austria)
Pacific Racing Association Magna Vierte Beteiligungs AG
(California) (Austria)
MEC Land Holdings (California) Magna Projektentwicklungs AG
Inc. (Austria)
(California)
Thistledown, Inc.
(Ohio)
Remington Park Inc.
(Oklahoma)
SLRD Thoroughbred Training
Center, Inc.
(Delaware)
MI Racing, Inc.
(Delaware)
</TABLE>
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
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. ensuring that adequate reports on health, safety and environmental
matters are presented to our Board of Directors, at a minimum, on an
annual basis.
We are currently subject to Magna's Health, Safety and Environmental Policy,
which is substantially similar to the policy we intend to adopt.
To date, compliance with environmental laws and regulations has not had a
material adverse effect on our financial condition and results of operations,
however, changes in governmental laws and regulations are ongoing and may make
environmental compliance increasingly expensive. We cannot predict future costs
that we may incur to meet environmental obligations.
A subsidiary of Magna has agreed to indemnify us in respect of environmental
remediation costs and expenses relating to existing conditions in some of our
Austrian real estate properties.
Employees
As of December 31, 1999, we employed approximately 1,500 employees,
approximately 800 of whom are represented by a union. Since our inception, we
have not had a work stoppage. We consider our relations with our employees to
be good. We also believe that our future success will depend in part on our
continued ability to attract, integrate, retain and motivate highly qualified
technical and managerial personnel, and upon the continued service of our
senior management.
Our contract with the Service Employees International Union, Local 280,
which represents approximately 400 pari-mutuel employees at Santa Anita Park
during our racing season, will expire on July 24, 2000. We expect that we will
be able to negotiate a new union contract with Local 280 through the collective
bargaining process.
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, including TV Games Network, which is owned by TV Guide,
Inc., and The Racing Network. TV Games Network currently markets the signals of
approximately 45 racetracks, ten of which are under exclusive contract,
including the signal from Churchill Downs' racetracks and the signals from
Gulfstream Park and The Oak Tree Meet. TV Games Network's exclusive right to
market the signals from Gulfstream Park and The Oak Tree Meet expires in
December, 2003. We expect that TV Games Network's initial competitive advantage
may be off-set by the fact that in 2003 we will have exclusive rights to market
the signal for Santa Anita Park, Gulfstream Park and Golden Gate Fields. In
addition, we may be able to eliminate this competitive disadvantage by pursuing
this element of our strategy in conjunction with an experienced strategic
partner.
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RECENT ACQUISITIONS
A significant proportion of our assets were acquired from our parent
company, Magna, and its subsidiaries on a non-arm's length basis pursuant to
the Reorganization. Details of the acquisition of Santa Anita Park by some of
Magna's subsidiaries are provided below. In addition, details of material
acquisitions made by us are also provided below:
Pursuant to an asset purchase agreement dated as of November 13, 1998, with
Meditrust Corporation, Meditrust Operating Company, The Santa Anita Companies,
Inc. and Santa Anita Enterprises, Inc., collectively referred to as Meditrust,
the assets of Santa Anita Park and the stock of Los Angeles Turf Club, Inc.
were acquired by one of Magna's subsidiaries, The Santa Anita Companies, Inc.,
as of December 10, 1998 and the transaction closed on December 11, 1998. The
purchase price for the assets acquired was 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.
Pursuant to an asset purchase agreement dated as of March 8, 1999, one of
our indirect, wholly-owned subsidiaries, SLRD Thoroughbred Training Center,
Inc., agreed to acquire from San Luis Rey Downs Enterprises LLC the assets of
San Luis Rey Downs for a purchase price of approximately $6.4 million, all of
which was paid in cash. This transaction was completed on May 1, 1999.
Pursuant to a stock purchase agreement dated as of June 30, 1999 between us
and Gulfstream Holdings, Inc. of Illinois and Gulfstream Park Racing
Association Inc., we agreed to acquire from Gulfstream Holdings Inc. of
Illinois all the issued and outstanding stock of Gulfstream Park Racing
Association Inc. for a purchase price of $88.2 million. Gulfstream Park owns
all the assets of Gulfstream Park Racing Association Inc. 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 $24.0 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 $24.0 million, the stock of
Thistledown cost $14.0 million, $9.5 million of which was paid in cash and the
balance of which was paid through the issuance of 650,695 shares of our Class A
Subordinate Voting Stock. The stock of Remington Park, Inc. cost $10.0 million,
all of which was paid in cash. We completed this acquisition on November 12,
1999.
Pursuant to a stock purchase agreement dated as of November 5, 1999, we
agreed to acquire from Ladbroke Racing Corporation, all the issued and
outstanding stock of Ladbroke Land Holdings Inc. and Pacific Racing
Association. These companies collectively own and operate Golden Gate Fields
racetrack in Albany, California. The purchase price for the stock of these
companies was $87.0 million, of which $60.0 million was paid in cash, $7.0
million was paid through the issuance 1,012,195 shares of our Class A
Subordinate Voting Stock and $20.0 million was paid by way of an interest-free
promissory note, $10.0 million of which matures on the first anniversary of the
date of closing and $5.0 million of which matures on each of the second and
third anniversaries. We completed this acquisition on December 10, 1999 and
subsequently changed the name of Ladbroke Land Holdings Inc. to MEC Land
Holdings (California) Inc.
Pursuant to an asset purchase agreement dated as of December 24, 1999, with
Great Lakes Downs, Inc. and Great Lakes Downs Cafe, Inc. we have agreed to
acquire the assets and assume approximately $9.3 million of liabilities of
Great Lakes Downs racetrack in Muskegon, Michigan for a purchase price of $1.7
million, payable by the issuance of 267,416 shares of our Class A Subordinate
Voting Stock. We expect to complete this transaction in mid-February 2000.
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CERTAIN INCOME TAX CONSIDERATIONS
Certain Canadian Federal Income Tax Considerations
This summary is based on the current provisions of the Income Tax Act
(Canada) (which we refer to as the Tax Act), the regulations thereunder, and
the current published administrative practices of the Canada Customs and
Revenue Agency (or Revenue Canada) and the current provisions of the Canada-
U.S. Income Tax Convention (which we refer to as 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 and assumes that they
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 or administrative practice, 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 distribution.
Residents of Canada
This portion of the summary is applicable to Magna shareholders who receive
the distribution of our Class A Subordinate Voting Stock or the Exchangeable
Shares, as the case may be, and who, for purposes of the Tax Act and at all
relevant times, are resident or deemed to be resident in Canada, will hold our
Class A Subordinate Voting Stock or the Exchangeable Shares, as the case may
be, as capital property, and deal at arm's length with Magna, us and
Exchangeco. This summary does not apply to a shareholder with respect to whom
we are or will be a foreign affiliate within the meaning of the Tax Act. Our
Class A Subordinate Voting Stock and the Exchangeable Shares will generally be
considered to be capital property to a holder unless such shares are held in
the course of carrying on a business of trading or dealing in securities or
otherwise as part of a business of buying and selling securities or were
acquired in a transaction or transactions considered to be an adventure in the
nature of trade. Canadian resident shareholders whose Exchangeable Shares might
not otherwise qualify as capital property may be entitled to make the
irrevocable election provided by subsection 39(4) of the Tax Act. Our Class A
Subordinate Voting Stock and the Exchangeable Shares held by certain financial
institutions, including banks, trust companies, credit unions, insurance
corporations, registered securities dealers and corporations controlled by one
or more of the foregoing, will generally not be held as capital property and
will be subject to special "mark-to-market" rules in the Tax Act not discussed
in this summary. Shareholders that are financial institutions should consult
their own tax advisors to determine the tax consequences to them of the
application of the mark-to-market rules.
For purposes of the Tax Act, all amounts relating to the acquisition,
holding or disposition of our Class A Subordinate Voting Stock must be
expressed in Canadian dollars including dividends, adjusted cost base and
proceeds of disposition; amounts denominated in United States dollars must be
converted into Canadian dollars based on the prevailing United States dollar
exchange rate generally at the time these amounts arise.
The Distribution
The distribution will be treated for the purposes of the Tax Act as a
taxable dividend received from a taxable Canadian corporation. The amount of
the distribution to holders who elect to receive our Class A Subordinate Voting
Stock will be the aggregate of the fair market value of our Class A Subordinate
Voting Stock at the time the distribution is paid, the amount of cash in lieu
of a fractional share and the amount of the concurrent regular quarterly cash
dividend. The amount of the distribution to holders who elect to receive
Exchangeable Shares will be the aggregate of the fair market value of the
Exchangeable Shares and the Automatic Exchange Right, Exchange Right and the
Voting Rights (all as described more fully below under "Description of
Exchangeable Shares" and referred to collectively as the Ancillary Rights) at
the time of the
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<PAGE>
distribution, any cash received in lieu of a fractional share and the amount of
the concurrent regular quarterly cash dividend. Magna will make a determination
of value for the purposes of preparing the tax information statement in respect
of the distribution which are required under the Tax Act to be mailed by Magna
to the shareholders. Magna will determine the fair market value of our Class A
Subordinate Voting Stock and the Exchangeable Shares on the basis of the 10-day
weighted average trading price in the "if, as and when issued" market for our
Class A Subordinate Voting Stock prior to the distribution date. Magna is of
the view that the Ancillary Rights have only nominal value. Any determination
of value by Magna is not binding on Revenue Canada.
For individuals, the amount of the distribution will be included in the
individual's income and will generally be subject to the gross-up and dividend
tax credit rules normally applicable to taxable dividends received from taxable
Canadian corporations.
The distribution received by a shareholder that is a corporation will
generally be included in computing its income. Such a shareholder will,
however, generally be entitled to deduct the amount of the distribution in
computing taxable income. Certain corporations may be liable under Part IV of
the Tax Act to pay a refundable tax of 33 1/3% on the distribution to the
extent that the dividend is deductible in computing the corporation's taxable
income.
Since the distribution will be treated for the purposes of the Tax Act as a
taxable dividend, shareholders may be liable for tax under the Tax Act without
having received a cash payment sufficient to satisfy that liability. If the
shareholder sells our Class A Subordinate Voting Stock or the Exchangeable
Shares, as the case may be, in order to satisfy that liability, there is no
assurance that the shareholder will realize the price per share at which our
Class A Subordinate Voting Stock or the Exchangeable Shares, as the case may
be, are valued for the purposes of calculating the amount of the distribution
for tax purposes. If a shareholder does not realize proceeds of disposition on
the sale at least equal to the amount at which the shares were valued for
purposes of calculating the amount of the dividend, however, the shareholder
would realize a capital loss on the disposition of the shares since the cost of
each share to the shareholder will be equal to its fair market value at the
time of the distribution. The general tax treatment of capital gains and
capital losses is discussed below under the heading "Taxation of Capital Gain
or Capital Loss".
Our Class A Subordinate Voting Stock
Acquisition and Disposition of our Class A Subordinate Voting Stock
The cost of our Class A Subordinate Voting Stock acquired on the
distribution will be equal to the fair market value of our Class A Subordinate
Voting Stock at the time of distribution. A disposition or deemed disposition
of our Class A Subordinate Voting Stock by a holder will generally result in a
capital gain (or capital loss) to the extent that the proceeds of disposition,
net of any reasonable costs of disposition, exceed (or are less than) the
adjusted cost base to the holder of our Class A Subordinate Voting Stock
immediately before the disposition. The general tax treatment of capital gains
and capital losses is discussed below under the heading "Taxation of Capital
Gain or Capital Loss".
Dividends on our Class A Subordinate Voting Stock
Dividends on our Class A Subordinate Voting Stock, if any, will be required
to be included in the recipient's income for the purpose of the Tax Act. The
amount of the dividend will include any United States non-resident withholding
tax withheld on these dividends. Dividends received by a shareholder who is an
individual will not be subject to the gross-up and dividend tax credit rules
generally applicable to taxable dividends received from taxable Canadian
corporations. A shareholder that is a corporation will include these dividends
in computing its income and generally will not be entitled to deduct the amount
of these dividends in computing its taxable income. A shareholder that is a
Canadian-controlled private corporation (as defined in the Tax Act) may be
liable to pay an additional refundable tax of 6 2/3% on these dividends. United
States non-
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<PAGE>
resident withholding tax on these dividends generally will be eligible for
foreign tax credit or deduction treatment where applicable under the Tax Act.
See the commentary below under the heading "Certain United States Federal
Income Tax Considerations".
Exchangeable Shares
Acquisition and Disposition of Exchangeable Shares
The cost of the Exchangeable Shares and Ancillary Rights acquired on the
distribution will be equal to the fair market value thereof as at the time of
distribution. A disposition or deemed disposition of the Exchangeable Shares by
a holder will generally result in a capital gain (or capital loss) to the
extent that the proceeds of disposition, net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base to the holder of
the Exchangeable Shares immediately before the disposition. The general tax
treatment of capital gains and losses is discussed below under the heading
"Taxation of Capital Gain or Capital Loss".
Dividends on Exchangeable Shares
Dividends on the Exchangeable Shares, if any, received or deemed to be
received by a holder who is an individual, will be required to be included in
computing the holder's income and will be subject to the gross-up and dividend
tax credit rules normally applicable to taxable dividends received from a
corporation resident in Canada.
Subject to the discussion below as to the denial of the dividend deduction,
in the case of a holder that is a corporation, other than a specified financial
institution as defined in the Tax Act, dividends received or deemed to be
received on the Exchangeable Shares will be included in computing the
corporation's income and will generally be deductible in computing its taxable
income. In the case of a holder that is a specified financial institution, this
type of dividend will be deductible in computing its taxable income only if
either: (i) the specified financial institution did not acquire the
Exchangeable Shares in the ordinary course of the business carried on by that
institution; or (ii) at the time of the receipt of the dividend by the
specified financial institution, the Exchangeable Shares are listed on a
prescribed stock exchange in Canada (which currently includes The Toronto Stock
Exchange) and the specified financial institution, either alone or together
with persons with whom it does not deal at arm's length, does not receive (or
is not deemed to receive) dividends in respect of more than 10% of the issued
and outstanding Exchangeable Shares. A corporation is a specified financial
institution for purposes of the Tax Act if it is a bank, a trust company, a
credit union, an insurance corporation or a corporation whose principal
business is the lending of money to persons with whom the corporation is
dealing at arm's length or the purchasing of debt obligations issued by these
persons or a combination thereof, and corporations controlled by or related to
these entities.
If we or any other person with whom we do not deal at arm's length is a
specified financial institution at a point in time that a dividend is paid on
an Exchangeable Share, then subject to the exemption described below, dividends
received or deemed to be received by a holder of Exchangeable Shares that is a
corporation will not be deductible in computing taxable income but will be
fully includable in taxable income under Part I of the Tax Act. We are of the
view that neither we nor any person with which we do not deal at arm's length
nor any partnership or trust of which we or the person is a member or
beneficiary, respectively, is a specified financial institution at the current
time but there can be no assurance that this status will not change prior to
any dividend received or deemed to be received by a corporate shareholder. This
denial of the dividend deduction for a holder of the Exchangeable Shares that
is a corporation will not in any event apply if, at the time a dividend is
received or deemed to be received, the Exchangeable Shares are listed on a
prescribed stock exchange (which currently includes The Toronto Stock
Exchange), we are related to Exchangeco for the purposes of the Tax Act and the
recipient (together with persons with whom the recipient does not deal at arm's
length or any partnership or trust of which the recipient or person is a member
or beneficiary respectively) does not receive dividends on more than 10% of the
issued and outstanding Exchangeable Shares.
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A holder of the Exchangeable Shares that is a private corporation (as
defined in the Tax Act) or any other corporation resident in Canada and
controlled or deemed to be controlled by or for the benefit of an individual or
a related group of individuals may be liable under Part IV of the Tax Act to
pay a refundable tax of 33 1/3% on dividends received or deemed to be received
on the Exchangeable Shares to the extent that these dividends are deductible in
computing the holder's taxable income. A holder of the Exchangeable Shares that
is a Canadian-controlled private corporation (as defined in the Tax Act) may be
liable to pay an additional refundable tax of 6 2/3% on dividends or deemed
dividends that are not deductible in computing taxable income.
The Exchangeable Shares will be taxable preferred shares and short-term
preferred shares for purposes of the Tax Act. Accordingly, Exchangeco will be
subject to a 66 2/3% tax under Part VI.I of the Tax Act on dividends paid or
deemed to be paid on the Exchangeable Shares and will be entitled to deduct 9/4
of the tax payable in computing its taxable income under Part I of the Tax Act.
Dividends received or deemed to be received on the Exchangeable Shares will not
be subject to the 10% tax under Part IV.I of the Tax Act.
Redemption or Exchange of Exchangeable Shares
On the redemption (including a retraction) of an Exchangeable Share by
Exchangeco, the holder of an Exchangeable Share will be deemed to have received
a dividend equal to the amount, if any, by which the redemption proceeds (the
fair market value at the time our Class A Subordinate Voting Stock is received
by the shareholder from Exchangeco on the redemption plus the full amount of
all declared but unpaid dividends, if any) exceeds the paid-up capital (for
purposes of the Tax Act) of the Exchangeable Shares at the time the
Exchangeable Share is so redeemed. The amount of this deemed dividend will be
subject to the tax treatment described above under the heading "Dividends on
Exchangeable Shares". On the redemption, the holder of an Exchangeable Share
will also be considered to have disposed of the Exchangeable Share for proceeds
of disposition equal to the redemption proceeds less the amount of such deemed
dividend. A holder will in general realize a capital gain (or a capital loss)
equal to the amount by which the adjusted cost base to the holder of the
Exchangeable Share is less than (or exceeds) such proceeds of disposition. The
general tax treatment of capital gains and losses is discussed at "Taxation of
Capital Gain or Capital Loss" below. In the case of a holder of Exchangeable
Shares that is a corporation, in some circumstances the amount of this deemed
dividend may be treated as proceeds of disposition and not as a dividend.
On the exchange of an Exchangeable Share by the holder thereof with us for
our Class A Subordinate Voting Stock, the holder will in general realize a
capital gain (or a capital loss) to the extent the proceeds of disposition of
the Exchangeable Share net of any reasonable costs of disposition, exceed (or
are less than) the adjusted cost base to the holder of the Exchangeable Share.
For these purposes, the proceeds of disposition will be the aggregate of the
fair market value, at the time of the exchange, of our Class A Subordinate
Voting Stock received on the exchange, any Dividend Amount received by the
holder as part of the exchange consideration and the amount of any cash
received in lieu of a fractional share. For a more comprehensive discussion,
see "Taxation of Capital Gain or Capital Loss" below.
Acquisition and Disposition of Our Class A Subordinate Voting Stock
The cost of our Class A Subordinate Voting Stock received on the retraction,
redemption or exchange of an Exchangeable Share will be equal to the fair
market value of our Class A Subordinate Voting Stock at the time of that event,
to be averaged with the adjusted cost base of any other of our Class A
Subordinate Voting Stock held at that time by the holder as capital property.
For the tax treatment of a disposition of or dividend on our Class A
Subordinate Voting Stock see "Our Class A Subordinate Voting Stock--Acquisition
and Disposition of our Class A Subordinate Voting Stock" and "--Dividends on
our Class A Subordinate Voting Stock".
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Taxation of Capital Gain or Capital Loss
Three-quarters of any capital gain (the taxable capital gain) realized by a
holder will be included in the holder's income for the year of disposition.
Three-quarters of any capital loss so realized (the allowable capital loss) may
be deducted by the holder against taxable capital gains for the year of
disposition. Any excess of allowable capital losses over taxable capital gains
of the holder for the year of disposition may be carried back up to three
taxation years or forward indefinitely and deducted against net taxable capital
gains in those other years to the extent and in the circumstances prescribed in
the Tax Act.
Capital gains realized by an individual or trust, other than certain trusts,
may give rise to alternative minimum tax under the Tax Act. A holder that is a
Canadian-controlled private corporation (as defined in the Tax Act) may be
liable to pay an additional refundable tax of 6 2/3% on taxable capital gains.
If the holder of an Exchangeable Share is a corporation, the amount of any
capital loss arising on a disposition or deemed disposition of any such share
may be reduced by the amount of dividends received or deemed to have been
received by it on such share to the extent and under circumstances prescribed
by the Tax Act. Similar rules may apply where a corporation is a member of a
partnership or a beneficiary of a trust that owns Exchangeable Shares or where
a trust or partnership of which a corporation is a beneficiary or a member is a
member of a partnership or a beneficiary of a trust that owns any such shares.
Eligibility for Investment in Canada
Provided the Exchangeable Shares are listed on a prescribed stock exchange
in Canada (which currently includes The Toronto Stock Exchange), the
Exchangeable Shares will be qualified investments under the Tax Act for trusts
governed by registered retirement savings plans ("RRSPs"), registered
retirement income funds ("RRIFs"), deferred profit sharing plans ("DPSPs") and
registered education savings plans ("RESPs"). The Ancillary Rights will not be
qualified investments under the Tax Act. However, Magna is of the view that the
fair market value of such rights is nominal. Based on such view, there should
be no material consequences under the Tax Act to RRSPs, RRIFs and DPSPs holding
such non-qualified investments. RESPs holding such non-qualified investments
may, however, realize adverse consequences regardless of the fair market value
of such non-qualified investments. Provided the Exchangeable Shares are listed
on a prescribed stock exchange in Canada (which currently includes The Toronto
Stock Exchange), the Exchangeable Shares will not be foreign property under the
Tax Act for trusts governed by such plans or for certain other persons to whom
Part XI of the Tax Act is applicable. The Ancillary Rights will be foreign
property under the Tax Act. However, Magna is of the view that the fair market
value of such rights is nominal.
Provided our Class A Subordinate Voting Stock are listed on a prescribed
stock exchange in Canada (which currently includes The Toronto Stock Exchange)
our Class A Subordinate Voting Stock will be qualified investments under the
Tax Act for trusts governed by RRSPs, RRIFs, DPSPs and RESPs. Our Class A
Subordinate Voting Stock will be foreign property under the Tax Act.
Non Residents of Canada
The following portion of the summary is applicable to persons who receive
the Special Dividend, who, for purposes of 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.
Special Dividend
A non-resident holder who receives the distribution will be subject to
Canadian withholding tax at a rate of 25% of the fair market value thereof at
the time of payment or crediting subject to reduction by an
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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 distribution
for the purposes of determining the amount of the withholding tax and for
preparing the information statements in respect of the distribution which are
required to be mailed by Magna to the non-resident holders. The fair market
value of the distribution will include the fair market value of the shares of
our Class A Subordinate Voting Stock, the amount of cash in lieu of fractional
shares and the amount of the regular quarterly cash dividend, including any
shares or cash withheld to satisfy any non-resident withholding tax liability.
Magna will determine the fair market value of our Class A Subordinate Voting
Stock at the time of distribution on the basis of the 10-day weighted average
trading price in the "if, as and when issued" market prior to the distribution
date. 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 and, if necessary, a portion of the
shares of our Class A Subordinate Voting Stock otherwise distributable. For
details with respect to the withholding of our Class A Subordinate Voting
Stock, see "The Special Dividend--Withholding Tax Liability of Non-Residents of
Canada".
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.
Tax Treatment to U.S. Holders of the Distribution of our 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 our 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 our 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
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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 our 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.
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 our 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 our Class A
Subordinate Voting Stock (including a redemption of our 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 our 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.
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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 our Class A Subordinate Voting Stock or gross proceeds of a
sale of our Class A Subordinate Voting Stock if (i) the beneficial owner of our
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
Our current directors are Messrs. J. Brian Colburn, Vincent J. Galifi, James
Nicol and Frank Stronach. Prior to the completion of the distribution Messrs.
Colburn and Galifi intend to resign as directors and we intend to appoint the
following individuals as directors.
Directors
<TABLE>
<CAPTION>
Name and Address Age Principal Occupation
---------------- --- --------------------
<C> <C> <S>
Jerry D. Campbell......... 59 President and Chief Executive Officer of the
Jackson, Michigan Company
William G. Davis(1)....... 69 Counsel, Torys
Brampton, Ontario
Peter M. George........... 56 Vice Chairman and Chief Executive Officer of
Watford, England Hilton Group plc (formerly Ladbroke Group plc)
Joseph W. Harper.......... 56 President and General Manager of Del Mar
Del Mar, California Thoroughbred Club
J. Terrence Lanni......... 56 Chairman of the Board and Chairman of the
Pasadena, California Executive Committee of MGM Grand Inc.
Edward C. Lumley(1)....... 59 Vice Chairman, Nesbitt Burns Inc.
South Lancaster, Ontario
Earle I. Mack............. 61 Senior Partner and Chief Financial Officer of
Rochelle Park, New Jersey The Mack Company
James Nicol(1)............ 45 Vice-Chairman of the Company and Vice-Chairman
Toronto, Ontario of Magna International Inc.
Gino Roncelli............. 64 Chief Executive Officer of Roncelli Plastics
Arcadia, California Inc. and Councilman for the City of Arcadia,
California
Andrew Stronach(2)........ 31 Executive Vice-President, Corporate Development
Aurora, Ontario of the Company
Frank Stronach(1)(2)...... 67 Partner, Frank Stronach & Co., Chairman of
Oberwaltersdorf, Austria Magna International Inc. and Chairman of the
Company
Ronald J. Volkman......... 61 Chairman of the Board and President of ATX,
San Bruno, California Inc.
John C. York II........... 50 Executive Vice President and Senior Vice
Youngstown, Ohio President, Racing Operations of The Edward J.
DeBartolo Corporation
</TABLE>
- --------
(1) Are currently directors of Magna.
(2) Mr. Andrew Stronach is the son of Mr. Frank Stronach.
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.
Mr. Campbell served as Chairman of the Board and Chief Executive Officer of
Republic Bancorp Inc. from April 1986 to February, 2000. Mr. Lanni served as
Chief Executive Officer of MGM Grand Inc. from June 1995 to December 1999 and
was President and Chief Operating Officer
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of Caesars World, Inc. from April 1991 to February 1995. Mr. Nicol has 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. Mr. Andrew Stronach has served as
President of both Adena Springs Farm and Stronach Stables since 1998 and held
various senior administrative positions with both of these companies
since 1995.
We intend to appoint one additional independent director to take effect upon
completion of the distribution. This independent director will be free from any
material interest, business or other relationship with us or Magna. Upon
appointment of all our proposed additional directors, we will constitute an
Audit Committee and a Corporate Governance, Human Resources and Compensation
Committee. A majority of the members of each of these committees will be
comprised of independent directors.
Executive Officers
Our current officers are: Messrs. Frank Stronach, Chairman of the Board;
James Nicol, President and Vice Chair; Graham Orr, Executive Vice-President and
Chief Financial Officer; Vincent Galifi, Executive Vice-President, Finance; J.
Brian Colburn, Executive Vice-President and Secretary; Lonny Powell, Executive
Vice-President, Racing Operations; and Frank De Marco Jr., Vice-President,
Regulatory Affairs. Prior to the completion of the distribution Messrs.
Colburn, Galifi, Nicol and Orr intend to resign as officers and we intend to
appoint the following individuals as officers:
<TABLE>
<CAPTION>
Position with the Company and Principal
Name and Address Age Occupation
---------------- --- ---------------------------------------
<C> <C> <S>
Jerry D. Campbell........ 59 President and Chief Executive Officer of the
Jackson, Michigan Company
David A. Mitchell........ 46 Executive Vice-President and Chief Financial
Las Vegas, Nevada Officer of the Company
James Nicol.............. 45 Vice-Chairman of the Company and Vice-Chairman
Toronto, Ontario of Magna (since May 1998)
Lonny T. Powell.......... 40 Executive Vice-President, Racetrack Operations
Glendora, California of the Company and President and Chief Executive
Officer of Los Angeles Turf Club, Inc. (since
July 1999)
Andrew Stronach.......... 31 Vice-President, Corporate Development of the
Aurora, Ontario Company
Frank Stronach........... 67 Chairman of the Company (since March 1999) and
Oberwaltersdorf, Austria Chairman of
Magna International Inc.
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>
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 Mr. Campbell, Mr. Powell, Mr. A. Stronach and Mr. DeMarco.
Mr. Campbell served as Chairman of the Board and Chief Executive Officer of
Republic Bancorp Inc. from its establishment in April 1986 to December 1999.
Mr. Campbell has over 32 years of executive experience, including 30 years as a
chief executive officer. In addition, Mr. Campbell has approximately 25 years
of experience in the horse racing industry through his involvement in the
breeding and racing of horses. Mr. Campbell is also the President and Chief
Executive Officer of Great Lakes Downs, Inc. which owns and operates Great
Lakes Downs racetrack in Muskegan, Michigan.
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Mr. Mitchell served as a Senior Vice-President of Caesars World, Inc. from
September 1994 to December 1999. Mr. Mitchell's primary responsibilities
included the development of major domestic and international gaming venues,
including venues in Argentina, Egypt, France, Ireland, Lebanon, Macau, Mexico,
Morocco, Phillippines, South Africa, Spain and Venezuela. Mr. Mitchell also has
several years of management experience in the horse racing industry.
Mr. Powell served as the President of Turf Paradise racetrack 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. Andrew Stronach has served as President of both Adena Springs Farm and
Stronach Stables since 1998 and held various senior administrative positions
with both of these companies since 1995.
Mr. De Marco has been a practicing attorney in Los Angeles County since 1951
and has been the Executive Director, General Counsel and Secretary of Los
Angeles Turf Club, Inc. since April, 1998.
Prior to the date of this prospectus, 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 senior officers as
a group (16 persons) will beneficially own 147,529 of shares of our Class A
Subordinate Voting Stock or Exchangeable Shares, representing less than 1% of
our Class A Subordinate Voting Stock (assuming the exchange of all Exchangeable
Shares) and none of our Class B Stock.
Employment Agreements
Prior to the completion of the distribution we will enter into an employment
agreement with Mr. Campbell in connection with his agreement to serve as our
President and Chief Executive Officer effective January 1, 2000. Mr. Campbell's
contract will provide for a base salary of $300,000 per annum, an annual bonus
based on a percentage of our pre-tax profits, a discretionary bonus based on
personal performance, confidentiality obligations, non-competition covenants
and a termination provision permitting his employment to be terminated by us by
giving minimum advance written notice of termination or by paying a retiring
allowance instead. Mr. Campbell's contract will also provide for the issuance
of stock options to purchase 1,000,000 shares of our Class A Subordinate Voting
Stock at an exercise price equal to the fair market of these shares at the time
the distribution of our Class A Subordinate Voting Stock to Magna's
shareholders is completed. The issuance of these options is subject to approval
by our Board of Directors and is also subject to regulatory approval.
We have entered or will enter into employment contracts with the other
members of our senior management effective on or prior to the distribution
date. These employment contracts generally provide for base salaries and annual
bonuses (in most cases based on a specified percentage of our pre-tax profits
before profit sharing), confidentiality obligations and non-competition
covenants. Each of these employment contracts 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 instead. Subject to
approval by our Board of Directors, some of our senior officers may receive
options to acquire shares of our Class A Subordinate Voting Stock at the fair
market value at the time of issuance.
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 that fiscal year. See
"Description of Securities--Corporate Constitution" below for a more detailed
discussion of our incentive bonus policy.
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 a stock option plan, referred to as the "Stock Option
Plan", in order to provide stock options and stock appreciation rights in
respect of our Class A Subordinate Voting Stock to our eligible senior officers
and employees. Some 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, directors who are not our officers or officers of Magna
would be entitled to receive stock options for 5,000 shares of our Class A
Subordinate Voting Stock upon first becoming elected as a director. These
eligible directors would receive an additional stock option for 5,000 shares of
our Class A Subordinate Voting Stock upon the completion of five consecutive
years as an eligible director.
Under the Stock Option Plan, stock options and stock appreciation rights may
be granted in respect of a maximum of 8,019,821 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 greater
of (i) the closing price of the last board lot of shares of our Class A
Subordinate Voting Stock on the trading day immediately prior to the date of
the grant and (ii) the fair market value of the shares of our Class A
Subordinate Voting Stock on 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 may be granted in tandem with a
stock option or independent of a stock 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
that 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, this 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.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 7, 2000 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:
. 1,662,890 outstanding shares of our Class A Subordinate Voting Stock
as of February 7, 2000.
. 63,712,141 shares of Class B Stock outstanding as of February 7,
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)(2) 63,712,141 100%
337 Magna Drive
Aurora, Ontario
L4G 7K1
Class A Subordinate The Edward J. DeBartolo 650,695(3) 39%
Voting Stock........... Corporation
7620 Market Street
Youngstown, Ohio
44512
Class A Subordinate Ladbroke Racing Corporation 1,012,195(4) 61%
Voting Stock........... c/o Hilton Group plc
Maple Court Central Park
Reeds Cresent
Watford, Hertfordshire
WD1 1HZ
</TABLE>
- --------
(1) Magna directly owns 58,499,149 or 91.81% of these shares of our Class B
Stock and also owns 14,823,187 Exchangeable Shares exchangeable into the
same number of shares of our Class A Subordinate Voting Stock. The
remaining shares of our Class B Stock are owned through direct or indirect
wholly owned subsidiaries of Magna. Assuming the exercise of the
Exchangeable Shares, Magna would be entitled to vote approximately 99% of
the votes attaching to our stock.
(2) The Stronach Trust beneficially owns approximately 66% of the Class B
Shares of Magna, which shares represent approximately 58% of the voting
equity of Magna as of February 7, 2000 (assuming the exchange of all
Exchangeable Shares).
(3) Represents approximately 0.04% of our voting equity as of February 7, 2000
(assuming the exchange of all Exchangeable Shares).
(4) Represents approximately 0.06% of our voting equity as of February 7, 2000
(assuming the exchange of all Exchangeable Shares).
As of February 7, 2000, none of our current or proposed directors or
officers owned any shares of our Class A Subordinate Voting Stock or Class B
Stock or any Exchangeable Shares.
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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 New York Stock
Exchange and The Toronto Stock Exchange. Magna's Class B Shares are listed on
The Toronto Stock Exchange. Magna is currently the sole stockholder of our
Class B Stock and the Exchangeable Shares and The Edward J. DeBartolo
Corporation and Ladbroke Racing Corporation are currently the sole holders of
our Class A Subordinate Voting Stock. 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 these persons. See "Description
of Securities--Corporate Constitution--Board of Directors" for a more detailed
discussion. Policies of applicable securities regulatory authorities also
recommend that issuers involved in a "related party transaction" have a related
party transaction approved by a special committee of directors, consisting only
of directors who are independent of the interested party and, in some
circumstances, that an independent valuation and the approval of such
transaction by a majority of the disinterested stockholders be obtained. We
intend to constitute a special committee of directors in appropriate
circumstances and to comply with any other requirements that may be imposed
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 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 our 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's commitment is contained in a forebearance agreement dated as of . ,
2000 between us and Magna and in which Magna's shareholders are express third
party beneficiaries. We have been advised by Magna that it currently intends to
retain control over us even though it may only hold a minority equity interest
in us.
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 some 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. Mr. Frank Stronach, our
Chairman and 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.
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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
Mr. Frank Stronach, our Chairman and one of our directors and 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 September 30, 1999, Magna had
paid $9.0 million to the vendor in connection with this transaction. This
transaction was approved by the Board of Directors of Magna at the time the
agreement to purchase was originally entered into. 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 described
above.
Transactions with Magna
Pursuant to a conditional sale agreement, Magna transferred real property in
Aurora, Canada to us with a value of $20.6 million, which represents the book
value of the property. The conditional sale agreement is subject to the
successful severance of the affected properties. If severance is not obtained
within a specified period such that Magna retains ownership of the Aurora
property, Magna must return $20.6 million to us with interest. Prior to
completion of the conditional sale, the property is being leased by us from
Magna for a nominal amount.
Pursuant to two conditional sale agreements, Magna transferred to us vacant
land with a value of $4.6 million, which represents the book value of the
property. The conditional sale agreements are subject to the successful
severance of the affected 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 us with interest.
We have 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 (approximately $3.9 million).
At September 30, 1999, we had an outstanding note due to Magna in the amount
of $35.2 million. On September 1, 1999, Magna invested an additional $250.0
million in cash in us by way of equity contribution. Of this amount, $146.9
million was loaned back to Magna. The note receivable from Magna for this
obligation is due on demand and bears interest at the U.S. prime rate less 1%
per annum. Both the note payable and receivable with Magna were settled
subsequent to September 30, 1999.
We have granted Magna a right of first refusal to purchase our two golf
courses.
As a result of the reorganization, we acquired shares in a subsidiary which
has been named as a defendant in a class action brought in a United States
District Court by Gutwillig, et al. An Austrian subsidiary of Magna has agreed
to indemnify this subsidiary for any damages or expenses associated with this
claim. For further information regarding our acquisition of this subsidiary,
see "Reorganization". Also, for details on the legal action, see "Legal
Proceedings".
A subsidiary of Magna has agreed to indemnify us in respect of environmental
remediation costs and expenses relating to existing conditions in some of our
Austrian real estate properties.
Access Fees
Pursuant to an access agreement dated as of March 1, 1999, Magna is
currently paying us an annual fee of $2.7 million 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. During the
nine months ended September 30, 1999, Magna paid us $1.6 million in access
fees. The access fee relating to Fontana Sports is payable until March 1, 2004.
Upon completion of the Aurora golf course, Magna will enter into an agreement
to pay us an annual access fee to use the Aurora golf course for Magna-
sponsored corporate and charitable
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events and business development purposes. The access fee agreement relating to
the Aurora golf course will expire five years from the date of the agreement.
We have also granted Magna a right of first refusal to purchase these two golf
courses, if we decide to sell them.
Purchase of Great Lakes Downs
Pursuant to a purchase agreement dated as of December 24, 1999, with Great
Lakes Downs, Inc. and Great Lakes Downs Cafe, Inc., we agreed to acquire the
assets and assume approximately $9.3 million of liabilities of Great Lakes
Downs racetrack for a purchase price of approximately $1.7 million, payable by
the issuance of 267,416 shares of our Class A Subordinate Voting Stock. Mr.
Jerry Campbell, one of our proposed directors and our proposed President and
Chief Executive Officer is the principal shareholder of Great Lakes Downs, Inc.
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 slave or forced
labor performed by the plaintiffs for that subsidiary and some other Austrian
and German corporate defendants at their facilities in Europe during World War
II. As a result of the transactions described under the heading
"Reorganization" above, we acquired the stock of this subsidiary. Under
Austrian law, this subsidiary would be jointly and severally liable for the
damages awarded in respect of this class action claim. We cannot predict the
final outcome of this class action suit, or establish a reasonable estimate of
possible damages or a range of possible damages that could be awarded to the
plaintiffs if their claims are successful. However, an Austrian subsidiary of
Magna has agreed to indemnify that subsidiary for any damages or expenses
associated with this claim.
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 or for the Exchangeable Shares.
Holders of shares of our Class A Subordinate Voting Stock, our Class B Stock
and the Exchangeable Shares are entitled to receive their proportionate shares
of dividends as may be declared by our board of directors, subject to the prior
rights attaching to any other stock ranking in priority to our Class A
Subordinate Voting Stock, our Class B Stock and the Exchangeable Shares.
Subject to applicable law, we intend to pay dividends starting with the
fiscal year commencing January 1, 2004 in respect of the quarter commencing on
that date and each succeeding quarter on our Class A Subordinate Voting Stock
and our Class B Stock. We will declare future dividends on our Class A
Subordinate Voting Stock and our Class B Stock in accordance with our articles
of incorporation and our Corporate Constitution. See "Description of Our
Securities--Corporate Constitution--Dividends".
We were incorporated on March 4, 1999 and have not declared any dividends to
date.
DESCRIPTION OF OUR 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 this type of stock.
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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 these 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 the 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
our Class A Subordinate Voting Stock and on our Class B Stock in our Class A
Subordinate Voting Stock or our Class B Stock, which would cause additional
voting dilution to holders of our Class A Subordinate Voting Stock. No dividend
payable in our Class B Stock may be declared on our Class A Subordinate Voting
Stock.
Holders of our Class A Subordinate Voting Stock have additional voting
rights under our Corporate Constitution. For further information about these
rights, see "Description of Securities--Corporate Constitution" below.
Our articles of incorporation state that where these articles, including the
Corporate Constitution, require the approval of the holders of our Class A
Subordinate Voting Stock voting as a separate class, this approval means the
approval given by a majority of the votes cast at a meeting of these 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 these 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 the 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
. from time to time, to convert the Class B Stock into our 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.
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Change of Control Protection
Under applicable Canadian law, an offer to purchase shares of our Class B
Stock would not necessarily result in an offer to purchase shares of our Class
A Subordinate Voting Stock. Magna, as the holder of all our issued and
outstanding Class B Stock, intends to enter into a trust agreement prior to the
completion of the distribution with Montreal Trust Company of Canada and us.
This trust agreement provides that the holders of our Class A Subordinate
Voting Stock will not be deprived of any rights under applicable take-over bid
laws to which they would have been entitled in the event of a take-over bid
(which may include a private offer to purchase) if our Class B Stock and the
Class A Subordinate Voting Stock were a single class of stock.
Under the trust agreement, Magna will not sell any Class B Stock pursuant to
a take-over bid, as defined under the Securities Act (Ontario), at a price per
share in excess of 115% of the market price of our Class A Subordinate Voting
Stock. This prohibition will not apply if: (i) the sale is made pursuant to an
offer to purchase only part of the Class B Stock made to all holders of our
Class B Stock and an identical offer in all material respects is made
concurrently to purchase our Class A Subordinate Voting Stock, which identical
offer has no condition attached other than the right not to take up and pay for
shares tendered if no shares are purchased pursuant to the offer for Class B
Stock; or (ii) there is a concurrent unconditional offer to purchase all our
Class A Subordinate Voting Stock at a price per share at least as high as the
highest price per share paid pursuant to the take-over bid for the Class B
Stock.
The trust agreement will contain provisions for the authorization of action
by the trustee to enforce the rights of the holders of our Class A Subordinate
Voting Stock. The trustee only has to enforce these rights if either us or the
holders of our Class A Subordinate Voting Stock agree to pay the trustee's
costs and to indemnify the trustee. A holder of the Class A Subordinate Voting
Stock is not entitled to take action unless the trustee refused to act after a
request to do so by holders of 10% of our outstanding Class A Subordinate
Voting Stock.
The trust agreement will prohibit Magna from disposing of any shares of our
Class B Stock unless the disposition is conditional upon the person acquiring
those shares becoming a party to the trust agreement. Conversion of Class B
Stock into Class A Subordinate Voting Stock and the subsequent sale of that
Class A Subordinate Voting Stock is excluded from this prohibition.
The trust agreement will provide that it may not be amended and material
provisions cannot be waived, without the approval of The Toronto Stock Exchange
and at least two-thirds of the votes cast by the holders of the Class A
Subordinate Voting Stock. The two-thirds majority must include a simple
majority of the votes cast by holders of the Class A Subordinate Voting Stock
excluding any of our principal shareholders and their affiliates and any
persons who have an agreement to purchase Class B Stock on terms which would
constitute a sale for the purposes of the trust agreement.
The trust agreement will not prevent the holder of our Class B Stock from:
(i) granting a security interest in shares of our Class B Stock in
connection with a bona fide borrowing, provided that the secured party
concurrently agrees in writing to become a party to the trust
agreement; or
(ii) selling, transferring or otherwise disposing of any or all of the
shares of our Class B Shares which the holder holds to a company
controlled by or under common control with the holder, provided
further that the transferee concurrently agrees in writing to become a
party to the trust agreement.
No provision of the trust agreement will limit the rights of any holder of
the Class A Subordinate Voting Stock under any applicable securities
legislation.
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Corporate Constitution
We have adopted 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 our Class A Subordinate Voting Stock held
by 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 these 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
We are currently examining establishing an employee profit sharing plan
pursuant to which a percentage of our pre-tax profits before profit sharing for
each fiscal year commencing in respect of our fiscal year commencing January 1,
2004 would 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 that year or the immediately following fiscal year. For a more
complete discription, see "Incentive Bonuses".
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 that 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 that 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 that 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 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.
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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 social objectives during
that 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 chief executive
officer, chief operating officer, chief financial officer and any other
employee designated by these persons, in respect of each fiscal year shall not
exceed 6% of our pre-tax profits before profit sharing for that fiscal year and
that base salaries payable to these persons shall be comparable to those in the
industry generally.
DESCRIPTION OF EXCHANGEABLE SHARES
The following is a summary of the rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares of our Ontario subsidiary MEC
Holdings (Canada) Inc. and the terms of the Exchangeable Share Support
Agreement and the Voting and Exchange Agreement, two agreements relating to the
Exchangeable Shares to which we are a party, each dated as of December 30,
1999.
General
The Exchangeable Shares will be issued by our subsidiary MEC Holdings
(Canada) Inc., which we refer to throughout this prospectus as Exchangeco. The
Exchangeable Shares, together with certain ancillary rights, are economically
equivalent to the shares of our Class A Subordinate Voting Stock. The
Exchangeable Shares will be exchangeable at any time at the option of the
holder, on a one-for-one basis, for shares of our Class A Subordinate Voting
Stock. By furnishing instructions to Magna under the Voting and Exchange
Agreement, holders of the Exchangeable Shares will be able to exercise
essentially the same voting rights with respect to us as they would have if
they exchanged their Exchangeable Shares for shares of our Class A Subordinate
Voting Stock. Holders of Exchangeable Shares will also be entitled to receive
from Exchangeco dividends that are economically equivalent to any dividends
paid on shares of our Class A Subordinate Voting Stock. The Exchangeable Shares
are subject to adjustment or modification in the event of a stock split, stock
dividend or other change to our capital structure so as to maintain the one-to-
one relationship between the Exchangeable Shares and the shares of our Class A
Subordinate Voting Stock.
Voting, Dividend and Liquidation Rights
Voting Rights with Respect to Exchangeco
Except as required by law or under the Exchangeable Share Support Agreement,
the terms of the Exchangeable Shares with respect to the amendment thereof or
the Voting and Exchange Agreement, the holders of Exchangeable Shares are not
entitled to receive notice of or attend any meeting of shareholders of
Exchangeco or to vote at any such meeting.
Voting Rights with Respect to Us
Pursuant to the Voting and Exchange Agreement, each holder of an
Exchangeable Share, other than us and our subsidiaries, on the record date for
any meeting at which our stockholders are entitled to vote will be
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entitled to instruct Magna, and Magna has agreed, to exercise one of the votes
attached to a share of our Class A Subordinate Voting Stock or a share of our
Class B Stock for each Exchangeable Share held by that holder. Under that
agreement Magna has agreed that, for so long as any of the Exchangeable Shares
are outstanding, it will at all times hold the power to cast an identical
number of votes attaching to our Class A Subordinate Voting Stock or our Class
B Stock. If we are required to hold a class vote of our Class A Subordinate
Voting Stock, Magna may not use the voting rights attaching to any of the
shares of our Class B Stock that it holds to satisfy its obligation to cast
votes as instructed by holders of Exchangeable Shares, but may only exercise
the voting rights attaching to our Class A Subordinate Voting Stock held by it
for that purpose. If necessary, Magna will convert shares of our Class B Stock
into shares of our Class A Subordinate Voting Stock in order to have enough
shares of that class available to honor all the voting instructions that it
receives. If Magna does not receive voting instructions covering all the
outstanding Exchangeable Shares, it will refrain from exercising a number of
voting rights attaching to our shares that it holds that is equal to the number
of Exchangeable Shares for which no voting instructions were received. A holder
of Exchangeable Shares may, upon request to Magna, obtain a proxy from Magna
entitling the holder to vote directly at the relevant meeting the votes
attached to our shares held by Magna to which the Exchangeable Share holder is
entitled to give Magna voting instructions.
We will send to the holders of the Exchangeable Shares, at our own expense,
the notice of each meeting at which our stockholders are entitled to vote,
together with the related meeting materials and a statement as to the manner in
which the holder may instruct Magna to exercise voting rights or to deliver a
proxy to the holder. This mailing shall commence on the same day as we send the
notice and materials to our stockholders. We will also send to the holders of
Exchangeable Shares copies of all information statements, interim and annual
financial statements, reports and other materials sent by us to stockholders at
the same time as such materials are sent to them. To the extent these materials
are provided to us, we will also send to the holders of Exchangeable Shares all
materials sent by third parties to our stockholders, including dissident proxy
circulars and tender and exchange offer circulars, as soon as reasonably
practicable after such materials are delivered to us.
All rights of a holder of an Exchangeable Share to instruct Magna to
exercise votes attached to a share of our stock held by Magna will cease upon
the exchange, whether by redemption, retraction or liquidation, or through the
exercise of any of the rights as described below, of that holder's Exchangeable
Share for a share of our Class A Subordinate Voting Stock.
In accordance with the terms of the Exchangeable Share Support Agreement, we
and our subsidiaries will not exercise any voting rights with respect to any
Exchangeable Shares held by us or our subsidiaries, although we will appoint
proxyholders with respect to such Exchangeable Shares for the sole purpose of
attending meetings of the holders of Exchangeable Shares in order to be counted
as part of the quorum for these meetings.
Dividend Rights
Holders of Exchangeable Shares will be entitled to receive, subject to
applicable law and to the next paragraph, dividends: (i) in the case of a cash
dividend declared on shares of our Class A Subordinate Voting Stock, in an
amount in cash for each Exchangeable Share corresponding to the cash dividend
declared on each of the shares of our Class A Subordinate Voting Stock; (ii) in
the case of a stock dividend declared on the shares of our Class A Subordinate
Voting Stock to be paid in shares of our Class A Subordinate Voting Stock, in
that number of Exchangeable Shares for each Exchangeable Share as is equal to
the number of shares of our Class A Subordinate Voting Stock to be paid on each
such outstanding share; or (iii) in the case of a dividend declared on the
shares of our Class A Subordinate Voting Stock in property other than cash or
shares of our Class A Subordinate Voting Stock, in such type and amount of
property as is the same as or economically equivalent to, the type and amount
of property declared as a dividend on each of the shares of our Class A
Subordinate Voting Stock. Cash dividends on the Exchangeable Shares are payable
in U.S. dollars or the Canadian dollar equivalent thereof, at the option of
Exchangeco. The declaration date, record date and payment
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date for dividends on the Exchangeable Shares will be the same as the relevant
date for the corresponding dividends on the shares of our Class A Subordinate
Voting Stock. See "Trading History and Dividend Record and Policy".
In the case of a stock dividend declared on the shares of our Class A
Subordinate Voting Stock to be paid in shares of our Class A Subordinate Voting
Stock, in lieu of declaring a corresponding stock dividend on the Exchangeable
Shares, the Board of Directors of Exchangeco may, in its discretion and subject
to applicable law, subdivide, redivide or change (collectively referred to as a
subdivision), each Exchangeable Share on the basis that each Exchangeable Share
before the subdivision becomes a number of Exchangeable Shares as is equal to
the sum of: (i) a share of our Class A Subordinate Voting Stock; and (ii) the
number of shares of our Class A Subordinate Voting Stock to be paid as a stock
dividend on each share of our Class A Subordinate Voting Stock. In this
instance, the subdivision shall become effective on the effective date for the
dividend declared on the shares of our Class A Subordinate Voting Stock without
any further act or formality on the part of the Board of Directors of
Exchangeco or of the holders of Exchangeable Shares. No approval of the holders
of Exchangeable Shares to an amendment to the articles of Exchangeco shall be
required to give effect to the subdivision. The record date for the
determination of the holders of Exchangeable Shares entitled to receive
Exchangeable Shares in connection with any subdivision of Exchangeable Shares
and the effective date of the subdivision shall be the same dates as the record
date and payment date, respectively, for the corresponding stock dividend
declared on the shares of our Class A Subordinate Voting Stock.
Rights Upon an Event of Insolvency
Upon the occurrence and during the continuance of an event of insolvency of
Exchangeco, each holder of Exchangeable Shares, other than us and our
subsidiaries, will be entitled to exercise an exchange right with respect to
any or all of the Exchangeable Shares held by the holder, thereby requiring us
to purchase each Exchangeable Share from the holder of our Class A Subordinate
Voting Stock, the purchase price for which will be satisfied by the delivery of
one share of our Class A Subordinate Voting Stock. As soon as practicable
following the occurrence of an event of insolvency of Exchangeco, or any event
which may, with the passage of time and/or the giving of notice, become such an
event, we or Exchangeco will give notice thereof to each holder of Exchangeable
Shares, which notice will advise the holder of the rights described in this
paragraph. The purchase price payable by us for each Exchangeable Share
purchased under this exchange right will be the same amount as Exchangeco would
pay holders of Exchangeable Shares upon a liquidation.
Liquidation Rights with Respect to Exchangeco
In the event of the liquidation, dissolution or winding-up of Exchangeco or
any other distribution of the assets of Exchangeco among its shareholders for
the purpose of winding-up its affairs, holders of the Exchangeable Shares will
have, subject to applicable law, preferential rights to receive from Exchangeco
a specified liquidation amount, being the then current market price of a share
of our Class A Subordinate Voting Stock, for each Exchangeable Share held,
payable in shares of our Class A Subordinate Voting Stock, plus all declared
and unpaid dividends. Upon the occurrence of a liquidation, dissolution or
winding-up, we will have an overriding liquidation call right to purchase all
the outstanding Exchangeable Shares, other than Exchangeable Shares held by us
or our subsidiaries, from the holders thereof on the liquidation date for a
purchase price per share equal to the specified liquidation amount.
Liquidation Rights with Respect to Us
In order for the holders of the Exchangeable Shares to participate on a pro
rata basis with the holders of shares of our Class A Subordinate Voting Stock,
on the fifth business day prior to the effective date of our voluntary or
involuntary liquidation, dissolution or winding-up, each Exchangeable Share,
other than those held by us or our subsidiaries, will, pursuant to an automatic
exchange right under Voting and Exchange Agreement, automatically be exchanged
for a share of our Class A Subordinate Voting Stock together with an amount of
cash equal to any declared but unpaid dividends on each Exchangeable Share. The
certificates previously
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evidencing the Exchangeable Shares shall automatically be deemed to evidence an
equal number of shares of our Class A Subordinate Voting Stock. Upon a holder's
request and the surrender of the Exchangeable Share certificates, we will
deliver to the holder certificates representing an equivalent number of shares
of our Class A Subordinate Voting Stock. For a description of some of our
obligations with respect to the dividend and liquidation rights of the holders
of Exchangeable Shares, see "Description of Exchangeable Shares--Support
Obligation".
Retraction
Subject to the exercise by us of our retraction call right, holders of the
Exchangeable Shares will be entitled, at any time following the effective time
of the retraction, to retract, i.e., require Exchangeco to redeem, any or all
of the Exchangeable Shares held by that holder for a retraction price per share
equal to the then current market price of a share of our Class A Subordinate
Voting Stock, which retraction price will be satisfied by the delivery of one
share of our Class A Subordinate Voting Stock, plus all declared and unpaid
dividends. Holders of the Exchangeable Shares may effect this retraction by
presenting: (i) a certificate or certificates to Exchangeco representing the
number of Exchangeable Shares the holder desires to retract; (ii) a duly
executed retraction request indicating the number of Exchangeable Shares the
holder desires to retract and the retraction date and acknowledging the
retraction call right described in the paragraph below; and (iii) any other
documents as may be required to effect the retraction of the Exchangeable
Shares.
When a holder retracts Exchangeable Shares, we will have an overriding call
right to purchase on the retraction date all but not less than all of the
retracted shares, at a purchase price per share equal to the retraction price,
which purchase price will be satisfied by the delivery of one share of our
Class A Subordinate Voting Stock for each Exchangeable Share so purchased. Upon
receipt of a retraction request, Exchangeco will immediately notify us of it.
We must then advise Exchangeco within five business days as to whether we will
exercise our retraction call right. If we do not so advise Exchangeco,
Exchangeco will notify the holder as soon as possible thereafter that we will
not exercise our retraction call right. If we advise Exchangeco that we will
exercise our retraction call right within this five business-day period, then
provided the retraction request is not revoked by the holder as described
below, the retraction request shall thereupon be considered only to be an offer
by the holder to sell the retracted shares to us in accordance with our
retraction call right.
A holder may revoke his or her retraction request, in writing, at any time
prior to the close of business on the business day preceding the retraction
date, in which case the retracted shares will neither be purchased by us nor be
redeemed by Exchangeco. If a holder does not revoke his or her retraction
request, on the retraction date the retracted shares will either be purchased
by us or redeemed by Exchangeco, as the case may be.
If, as a result of solvency requirements or applicable law, Exchangeco is
not permitted to redeem all retracted shares tendered by a retracting holder,
Exchangeco will redeem only those retracted shares tendered by the holder,
rounded down to a whole number of shares, as would not be contrary to the
provisions of applicable law. We will be required to purchase the retracted
shares not redeemed on the retraction date.
Redemption
Subject to applicable law and the redemption call right described in the
next paragraph, on the redemption date, Exchangeco will redeem all but not less
than all of the then outstanding Exchangeable Shares for a redemption price per
share equal to the then current market price of a share of our Class A
Subordinate Voting Stock, which redemption price will be satisfied by the
delivery of one share of our Class A Subordinate Voting Stock together with all
declared but unpaid dividends for each Exchangeable Share so purchased.
Exchangeco will, at least 60 days prior to the redemption date, or any number
of days as the Board of Directors of Exchangeco may determine to be reasonably
practicable under the circumstances in respect of a redemption date arising in
connection with, among other events, a change of control of us or an event in
respect of which the approval of holders of Exchangeable Shares is required,
provide the registered holders of the Exchangeable
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Shares with written notice of the proposed redemption of the Exchangeable
Shares by Exchangeco or the purchase of the Exchangeable Shares by us pursuant
to the redemption call right.
We will have an overriding call right to purchase on the redemption date
all, but not less than all, of the Exchangeable Shares then outstanding, other
than Exchangeable Shares held by us and our subsidiaries, for a purchase price
per share equal to the redemption price, which purchase price will be satisfied
by the delivery of one share of our Class A Subordinate Voting Stock for each
Exchangable Share so purchased. Upon our exercise of the redemption call right,
holders will be obligated to sell their Exchangeable Shares to us. If we
exercise the redemption call right, Exchangeco's right and obligation to redeem
the Exchangeable Shares on the redemption date will terminate.
Date for Redemption
Exchangeco has the right to redeem all of the Exchangeable Shares on and
after October 1, 2001, or any other date after October 1, 2001 but prior to
April 1, 2003 that the Board of Directors of Exchangeco may determine provided
that written notice of the determination of this other date is provided to
holders of the Exchangeable Shares at least 60 days before October 1, 2001.
In some circumstances, Exchangeco has the right to require a redemption of
the Exchangeable Shares prior to the date referred to in the paragraph above.
Subject to the terms and condition of the Exchangeable Share Support Agreement,
and subject to the redemption call right, an early redemption may occur upon:
(a) the number of Exchangeable Shares then outstanding, other than
Exchangeable Shares held by us and our subsidiaries, constitutes less
than 5% of the aggregate of the number of shares of our Class A
Subordinate Voting Stock then outstanding and the total number of
Exchangeable Shares then outstanding, including all Exchangeable Shares
held by us and our subsidiaries;
(b) the occurrence of a change of control of us, provided that the Board of
Directors of Exchangeco determines (i) that it is not reasonably
practicable to substantially replicate the terms and conditions of the
Exchangeable Shares in connection with the change of control
transaction, and (ii) that the redemption of the Exchangeable Shares is
necessary to enable the completion of the change of control
transaction;
(c) a proposal being made for any matter relating to Exchangeco that
requires the approval of the holders of Exchangeable Shares, provided
that the Board of Directors of Exchangeco determines that it is not
reasonably practicable to accomplish the business purpose intended by
the matter, which business purpose must be bona fide and not for the
primary purpose of causing the occurrence of an early redemption, in
any other commercially reasonable manner; or
(d) the failure by the holders of the Exchangeable Shares to approve or
disapprove, as applicable, a matter relating to Exchangeco that
requires the approval of the holders of Exchangeable Shares for the
purpose of maintaining the equivalence of the Exchangeable Shares and
the shares of our Class A Subordinate Voting Stock.
Ranking
The Exchangeable Shares will be entitled to a preference over the common
shares of Exchangeco and any other shares ranking junior to the Exchangeable
Shares with respect to the payment of dividends and the distribution of assets
in the event of a liquidation, dissolution or winding-up of Exchangeco, whether
voluntary or involuntary, or any other distribution of the assets of
Exchangeco, among its shareholders for the purpose of winding-up its affairs.
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Certain Restrictions
Exchangeco will not take any of the following actions without the approval
of the holders of Exchangeable Shares as set forth below under "Description of
Exchangeable Shares--Amendment and Approval":
(a) pay any dividends on the common shares of Exchangeco, or any other
shares ranking junior to the Exchangeable Shares, other than stock
dividends payable in common shares of Exchangeco, or any other shares
ranking junior to the Exchangeable Shares, as the case may be;
(b) redeem, purchase or make any capital distribution in respect of common
shares of Exchangeco, or any other shares ranking junior to the
Exchangeable Shares;
(c) redeem or purchase any other shares of Exchangeco ranking equally with
the Exchangeable Shares with respect to the payment of dividends or any
liquidation distribution;
(d) issue any Exchangeable Shares other than: (i) pursuant to any
shareholder rights plan adopted by Exchangeco; (ii) by way of stock
dividend to the holders of Exchangeable Shares, or (iii) by way of any
subdivision described above under the heading "Description of
Exchangeable Shares--Dividend Rights"; or
(e) issue any shares of Exchangeco ranking equally with, or superior to,
the Exchangeable Shares other than by way of stock dividend to the
holders of the Exchangeable Shares.
The restrictions in clauses (a), (b), (c) and (d) above will not apply at
any time when the dividends on the outstanding Exchangeable Shares
corresponding to dividends declared and paid on the shares of our Class A
Subordinate Voting Stock from its first date of issue through that time have
been declared and paid in full.
Amendment and Approval
The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed only with the approval
of the holders thereof. Any such approval or any other approval or consent to
be given by the holders of the Exchangeable Shares will be deemed to have been
sufficiently given if given in accordance with applicable law subject to a
minimum requirement that such approval or consent be evidenced by a resolution
passed by not less than two-thirds of the votes cast on that resolution at a
meeting of the holders of Exchangeable Shares duly called and held at which
holders of at least 25% of the then outstanding Exchangeable Shares are present
or represented by proxy. In the event that no such quorum is present at this
meeting within one-half hour after the time appointed therefor, then the
meeting will be adjourned to a place and time, not less than five days later as
may be designated by the Chairman of such meeting. At the adjourned meeting,
the holders of Exchangeable Shares present or represented by proxy may transact
the business for which the meeting was originally called and a resolution
passed thereat by the affirmative vote of not less than two-thirds of the votes
cast on that resolution will constitute the approval or consent of the holders
of the Exchangeable Shares.
Support Obligation
Pursuant to the Exchangeable Share Support Agreement, for so long as any
Exchangeable Shares, other than Exchangeable Shares owned by us or our
subsidiaries, remain outstanding:
(a) we will not declare or pay dividends on the shares of our Class A
Subordinate Voting Stock unless Exchangeco is able to (x) declare and
pay and simultaneously declares or pays, as the case may be, an
equivalent dividend on the Exchangeable Shares or (y) subdivide and
simultaneously subdivides the Exchangeable Shares in lieu of declaring
a stock dividend;
(b) we will advise Exchangeco in advance of the declaration of any dividend
on the shares of our Class A Subordinate Voting Stock and ensure that
(x) the declaration date, record date and payment
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date for dividends on the Exchangeable Shares are the same as those for
the corresponding dividend on the shares of our Class A Subordinate
Voting Stock or (y) the record date and effective date for a subdivision
of the Exchangeable Shares in lieu of declaring a stock dividend are the
same at the record date and payment date for the corresponding stock
dividend on the shares of our Class A Subordinate Voting Stock;
(c) we will ensure that the record date for any dividend declared on the
shares of our Class A Subordinate Voting Stock is not less than 10
business days after the declaration date of this dividend;
(d) we will take all actions and do all things reasonably necessary or
desirable to enable and permit Exchangeco, in accordance with
applicable law, to pay to the holders of the Exchangeable Shares the
applicable liquidation amount, redemption price and retraction price in
the event of a liquidation, dissolution or winding-up of Exchangeco, a
retraction request by a holder of Exchangeable Shares or a redemption
of Exchangeable Shares by Exchangeco; and
(e) we will take all actions and do all things reasonably necessary or
desirable to enable and permit us in accordance with applicable law, to
perform our obligations arising upon the exercise by us of our call
rights, including the delivery of shares of our Class A Subordinate
Voting Stock in accordance with the provisions of the applicable call
right.
The Exchangeable Share Support Agreement and the terms of the Exchangeable
Shares provide that, without the prior approval of Exchangeco and the holders
of the Exchangeable Shares given in the manner set forth above under
"Description of Exchangeable Shares--Amendment and Approval", we will not
issue or distribute additional shares of our Class A Subordinate Voting Stock,
securities exchangeable for or convertible into or carrying rights to acquire
shares of our Class A Subordinate Voting Stock, rights, options or warrants to
subscribe therefore, evidences of indebtedness or other assets, to all or
substantially all holders of shares of our Class A Subordinate Voting Stock,
nor shall we change the shares of our Class A Subordinate Voting Stock, unless
the same or an economically equivalent distribution on or change to the
Exchangeable Shares (or in the rights of the holders thereof) is made
simultaneously. The Exchangeco Board of Directors is conclusively empowered to
determine in good faith and in its sole discretion whether any corresponding
distribution on or change to the Exchangeable Shares is the same as or
economically equivalent to any proposed distribution on or change to the
shares of our Class A Subordinate Voting Stock. In the event of any proposed
tender offer, share exchange offer, issuer bid, take-over bid or similar
transaction with respect to the shares of our Class A Subordinate Voting Stock
which is recommended by our Board of Directors and in connection with which
the Exchangeable Shares are not redeemed by Exchangeco or purchased by us
pursuant to the redemption call right, we will use reasonable efforts to take
all actions necessary or desirable to enable holders of Exchangeable Shares to
participate in this type of transaction to the same extent and on an
economically equivalent basis as the holders of shares of our Class A
Subordinate Voting Stock.
In order to assist us to comply with our obligations under the Exchangeable
Share Support Agreement and to permit us to exercise the call rights,
Exchangeco is required to notify us of the occurrence of some events,
including the liquidation, dissolution or winding-up of Exchangeco, and
Exchangeco's receipt of a retraction request from a holder of Exchangeable
Shares.
Under the Exchangeable Share Support Agreement, we have agreed not to
exercise any voting rights attached to the Exchangeable Shares owned by us or
any of our subsidiaries on any matter considered at meetings of holders of
Exchangeable Shares. We have also agreed to use our reasonable efforts to
enable Exchangeco to maintain a listing for the Exchangeable Shares on a
Canadian stock exchange.
With the exception of administrative changes for the purpose of adding
covenants of any or all parties, making necessary amendments or curing
ambiguities or clerical errors in each case provided that our Board of
Directors and the Board of Directors of Exchangeco are of the opinion that
these amendments are not prejudicial to the interests of the holders of the
Exchangeable Shares, the Exchangeable Share Support
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Agreement may not be amended without the approval of the holders of the
Exchangeable Shares given in the manner set forth above under "Description of
Exchangeable Shares--Amendment and Approval".
SELLING SHAREHOLDERS
The following table sets forth information with respect to the amount of
Class A Subordinate Voting Stock held by each of the Selling Shareholders as of
February 7, 2000. The Class A Subordinate Voting Stock presently held by the
Selling Shareholders may be offered from time to time in whole or in part by
each Selling Shareholder for resale pursuant to this prospectus. Once sold by a
Selling Shareholder, the Class A Subordinate Voting Stock is not thereafter
covered by this prospectus even if subsequently acquired or reacquired by a
Selling Shareholder. None of the Selling Shareholders listed below has had a
material relationship within the past three years with us or any of our
predecessors or affiliates, other than as a result of the Class A Subordinate
Voting Stock, except as otherwise disclosed in this prospectus. See "Recent
Acquisitions".
Class A Subordinate Voting Stock
<TABLE>
<CAPTION>
Selling Shareholders Number of Shares Held
- -------------------- ---------------------
<S> <C>
The Edward J. Bartolo Corporation......................... 650,695
Ladbroke Racing Corporation............................... 1,012,195
---------
Total................................................... 1,662,890(1)
</TABLE>
- --------
(1) A further 267,416 shares of our Class A Subordinate Voting Stock will be
issued to Great Lakes Downs, Inc. upon completion by us of the acquisition
of the assets of Great Lakes Downs, Inc. and Great Lakes Downs Cafe, Inc.
Because the Selling Shareholders may offer all or some of the Class A
Subordinate Voting Stock that they hold pursuant to this prospectus, and
because this offering is not as of the date of this prospectus being
underwritten on a firm commitment basis, no estimate can be given as to the
amount of Class A Subordinate Voting Stock that will be held by the Selling
Shareholders after completion of this distribution. See "Plan of Distribution"
for further details regarding sales of our Class A Subordinate Voting Stock by
the Selling Shareholders.
PLAN OF DISTRIBUTION
This prospectus relates to three distributions of our Class A Subordinate
Voting Stock:
. the distribution by Magna of our Class A Subordinate Voting Stock to
holders of Magna's Class A Subordinate Voting Shares and Class B Shares
by way of special dividend;
. the distribution on a delayed or continuous basis of our Class A
Subordinate Voting Stock on redemption or exchange of the Exchangeable
Shares to be distributed by Magna to some of its Canadian shareholders
as part of the special dividend referred to above; and
. the distribution on a delayed or continuous basis of our Class A
Subordinate Voting Stock by some of our shareholders.
The first two distributions set forth above are described in "The Special
Dividend" and "Description of the Exchangeable Shares", respectively. The third
distribution is described below.
Any or all of the 1,662,890 shares of our Class A Subordinate Voting Stock
(1,930,306 shares of our Class A Subordinate Voting Stock, assuming the
completion of the Great Lakes Downs transaction) held by the Selling
Shareholders may be sold from time to time to purchasers directly by any of the
Selling Shareholders.
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Alternatively, the Selling Shareholders may from time to time offer our Class A
Subordinate Voting Stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of our Class A
Subordinate Voting Stock for whom they may act as agents. The Selling
Shareholders and any such underwriters, dealers or agents that participate in
the distribution of these shares may be deemed to be underwriters, and any
profit on the sale of these shares by them and any discounts, commissions or
concessions received by them may be deemed to be underwriting discounts and
commissions under the Securities Act. At the time a particular underwritten
offering of these shares is made, to the extent required, a supplement to this
prospectus will be distributed which will set forth the aggregate principal
amount of our Class A Subordinate Voting Stock being offered and the terms of
the offering, including the name or names of any underwriters, dealers or
agents, the purchase price paid by any underwriter for our Class A Subordinate
Voting Stock purchased from the Selling Shareholders, any discounts,
commissions and other items constituting compensation from the Selling
Shareholders and any discounts, commissions or concessions allowed or reallowed
or paid to dealers.
The 1,662,890 shares of our Class A Subordinate Voting Stock (1,930,306
shares of our Class A Subordinate Voting Stock, assumming the completion of the
Great Lakes Downs transaction) held by the Selling Shareholders may be sold
from time to time in one or more transactions at a fixed offering price, which
may be changed, or at varying prices determined at the time of sale or at
negotiated prices. These prices will be determined by the Selling Shareholders
or by agreement between the Selling Shareholders and underwriters or dealers.
Each Selling Shareholder will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, Regulation M,
which provisions may limit the timing of purchases and sales of any of the
Class A Subordinate Voting Stock by the Selling Shareholders. All the foregoing
may affect the marketability of these shares and the ability of any person to
engage in market making activities with respect to the Class A Subordinate
Voting Stock.
LEGAL MATTERS
Certain legal matters in connection with the distribution of shares of our
Class A Subordinate Voting Stock will be passed upon by Sidley & Austin, our
United States counsel. Certain legal matters in connection with the
distribution of the Exchangeable Shares will be passed upon by Osler, Hoskin &
Harcourt LLP, our Canadian counsel.
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
American Securities Transfer and Trust, Incorporated at its principal office in
Denver, Colorado and the co-transfer agent for our Class A Subordinate Voting
Stock is Montreal Trust Company of Canada at its principal office in Toronto,
Ontario. Montreal Trust Company of Canada at its principal office in Toronto,
Ontario is the transfer agent and registrar of the Exchangeable Shares.
PROMOTER
Since Magna took the initiative in substantially reorganizing our business
and capital, Magna may be a promoter of us, and a promoter of Exchangeco,
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".
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FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements of Magna
Entertainment Corp. as at and for the nine months ended September 30,
1999 and for the year ended December 31, 1998........................... F-2
Audited Consolidated Financial Statements of Magna Entertainment Corp. as
at December 31, 1998, July 31, 1998 and 1997 and for the five month
period ended December 31, 1998 and years ended July 31, 1998, 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, November 6, 1997 through December 31, 1997, January
1, 1997 through November 5, 1997 and for the year ended December 31,
1996.................................................................... F-43
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-58
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-70
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-83
Audited Combined Financial Statements of 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)) as at December 31, 1998
and 1997 and for each of the years in the three year period ended
December 31, 1998....................................................... F-95
</TABLE>
Separate financial statements for the real estate assets acquired by The
Santa Anita Companies, Inc. from Meditrust Corporation have not been provided
as this would provide no additional information that would be useful in the
context of the Company's registration of its shares of Class A Subordinate
Voting Stock. Such real estate was leased by the previous owner to the Los
Angeles Turf Club, Inc. ("LATC"). Given the terms of the lease agreement
between LATC and the previous owner of such real estate, the financial
statements of LATC capture all of the costs of operating such real estate.
Further, the rents paid by LATC were the only revenues generated by such real
estate. Rents paid by LATC have been eliminated in the Company's pro forma
consolidated financial statements and replaced by the appropriate amount of
depreciation expense.
Separate financial statements presenting the assets acquired and liabilities
assumed of Great Lakes Downs, Inc. and related results of operations, have not
been provided or given pro forma effect in the Pro Forma Consolidated Financial
Statements of Magna Entertainment Corp. because the effect of this acquisition
was not, and is not expected to be, material.
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma consolidated financial statements give
effect to the acquisition by the Company of the following entities in exchange
for shares of the Company's Class A Subordinate Voting Stock, cash and the
assumption of certain debt:
. Los Angeles Turf Club, Inc.
. Gulfstream Park Racing Association, Inc.
. Remington Park, Inc.
. Thistledown, Inc.
. Golden Gate Fields
The pro forma consolidated financial statements have been presented assuming
that the Reorganization (as described in the principles of consolidation note
preceding the historical consolidated financial statements of the Company and
in note 16(a) of the Company's historical consolidated financial statements)
and acquisitions above had been completed as of September 30, 1999 for the
consolidated balance sheet information and as of January 1, 1998 for the
consolidated statements of income (loss) and comprehensive income (loss).
The unaudited pro forma consolidated financial statements have been prepared
by the Company based on the historical consolidated financial statements of the
Company and the acquired entities included elsewhere in this prospectus, and
certain transactions and assumptions as described in the notes thereto.
These pro forma consolidated financial statements may not be indicative of
actual results if the transactions had been effected on the dates indicated or
which may be achieved in the future. The pro forma consolidated financial
statements and accompanying notes should be read in conjunction with the
historical consolidated financial statements of the Company and acquired
entities, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Operating Results" each of which appear
elsewhere in this prospectus.
F-2
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
MAGNA ENTERTAINMENT CORP.
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
F-3
<PAGE>
MAGNA 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>
Magna
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)(ii)) (Note 2(c)(i))
------------- -------------- --------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack
Wagering........ $ 2,513 $41,043 $ $ $20,919 $ $11,502
Non-wagering.... 1,439 22,119 2,729 3,990
Real estate...... 21,239
------- ------- ------- ------ ------- ------ -------
25,191 63,162 23,648 15,492
------- ------- ------- ------ ------- ------ -------
Costs and
expenses
Racetrack costs
and expenses..... 3,625 62,586 (10,184) (303) 16,392 16,994
Real estate costs
and expenses..... 27,355
Impairment of
long-lived
assets........... 2,837
Depreciation and
amortization..... 2,759 1,200 695 982 1,860 3,600 2,707
Interest expense
(income), net.... 2,075 1,089 (924) 3,308 (3,231) 2,182
------- ------- ------- ------ ------- ------ -------
35,814 64,875 (9,489) (245) 21,560 369 24,720
------- ------- ------- ------ ------- ------ -------
Income (loss)
before income
taxes............ (10,623) (1,713) 9,489 245 2,088 (369) (9,228)
Income tax
provision
(recovery)....... (177) 3,269 861 (152)
------- ------- ------- ------ ------- ------ -------
Net income
(loss)........... (10,446) (1,713) 9,489 (3,024) 1,227 (217) (9,228)
Other
comprehensive
income:
Foreign currency
translation
adjustment....... 2,866
------- ------- ------- ------ ------- ------ -------
Comprehensive
income (loss).... (7,580) (1,713) 9,489 (3,024) 1,227 (217) (9,228)
------- ------- ------- ------ ------- ------ -------
Basic and diluted
earnings (loss)
per share of
Class A
Subordinate
Voting and
Class B Stock and
Exchangeable
Shares...........
Average number of
shares of Class A
Subordinate
Voting and Class
B Stock and
Exchangeable
Shares
outstanding
during the period
[in thousands]:
Basic and
diluted......... 78,535
=======
<CAPTION>
Golden Other
Remington Thistledown Golden Gate Pro Forma Pro Forma
Adjustments Thistledown Adjustments Gate Adjustments Adjustments Consolidated
(Note 2(c)(iii)) (Note 2(d)(i)) (Note 2(d)(iii)) (Note 2(e)(i)) (Note 2(e)(iii)) (Note 2(j)) Total
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack
Wagering........ $ $14,211 $ $17,363 $ $ $107,551
Non-wagering.... 3,469 8,288 42,034
Real estate...... 21,239
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
17,680 25,651 170,824
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Costs and
expenses
Racetrack costs
and expenses..... 16,027 21,677 (536) 126,278
Real estate costs
and expenses..... 27,355
Impairment of
long-lived
assets........... (2,837)
Depreciation and
amortization..... 91 1,465 207 3,621 (335) 18,852
Interest expense
(income), net.... (2,308) 487 (576) 1,697 (359) (1,825) 1,615
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
(5,054) 17,979 (369) 26,995 (1,230) (1,825) 174,100
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Income (loss)
before income
taxes............ 5,054 (299) 369 (1,344) 1,230 1,825 (3,276)
Income tax
provision
(recovery)....... (1,461) 253 (228) 202 (104) 2,463
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Net income
(loss)........... 6,515 (552) 597 (1,546) 1,334 1,825 (5,739)
Other
comprehensive
income:
Foreign currency
translation
adjustment....... 2,866
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Comprehensive
income (loss).... 6,515 (552) 597 (1,546) 1,334 1,825 (2,873)
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Basic and diluted
earnings (loss)
per share of
Class A
Subordinate
Voting and
Class B Stock and
Exchangeable
Shares........... $ (0.07)
============
Average number of
shares of Class A
Subordinate
Voting and Class
B Stock and
Exchangeable
Shares
outstanding
during the period
[in thousands]:
Basic and
diluted......... 651 1,012 80,198
================ ================ ============
</TABLE>
See accompanying notes
F-4
<PAGE>
MAGNA ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS)
for the Nine Months Ended September 30, 1999
[Unaudited]
[U.S. dollars in thousands, except per share information]
<TABLE>
<CAPTION>
Magna
Entertainment
Corp.
Nine Months
Ended Gulfstream Remington Thistledown
September 30, Gulfstream Adjustments Remington Adjustments Thistledown Adjustments
1999 (Note 2(b)(i)) (Note 2(b)(ii)) (Note 2(c)(i)) (Note 2(c)(iii)) (Note 2(d)(i)) (Note 2(d)(iii))
-------------- -------------- --------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack
Wagering........ $40,156 $21,477 $ $8,071 $ $10,784 $
Non-wagering.... 18,798 2,553 2,192 2,654
Real estate..... 12,167
------- ------- ------- ------ ----- ------- -----
71,121 24,030 10,263 13,438
------- ------- ------- ------ ----- ------- -----
Costs and
expenses
Racetrack costs
and expenses.... 46,292 13,614 10,406 12,020
Real estate
costs and
expenses........ 12,496
Depreciation and
amortization.... 4,676 1,292 2,400 487 69 1,081 155
Interest expense
(income), net... 264 2,041 (1,980) (98) 304 (406)
------- ------- ------- ------ ----- ------- -----
63,728 16,947 420 10,795 69 13,405 (251)
------- ------- ------- ------ ----- ------- -----
Income (loss)
before income
taxes........... 7,393 7,083 (420) (532) (69) 33 251
Income tax
provision
(recovery)...... 4,393 2,810 (167) (210) 9 105
------- ------- ------- ------ ----- ------- -----
Net income
(loss).......... 3,000 4,273 (253) (532) 141 24 146
Other
comprehensive
loss:
Foreign currency
translation
adjustment...... (3,908)
------- ------- ------- ------ ----- ------- -----
Comprehensive
income (loss)... (908) 4,273 (253) (532) 141 24 146
======= ======= ======= ====== ===== ======= =====
Basic and
diluted earnings
per share of
Class A
Subordinate
Voting and Class
B Stock and
Exchangeable
Shares..........
Average number
of shares of
Class A
Subordinate
Voting and
Class B Stock
and Exchangeable
Shares
outstanding
during the
period [in
thousands]:
Basic and
diluted......... 78,535 651
======= =====
<CAPTION>
Golden Other
Golden Gate Pro Forma Pro Forma
Gate Adjustments Adjustments Consolidated
(Note 2(e)(i)) (Note 2(e)(iii)) (Note 2(j)) Total
-------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue
Racetrack
Wagering........ $14,202 $ $ $94,690
Non-wagering.... 6,697 32,894
Real estate..... 12,167
-------------- ---------------- ----------- ------------
20,899 139,751
-------------- ---------------- ----------- ------------
Costs and
expenses
Racetrack costs
and expenses.... 16,261 (142) 98,451
Real estate
costs and
expenses........ 12,496
Depreciation and
amortization.... 1,902 850 12,912
Interest expense
(income), net... 1,833 (1,341) 100 717
-------------- ---------------- ----------- ------------
19,996 (633) 100 124,576
-------------- ---------------- ----------- ------------
Income (loss)
before income
taxes........... 903 633 (100) 15,175
Income tax
provision
(recovery)...... 2,336 (1,722) 7,554
-------------- ---------------- ----------- ------------
Net income
(loss).......... (1,433) 2,355 (100) 7,621
Other
comprehensive
loss:
Foreign currency
translation
adjustment...... (3,908)
-------------- ---------------- ----------- ------------
Comprehensive
income (loss)... (1,433) 2,355 (100) 3,713
============== ================ =========== ============
Basic and
diluted earnings
per share of
Class A
Subordinate
Voting and Class
B Stock and
Exchangeable
Shares.......... $ 0.10
============
Average number
of shares of
Class A
Subordinate
Voting and
Class B Stock
and Exchangeable
Shares
outstanding
during the
period [in
thousands]:
Basic and
diluted......... 1,012 80,198
================ ============
</TABLE>
See accompanying notes
F-5
<PAGE>
MAGNA ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
as at September 30, 1999
[Unaudited]
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
Magna Remington Thistledown
Entertainment Remington Adjustments Thistledown Adjustments
Corp. (Note 2(c)(ii)) (Note 2(c)(iii)) (Note 2(d)(ii)) (Note 2(d)(iii))
------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ 23,544 $ 3,171 $(10,250) $ 4,624 $ (9,750)
Accounts
receivable..... 5,926 707 2,296
Inventories.... 527 160 164
Prepaid
expenses and
other.......... 3,028 222 208
Note receivable
from Magna..... 146,862
-------- -------- -------- -------- --------
179,887 4,260 (10,250) 7,292 (9,750)
Real estate
properties and
fixed assets,
net............. 451,329 8,757 9,691
Other assets,
net............. 62,239 1,323 1,832 1,134 4,143
Deferred income
taxes...........
-------- -------- -------- -------- --------
693,455 14,340 (8,418) 18,117 (5,607)
======== ======== ======== ======== ========
<CAPTION>
Golden Other Pro Forma
Golden Gate Pro Forma Consolidated
Gate Adjustments Adjustments Balance
(Note 2(e)(ii)) (Note 2(e)(iii)) (Notes 2(f) thru (i)) Sheet
--------------- ---------------- --------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $46,731 $(106,534) $111,622 $ 63,158
Accounts
receivable..... 823 9,752
Inventories.... 851
Prepaid
expenses and
other.......... 127 3,585
Note receivable
from Magna..... (146,862)
--------------- ---------------- --------------------- ------------
47,681 (106,534) (35,240) 77,346
Real estate
properties and
fixed assets,
net............. 48,533 36,328 554,638
Other assets,
net............. 2,473 28,547 101,691
Deferred income
taxes........... 3,041 3,041
--------------- ---------------- --------------------- ------------
98,687 (41,659) (32,199) 736,716
=============== ================ ===================== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
liabilities:
Bank
indebtedness... $ 7,774 $ $ $ $
Accounts
payable........ 4,373 1,886 3,579
Accrued
salaries and
wages.......... 1,474
Refundable
deposits....... 2,092
Other accrued
liabilities.... 8,957 3,499 1,500
Income taxes
payable........ 4,878
Long-term debt
due within one
year........... 10,157
Deferred
revenue........ 4,699 518 12
Note payable to
Magna.......... 35,240
-------- -------- -------- -------- --------
79,644 5,903 5,091
-------- -------- -------- -------- --------
Long-term debt.. 12,162 61,629 (61,629)
-------- -------- -------- -------- --------
Other long-term
liabilities..... 1,317 19
-------- -------- -------- -------- --------
Deferred income
taxes........... 54,444 1,262 1,657
-------- -------- -------- -------- --------
Magna's net
investment...... 545,888
Share capital... 48,149 (48,149) 100 4,400
Deficit......... (39,731) 39,731 (49,965) 49,965
-------- -------- -------- -------- --------
545,888 8,418 (8,418) (49,865) 54,365
-------- -------- -------- -------- --------
693,455 14,340 (8,418) 18,117 (5,607)
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
liabilities:
Bank
indebtedness... $ $ $ $ 7,774
Accounts
payable........ 21,361 (20,692) 10,507
Accrued
salaries and
wages.......... 1,474
Refundable
deposits....... 2,092
Other accrued
liabilities.... 3,482 17,438
Income taxes
payable........ 4,878
Long-term debt
due within one
year........... 2,594 (2,594) 10,157
Deferred
revenue........ 5,229
Note payable to
Magna.......... (35,240)
--------------- ---------------- --------------------- ------------
27,437 (23,286) (35,240) 59,549
--------------- ---------------- --------------------- ------------
Long-term debt.. 59,591 (42,261) 29,492
--------------- ---------------- --------------------- ------------
Other long-term
liabilities..... 1,336
--------------- ---------------- --------------------- ------------
Deferred income
taxes........... 28,547 6,859 92,769
--------------- ---------------- --------------------- ------------
Magna's net
investment...... (545,888)
Share capital... 14,854 (7,854) 542,070 553,570
Deficit......... (3,195) 3,195
--------------- ---------------- --------------------- ------------
11,659 (4,659) (3,818) 553,570
--------------- ---------------- --------------------- ------------
98,687 (41,659) (32,199) 736,716
=============== ================ ===================== ============
</TABLE>
See accompanying notes
F-6
<PAGE>
MAGNA ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
1. BASIS OF PRESENTATION
The pro forma consolidated balance sheet as at September 30, 1999 has been
prepared from the unaudited consolidated balance sheet of Magna Entertainment
Corp. (the "Company"), the unaudited balance sheets of Remington Park, Inc.
("Remington") and Thistledown, Inc. ("Thistledown") and the unaudited combined
statement of assets and liabilities of Golden Gate Fields ("Golden Gate"), each
as at September 30, 1999. The pro forma consolidated statement of income (loss)
and comprehensive income (loss) for the nine months ended September 30, 1999
has been prepared from the unaudited consolidated statement of income (loss)
and comprehensive income (loss) of the Company, 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 nine
months ended September 30, 1999 and the unaudited consolidated statement of
income of Gulfstream Park Racing Association, Inc. ("Gulfstream") 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 have been prepared on the basis of the assumptions and adjustments
described in note 2 below and 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 September 30, 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 which comprises 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
F-7
<PAGE>
MAGNA ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
year ended December 31, 1998 includes the results of operations for LATC
from January 1, 1998 to December 10, 1998.
ii] Historically, the Santa Anita racetrack 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
statements 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
nine months ended September 30, 1999 includes the results of operations of
Gulfstream for the year ended December 31, 1998 and the eight months ended
August 31, 1999, respectively.
ii] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
nine months ended September 30, 1999 include adjustments that arise as a
result of the acquisition of Gulfstream on September 1, 1999 and the
application of purchase accounting. The adjustments to the results of
operations of Gulfstream for the year ended December 31, 1998 and eight
months ended August 31, 1999 are:
--additional depreciation and amortization expense of $3,600,000 and
$2,400,000, respectively, as a result of the increase in the book
value of the buildings by $19,355,000 and racing licence by
$62,527,000, based on the purchase price allocation, and accounting
policies to depreciate buildings over 40 years and 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
F-8
<PAGE>
MAGNA ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
--reduction of the tax expense by $152,000 and $167,000, respectively,
as a result of the above noted adjustments effected at a combined
federal and state tax rate of 40%.
[c] On November 12, 1999, the Company acquired all the outstanding capital
stock of Remington for a purchase price, including estimated transaction costs,
of $10,250,000 paid in cash.
[i] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
nine months ended September 30, 1999 includes the results of operations of
Remington for the same periods.
[ii] The pro forma consolidated balance sheet as at September 30, 1999
includes the financial position of Remington as at the same date.
[iii] The pro forma consolidated balance sheet as at September 30, 1999
includes an adjustment to record the application of purchase accounting to
the September 30, 1999 Remington balance sheet. Other assets (comprising
the racing licence) are increased by $1,832,000, 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 $39,731,000 are
eliminated.
The pro forma consolidated statements of income (loss) and comprehensive
income (loss) for the year ended December 31, 1998 and the nine months
ended September 30, 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 nine months ended
September 30, 1999 are:
--reversal of an impairment of long-lived assets charge in the amount
of $2,837,000 and nil, respectively, 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
$69,000, respectively, as a result of the increase in the book value
of the racing licence by $1,832,000, 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 $210,000, 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 November 12, 1999, the Company acquired all the outstanding capital
stock of Thistledown for a purchase price, including estimated transaction
costs, of $14,250,000 of which $9,750,000 was paid in cash and $4,500,000 was
paid through the issuance of shares of the Company.
[i] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
nine months ended September 30, 1999 includes the results of operations of
Thistledown for the same periods.
[ii] The pro forma consolidated balance sheet as at September 30, 1999
includes the financial position of Thistledown as at the same date.
[iii] The pro forma consolidated balance sheet as at September 30, 1999
includes an adjustment to record the application of purchase accounting to
the September 30, 1999 balance sheet. Other assets
F-9
<PAGE>
MAGNA ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(comprising the racing licence) are increased by $4,143,000, cash and cash
equivalents are reduced by the Company's purchase price paid of $9,750,000,
deferred tax liabilities are increased by $1,657,000, long-term debt is
reduced by $61,629,000, the share capital and deficit of Thistledown of
$100,000 and $49,965,000, respectively, 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 nine months
ended September 30, 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 nine months ended
September 30, 1999 are:
--additional depreciation and amortization expense of $207,000 and
$155,000, respectively, as a result of the increase in the book value
of the racing licence by $4,143,000, 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 $406,000, respectively,
as a result of the repayment of long-term debt of $61,629,000;
--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 $105,000 for the nine months ended
September 30, 1999 as a result of the above noted adjustments
effected at a combined federal and state tax rate of 40%.
[e] On December 10, 1999, the Company acquired 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 was paid in cash, $7,000,000 was
paid through the issuance of shares of the Company and $20,000,000 was paid
through the issuance of a non-interest bearing note, $10,000,000 of which
matures on the first anniversary of the date of closing and $5,000,000 of which
matures on each of the second and third anniversaries.
[i] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
nine months ended September 30, 1999 includes the results of operations of
Golden Gate for the same periods.
[ii] The pro forma consolidated balance sheet as at September 30, 1999
includes the financial position of Golden Gate as at the same date.
[iii] The pro forma consolidated balance sheet as at September 30, 1999
includes an adjustment to record the application of purchase accounting to
the September 30, 1999 Golden Gate balance sheet. Real estate properties
(comprising land) are increased by $36,328,000, other assets (comprising
the racing licence) are increased by $28,547,000, cash and cash equivalents
are reduced by the purchase price paid of $61,000,000 and by $45,534,000 in
respect of cash not acquired, deferred tax liabilities are increased by
$28,547,000, current liabilities are reduced by $23,286,000, long-term debt
is reduced by $59,591,000 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 $3,195,000, respectively, 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 nine months
ended September 30, 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 nine months ended
September 30, 1999 are:
F-10
<PAGE>
MAGNA ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
--reversal of racetrack operating costs of $536,000 and $142,000,
respectively, related to assets not acquired;
--additional depreciation and amortization expense of $1,427,000 and
$850,000, respectively, as a result of the increase in the book value
of the racing licence by $28,547,000, based on the purchase price
allocation, and accounting policies to depreciate buildings over 40
years and 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 $3,501,000,
respectively, as a result of the elimination of long-term debt of
$59,591,000;
--reversal of interest income of $1,983,000 and $1,585,000,
respectively, as a result of the removal of cash not acquired of
$45,534,000;
--additional interest expense accrued of $1,503,000 and $575,000,
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 $614,000 for the nine months ended
September 30, 1999 as a result of the above noted adjustments,
effected at a combined federal and state tax rate of 40%, less
$2,336,000 of 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 September 30, 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] The pro forma consolidated balance sheet reflects the use of $81,000,000
of cash to acquire Remington, Thistledown and Golden Gate as described in items
[c][iii], [d][iii] and [e][iii] above.
[h] The repayment of the note payable to Magna of $35,240,000 representing
the short-term funding provided by Magna since March 1999, repaid by the
Company subsequent to September 30, 1999.
[i] The collection of $146,862,000 by the Company subsequent to September
30, 1999 of the note receivable due from Magna.
[j] Interest expense has been adjusted to reflect the components of Magna's
net investment as defined under the Reorganization from January 1, 1998.
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 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.
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
[Except as to Note 16, which is as of January 14, 2000]
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
15 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 16[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.
. All the outstanding capital stock of Gulfstream Park Racing Association,
Inc. ("Gulfstream"). Gulfstream, which operates Gulfstream Park
racetrack, is located on approximately 255 acres of land in the cities of
Hallandale and Aventura, Florida.
. 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 split into two companies.
Under the split, 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 are
subject to a conditional sale agreement by Magna to the Company. The
conditional sale agreement is subject to the successful severance of the
affected 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 11[a]),
approximately 200 acres of land and improvements in Aurora, Ontario. An
18-hole golf course is currently under construction on the property.
Construction in progress has also been transferred to the Company,
accordingly, all such construction is reflected in the consolidated
financial statements of 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 and Gulfstream from September 1, 1999, representing the
dates of Magna's acquisitions of such entities; (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 automotive related
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,
Gulfstream, 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, Gulfstream, MVB (from January 1, 1999), MGE and
other separate tax paying legal entities at September 30, 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 investments
(subsequently converted into equity investments as part of the Reorganization)
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 January 14, 2000, 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....................... 100
Pacific Racing Association.................................... 100
Ladbroke Land Holdings, Inc................................... 100
Remington Park, Inc........................................... 100
Thistledown, Inc.............................................. 100
MI Racing, Inc. .............................................. 100
MEC Land Holdings (USA) Inc................................... 100
DLR, Inc...................................................... 100
OTL, Inc...................................................... 100
Vista Hospitality, Inc........................................ 100
Canada
MEC Holdings (Canada) Inc...................................... 100
1207032 Ontario Inc........................................... 100
1180482 Ontario Inc............................................ 100
Europe
Magna Entertainment Holding GmbH............................... 100
Magna Ventures Management GmbH................................ 100
SDP Landholding GmbH......................................... 100
Steyr-Barter Handels GmbH................................... 100
Steyr-Industrie-Commerz und Handels GmbH................... 100
Gemeinnutzige Wohnungs-Gesellschaft,
"Steyr-Daimler-Puch" GmbH & Co. KG.......................... 100
MI Air Flugbetriebs 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
F-16
<PAGE>
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 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 machinery and equipment
and 15% to 20% for furniture and fixtures.
Racing Licenses
Racing licenses are recorded at cost less accumulated amortization.
Amortization is provided on a straight-line basis over 20 years, representing
the estimated useful lives of such racing licenses.
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 horse racing on a
daily basis, except for season admissions which are recorded ratably over the
racing season. Racetrack wagering revenues and direct operating costs are shown
net of state and local taxes, stakes, purses and awards.
F-17
<PAGE>
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, 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.
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
horse racing are generally expensed when incurred. Advertising costs for the
nine-month period ended September 30, 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 and 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
F-18
<PAGE>
position at September 30, 1999 and the results of operations and cash flows for
the nine-month periods ended September 30, 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-19
<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,
September 30, December 31, -----------------
Note 1999 1998 1998 1997
---- ------------- ------------ -------- --------
[unaudited]
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $ 23,544 $ 17,503 $ 295 $ 220
Accounts receivable........ 5,926 8,979 1,088 788
Inventories................ 527 1,050 461 438
Prepaid expenses and
other..................... 3,028 1,522 69 70
Note receivable from
Magna..................... 11 146,862
-------- -------- -------- --------
179,887 29,054 1,913 1,516
-------- -------- -------- --------
Real estate properties, net.. 3 441,797 326,690 181,003 109,500
-------- -------- -------- --------
Fixed assets, net............ 4 9,532 8,221 1,886 2,159
-------- -------- -------- --------
Other assets, net............ 5 62,239 -- -- --
-------- -------- -------- --------
Deferred income taxes........ 6 -- 177 -- --
-------- -------- -------- --------
693,455 364,142 184,802 113,175
======== ======== ======== ========
LIABILITIES AND MAGNA'S NET
INVESTMENT
Current liabilities:
Bank indebtedness.......... 7,774 11,889 165 4,277
Accounts payable........... 4,373 15,409 2,700 1,823
Accrued salaries and
wages..................... 1,474 518 410 334
Refundable deposits........ 2,092 2,008 1,695 989
Other accrued liabilities.. 8,957 6,955 2,067 1,718
Income taxes payable....... 6 4,878 -- -- --
Long-term debt due within
one year.................. 7 10,157 3,655 3,446 3,052
Deferred revenue........... 4,699 3,098 160 1,456
Note payable to Magna...... 11 35,240 -- -- --
-------- -------- -------- --------
79,644 43,532 10,643 13,649
-------- -------- -------- --------
Long-term debt............... 7 12,162 16,791 15,884 11,609
-------- -------- -------- --------
Other long-term liabilities.. 13 1,317 1,317 -- --
-------- -------- -------- --------
Deferred income taxes........ 6 54,444 -- -- --
-------- -------- -------- --------
Magna's net investment....... 545,888 302,502 158,275 87,917
-------- -------- -------- --------
$693,455 $364,142 $184,802 $113,175
======== ======== ======== ========
</TABLE>
- --------
Commitments and contingencies [notes 7, 11 and 12]
See accompanying notes
F-20
<PAGE>
MI ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN MAGNA'S NET INVESTMENT
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month
September 30, 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)....... 3,000 (7,640) (4,231) (8,610) (1,382) (2,424)
Net contribution by
Magna.................. 244,294 68,501 143,634 80,919 46,498 5,554
Change in currency
translation
adjustment............. 8 (3,908) 3,831 4,824 (1,951) (7,184) (1,311)
-------- -------- -------- -------- ------- -------
Magna's net investment,
end of period.......... $545,888 $162,394 $302,502 $158,275 $87,917 $49,985
======== ======== ======== ======== ======= =======
</TABLE>
See accompanying notes
F-21
<PAGE>
MI ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month
September 30, 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 10, 11, 14
Racetrack
Wagering.............. 40,156 -- 2,513 -- -- --
Non-wagering.......... 18,798 -- 1,439 -- -- --
Real estate............. 12,167 17,196 6,597 20,486 15,276 2,460
------ ------- ------- -------- ------- -------
71,121 17,196 10,549 20,486 15,276 2,460
------ ------- ------- -------- ------- -------
Costs and expenses
Racetrack
Operating costs....... 42,299 -- 3,461 -- -- --
General and
administrative....... 3,993 -- 164 -- -- --
Real estate
Operating costs....... 11,197 20,968 7,293 24,778 13,232 4,084
General and
administrative....... 1,299 978 1,169 1,086 647 529
Depreciation and
amortization........... 4,676 1,737 1,649 1,852 1,824 330
Interest expense........ 7 1,259 1,177 1,236 1,399 955 116
Interest income......... 7 (995) (24) (15) (19) -- (175)
------ ------- ------- -------- ------- -------
63,728 24,836 14,957 29,096 16,658 4,884
------ ------- ------- -------- ------- -------
Income (loss) before
income taxes........... 10 7,393 (7,640) (4,408) (8,610) (1,382) (2,424)
Income tax provision
(recovery)............. 6 4,393 -- (177) -- -- --
------ ------- ------- -------- ------- -------
Net income (loss)....... 3,000 (7,640) (4,231) (8,610) (1,382) (2,424)
Other comprehensive
income (loss):
Foreign currency
translation
adjustment........... (3,908) 3,831 4,824 (1,951) (7,184) (1,311)
------ ------- ------- -------- ------- -------
Comprehensive income
(loss)................. $ (908) $(3,809) $ 593 $(10,561) $(8,566) $(3,735)
====== ======= ======= ======== ======= =======
</TABLE>
See accompanying notes
F-22
<PAGE>
MI ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month
September 30, 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)....... $ 3,000 $(7,640) $ (4,231) $(8,610) $(1,382) $(2,424)
Items not involving
current cash flows
Depreciation and
amortization.......... 4,676 1,737 1,649 1,852 1,824 330
Deferred taxes......... 6 717 -- (177) -- -- --
-------- ------- -------- ------- ------- -------
8,393 (5,903) (2,759) (6,758) 442 (2,094)
-------- ------- -------- ------- ------- -------
Changes in non-cash
items related to
operations
Residential development
inventory............. (3,958) 4,062 (1,797) (1,256) (7,620) (1,608)
Accounts receivable.... 3,112 (139) (7,285) (262) (297) (319)
Inventories............ 494 111 (570) (8) (354) (10)
Prepaid expenses and
other................. (596) (209) 244 3 (10) 20
Accounts payable....... (11,592) 853 8,526 786 693 (264)
Accrued salaries and
wages................. 923 235 84 61 195 134
Refundable deposits.... 246 488 207 654 1,140 --
Other accrued
liabilities........... 999 68 681 266 758 602
Income taxes payable... 3,363 -- -- -- -- --
Deferred revenue....... (140) (5,189) 1,381 (1,354) 1,159 (73)
-------- ------- -------- ------- ------- -------
1,244 (5,623) (1,288) (7,868) (3,894) (3,612)
-------- ------- -------- ------- ------- -------
INVESTMENT ACTIVITIES
Acquisition of
businesses............. 2 (87,579) -- (118,617) -- -- --
Real estate property
additions, net of
change in residential
development inventory.. (33,711) (63,601) (17,944) (72,460) (41,470) (24,180)
Fixed asset additions... (889) (76) (124) (183) (2,109) (939)
Increase in note
receivable from Magna.. (146,862) -- -- -- -- --
-------- ------- -------- ------- ------- -------
(269,041) (63,677) (136,685) (72,643) (43,579) (25,119)
-------- ------- -------- ------- ------- -------
FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness...... (2,489) (2,721) 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................... (3,198) (2,729) (114) (2,608) (2,638) --
Increase in note payable
to Magna............... 35,240 -- -- -- -- --
Net contribution by
Magna.................. 244,294 68,501 143,634 80,919 46,498 5,554
-------- ------- -------- ------- ------- -------
273,847 69,325 155,170 80,584 47,576 28,367
-------- ------- -------- ------- ------- -------
Effect of exchange rate
changes on cash and
cash equivalents....... (9) 6 11 2 (16) (24)
-------- ------- -------- ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents during the
period................. 6,041 31 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................. $ 23,544 $ 264 $ 17,503 $ 295 $ 220 $ 133
======== ======= ======== ======= ======= =======
</TABLE>
See accompanying notes
F-23
<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 September 30, 1999 and for the nine-month periods ended
September 30, 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:
[a]Acquisitions in the nine-month period ended September 30, 1999
Gulfstream Park
On September 1, 1999, the Company acquired all the outstanding capital
stock of Gulfstream for a purchase price, including estimated transaction
costs, of $81.2 million (net of cash acquired of $8.0 million) payable in
cash. Gulfstream, which operates the Gulfstream Park racetrack, is located
on approximately 255 acres of land in the cities of Hallandale and
Aventura, Florida.
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.
The purchase price has been allocated to the assets and liabilities
acquired as follows:
<TABLE>
<CAPTION>
Gulfstream SLRD Total
---------- ------ -------
<S> <C> <C> <C>
Non-cash working capital deficit................ $(3,978) $ -- $(3,978)
Real estate properties.......................... 81,700 6,375 88,075
Fixed assets.................................... 1,643 -- 1,643
Other assets.................................... 62,543 -- 62,543
Debt due within one year........................ (6,800) -- (6,800)
Deferred income tax liabilities................. (53,904) -- (53,904)
------- ------ -------
Net assets acquired and total purchase price,
net of cash acquired........................... $81,204 $6,375 $87,579
======= ====== =======
</TABLE>
[b]Acquisition in the five-month period ended December 31, 1998
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.
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
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-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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
3. REAL ESTATE PROPERTIES
Real estate properties consist of:
<TABLE>
<CAPTION>
July 31,
September 30, December 31, ------------------
1999 1998 1998 1997
------------- ------------ -------- --------
[unaudited]
<S> <C> <C> <C> <C>
Residential development
inventory.................. $ 19,168 $ 16,573 $ 13,908 $ 12,072
-------- -------- -------- --------
Revenue producing properties
Cost
Land and improvements..... 86,499 36,850 10,981 9,901
Buildings................. 78,087 56,840 14,922 12,586
Construction in progress.. 30,972 2,814 -- 20
-------- -------- -------- --------
195,558 96,504 25,903 22,507
Accumulated depreciation
Buildings................. (4,480) (2,317) (1,608) (678)
-------- -------- -------- --------
Revenue producing
properties, net............ 191,078 94,187 24,295 21,829
-------- -------- -------- --------
Properties under and held
for development
Cost
Land and improvements..... 143,355 126,652 60,706 48,441
Buildings................. 796 517 524 --
Construction in progress.. 6,180 4,389 302 --
-------- -------- -------- --------
Properties under and held
for development............ 150,331 131,558 61,532 48,441
-------- -------- -------- --------
Properties available for
sale
Cost
Land and improvements..... 53,455 53,935 52,374 19,754
Buildings................. 28,408 30,256 28,070 6,181
Furniture and fixtures.... 1,725 1,725 1,725 1,725
-------- -------- -------- --------
83,588 85,916 82,169 27,660
Accumulated depreciation
Buildings................. (1,651) (871) (325) (79)
Furniture and fixtures.... (717) (673) (576) (423)
-------- -------- -------- --------
Properties available for
sale, net.................. 81,220 84,372 81,268 27,158
-------- -------- -------- --------
$441,797 $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 ceased on properties classified as available for sale.
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
4. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
July 31,
Septembert 30, December 31, --------------
1999 1998 1998 1997
-------------- ------------ ------ ------
[unaudited]
<S> <C> <C> <C> <C>
Cost
Machinery and equipment........ $9,785 $7,632 $3,036 $2,724
Furniture and fixtures......... 2,371 2,225 -- --
------ ------ ------ ------
12,156 9,857 3,036 2,724
Accumulated depreciation
Machinery and equipment........ (2,391) (1,610) (1,150) (565)
Furniture and fixtures......... (233) (26) -- --
------ ------ ------ ------
$9,532 $8,221 $1,886 $2,159
====== ====== ====== ======
</TABLE>
5. OTHER ASSETS
Other assets consist of racing licenses as follows:
<TABLE>
<CAPTION>
July 31,
September 30, December 31, -------------
1999 1999 1998 1997
------------- ------------ ------ ------
[unaudited]
<S> <C> <C> <C> <C>
Licenses
Cost................................ $62,543 $ -- $ -- $ --
Accumulated amortization............ (304) -- -- --
------- ------ ------ ------
$62,239 $ -- $ -- $ --
======= ====== ====== ======
</TABLE>
6. INCOME TAXES
[a] Income taxes for SAC, LATC, Gulfstream, MVB (from January 1, 1999), MGE
and other separate tax paying legal entities at September 30, 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.
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
[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>
Nine-month
periods ended Five-month
September 30, 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%)................ $2,588 $(2,674) $(1,543) $ (3,014) $ (484) $ (848)
State income tax...... 630 -- -- -- -- --
Losses not benefited.. 1,174 2,674 1,366 3,014 484 848
Foreign rate
differentials........ (10) -- -- -- -- --
Other................. 11 -- -- -- -- --
------ ------- ------- -------- ------ ------
Income tax provision
(recovery)........... $4,393 $ -- $ (177) $ -- $ -- $ --
====== ======= ======= ======== ====== ======
</TABLE>
The income tax provision relates entirely to the income of SAC and LATC
less losses generated by Gulfstream and certain other U.S. legal
entities. 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 September 30, 1999 are
available to the Company. These losses amount to $7.1 million of which
$0.5 million expire in the year 2006 and the remainder have no expiry
date.
[c] The details of income (loss) before income taxes by jurisdiction are as
follows:
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month
September 30, period ended Years ended July 31,
---------------- December 31, -------------------------
1999 1998 1998 1998 1997 1996
------- ------- ------------ ------- ------- -------
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
United States..... $10,721 $ (193) $ (540) $ (243) $ (92) $ (211)
Foreign........... (3,328) (7,447) (3,868) (8,367) (1,290) (2,213)
------- ------- ------- ------- ------- -------
$ 7,393 $(7,640) $(4,408) $(8,610) $(1,382) $(2,424)
======= ======= ======= ======= ======= =======
</TABLE>
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
[d] The details of the income tax provision (recovery) are as follows:
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month Years ended
September 30, period ended July 31,
--------------December 31, --------------
1999 1998 1998 1998 1997 1996
------- ------------------ ---- ---- ----
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
Current provision
United States.................... $ 3,676 $ -- $ -- $-- $-- $--
Foreign.......................... -- -- -- -- -- --
------- ----- ----- ---- ---- ----
3,676 -- --- -- -- --
------- ----- ----- ---- ---- ----
Deferred provision
United States.................... 717 -- (177) -- -- --
Foreign.......................... -- -- -- -- -- --
------- ----- ----- ---- ---- ----
717 -- (177) -- -- --
------- ----- ----- ---- ---- ----
$ 4,393 $ -- $(177) $-- $-- $--
======= ===== ===== ==== ==== ====
</TABLE>
[e] Deferred income taxes have been provided on temporary differences,
which consist of the following:
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month Years ended
September 30, 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..... $ 540 $-- $ -- $-- $-- $--
Tax benefit of loss
carryforwards............ (1,174) (587) (451) (689) (45) --
Utilization of loss
carryforwards............ 177 -- -- -- -- --
Increase in valuation al-
lowance.................. 1,174 587 274 689 45 --
------ ---- ----- ---- ---- ----
$ 717 $-- $(177) $-- $-- $--
====== ==== ===== ==== ==== ====
</TABLE>
[f] Deferred tax assets and liabilities for SAC, LATC, Gulfstream, MVB
(from January 1, 1999), MGE, and other separate tax paying entities at
September 30, 1999 consist of the following temporary differences:
<TABLE>
<CAPTION>
July 31,
-----------
September 30, December 31,
1999 1998 1998 1997
------------- ------------ ----- ----
[unaudited]
<S> <C> <C> <C> <C>
Assets
Tax benefit of loss
carryforwards................... $ 2,419 $ 1,288 $ 787 $ 39
Valuation allowance.............. (2,419) (1,111) (787) (39)
------- ------- ----- ----
$ -- $ 177 $ -- $--
======= ======= ===== ====
Liabilities
Real estate properties book value
in excess of tax value.......... $27,005 $ -- $ -- $--
Other assets book value in excess
of tax value.................... 27,546 -- -- --
Other............................ (107) -- -- --
------- ------- ----- ----
$54,444 $ -- $ -- $--
======= ======= ===== ====
</TABLE>
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
Included in Magna's net investment at September 30, 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, Gulfstream, MVB, MGE
and other separate tax paying entities at September 30, 1999). Such
temporary differences consist principally of real estate properties book
value in excess of tax value.
7. DEBT AND COMMITMENTS
[a] The Company's long-term debt, consists of the following:
<TABLE>
<CAPTION>
July 31,
---------------
September 30, 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.............. $ 9,346 $13,567 $12,784 $14,661
Bank term line of credit,
bearing interest at LIBOR
[London Interbank Overnight
Rate] plus 1.25% per annum,
payable in annual installments
with a final balloon payment
due February 16, 2000. The
Company has pledged the assets
of one of its subsidiaries as
security for this facility..... 6,800 -- -- --
Mortgages outstanding with vari-
ous Austrian banks and local
governments (Austrian Schil-
lings 76 million), bearing in-
terest at rates ranging from
0.5% to 6.75% per annum, pay-
able in semi-annual install-
ments. The mortgages are repay-
able over various periods to
2037........................... 5,896 6,578 6,261 --
Term loan, bearing interest at a
fixed rate of 4% per annum pay-
able annually. The advance is
repayable in 10 annual install-
ments of principal of $35 thou-
sand (Austrian Schillings 0.4
million) commencing December
31, 1997....................... 277 301 285 --
------- ------- ------- -------
22,319 20,446 19,330 14,661
Less due within one year........ 10,157 3,655 3,446 3,052
------- ------- ------- -------
$12,162 $16,791 $15,884 $11,609
======= ======= ======= =======
</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 September 30, 1999 and for the nine-month periods ended
September 30, 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>
Nine-month
periods ended Five-month
September 30, 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......... $ 909 $ 760 $ 371 $ 1,021 $ 829 $ 136
Magna debt............ 679 864 1,055 986 520 256
------ ------- ------ ------- ------- -----
1,588 1,624 1,426 2,007 1,349 392
Less: Interest
capitalized............ 329 447 190 608 394 276
------ ------- ------ ------- ------- -----
Interst expense......... 1,259 1,177 1,236 1,399 955 116
Interest income
External.............. 216 24 15 19 -- 175
Internal.............. 779 -- -- -- -- --
------ ------- ------ ------- ------- -----
Interest expense
(income), net.......... $ 264 $ 1,153 $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 nine-month period ended September 30,
1999 and the five-month period ended December 31, 1998 was $1.8 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 September 30, 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 three months)........................................ $ 89
2000................................................................. 312
2001................................................................. 200
2002................................................................. 20
----
$621
====
</TABLE>
For the nine-month period ended September 30, 1999 and five-month
period ended December 31, 1998, payments under operating leases
amounted to approximately $264 thousand and $39 thousand, respectively
(for the years ended July 31, 1998--$44 thousand; 1997--$49 thousand;
1996--$7 thousand).
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
8. 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 nine-month period ended September 30, 1999, the
Company incurred an unrealized currency translation loss of $3.9 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).
9. 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.
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
10. SEGMENTED INFORMATION
Operating Segments
The Company has two operating segments: racetrack and real estate
operations.
The following summary presents key information by operating segment.
<TABLE>
<CAPTION>
Nine-month period ended
September 30, 1999
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
[unaudited]
<S> <C> <C> <C>
Revenue...................................... $ 58,954 $ 12,167 $ 71,121
Income (loss) before income taxes............ 10,637 (3,244) 7,393
Real estate properties and fixed asset
additions................................... 27,577 7,023 34,600
Real estate properties, fixed and other
assets, net................................. 304,907 208,661 513,568
Current assets............................... 179,887
Deferred income tax assets................... --
--------
Total assets................................. $693,455
========
<CAPTION>
Nine-month period ended
September 30, 1998
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
[unaudited]
<S> <C> <C> <C>
Revenue...................................... $ -- $ 17,196 $ 17,196
Loss before income taxes..................... -- (7,640) (7,640)
Real estate properties and fixed asset
additions................................... -- 63,677 63,677
Real estate properties, fixed and other
assets, net................................. -- 190,866 190,866
Current assets............................... 2,291
Deferred income tax assets................... --
--------
Total assets................................. $193,157
========
<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 asset
additions................................... 633 17,435 18,068
Real estate properties, fixed and other
assets, net................................. 127,767 207,144 334,911
Current assets............................... 29,054
Deferred income tax assets................... 177
--------
Total assets................................. $364,142
========
</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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
<TABLE>
<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 asset
additions................................... -- 72,643 72,643
Real estate properties, fixed and other
assets, net................................. -- 182,889 182,889
Current assets............................... 1,913
Deferred income tax assets................... --
--------
Total assets................................. $184,802
========
<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 asset
additions................................... -- 43,579 43,579
Real estate properties, fixed and other
assets, net................................. -- 111,659 111,659
Current assets............................... 1,516
Deferred income tax assets................... --
--------
Total assets................................. $113,175
========
<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 asset
additions................................... -- 25,119 25,119
Real estate properties, fixed and other
assets, net................................. -- 75,215 75,215
Current assets............................... 1,004
Deferred income tax assets................... --
--------
Total assets................................. $ 76,219
========
</TABLE>
Geographic Segments
Revenue by geographic segment of the Company is as follows:
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month
September 30, period ended Years ended July 31,
--------------- December 31, ----------------------
1999 1998 1998 1998 1997 1996
------- ------- ------------ ------- ------- ------
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
United States............ $60,778 $ 1,353 $ 4,707 $ 1,698 $ 1,617 $1,326
Europe................... 10,343 15,843 5,842 18,788 13,659 1,134
------- ------- ------- ------- ------- ------
$71,121 $17,196 $10,549 $20,486 $15,276 $2,460
======= ======= ======= ======= ======= ======
</TABLE>
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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
Real estate properties, fixed and other assets by geographic segment of the
Company are as follows:
<TABLE>
<CAPTION>
July 31,
September 30, December 31, -----------------
1999 1998 1998 1997
------------- ------------ -------- --------
[unaudited]
<S> <C> <C> <C> <C>
United States................... $324,182 $146,063 $ 17,687 $ 17,639
Canada.......................... 72,313 64,804 50,742 33,073
Europe.......................... 117,073 124,044 114,460 60,947
-------- -------- -------- --------
$513,568 $334,911 $182,889 $111,659
======== ======== ======== ========
</TABLE>
11. 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 September 30,
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 September 30, 1999 for this project is
$18.1 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 affected
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 affected 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.
[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 September 30, 1999, the Company had a note outstanding due to Magna
in the amount of $35.2 million. On September 1, 1999, Magna invested an
additional $250.0 million in cash, by way of equity contribution, in
the Company. Of this amount, $146.9 million was loaned back to Magna
and is reflected as a note receivable from Magna. The note is due on
demand and bears interest at the U.S. prime rate less 1% per annum.
Both the note payable and receivable with Magna were settled subsequent
to September 30, 1999.
F-35
<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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
[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 nine-months ended September 30, 1999, $1.6 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 the Company's 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 this subsidiary. Under
Austrian law, this 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 the Company in respect of
environmental remediation costs and expenses relating to existing
conditions in certain of the Austrian real estate properties.
12. 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 and 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.
13. 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 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.
F-36
<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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
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.
14. SUPPLEMENTARY FINANCIAL INFORMATION
[a] Quarterly Information (unaudited)
Summarized quarterly financial information of the Company for the nine-
months ended September 30, 1999 and the years ended December 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
For the nine-months
ended September 30, 1999 March 31 June 30 September 30 Total
------------------------ -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenue................. $39,907 $20,795 $10,419 $ 71,121
Gross profit (loss)..... 19,277 1,750 (3,402) 17,625
Net income (loss)....... $ 9,325 $(1,235) $(5,090) $ 3,000
<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)..... (1,292) (1,300) (1,180) 154 (3,618)
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)..... 1,042 489 931 91 2,553
Net income (loss)....... $ (579) $(1,057) $ 533 $(1,460) $ (2,563)
</TABLE>
F-37
<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 September 30, 1999 and for the nine-month periods ended
September 30, 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
Real estate costs and expenses
Operating costs.................................................. 6,723
General and administrative....................................... 248
Depreciation and amortization...................................... 742
Interest expense................................................... 526
-------
Loss before income taxes........................................... (2,395)
Income taxes....................................................... --
-------
Net loss........................................................... $(2,395)
=======
</TABLE>
[c] Racetrack wagering revenues are shown net of state and local taxes, stakes,
purses and awards as follows:
<TABLE>
<CAPTION>
Nine-month
periods ended Five-month Years ended
September 30, period ended July 31,
---------------December 31, --------------
1999 1998 1998 1998 1997 1996
-------- ------------------ ---- ---- ----
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
Total live race day handle less
patrons' winning tickets...... 207,224 -- 14,385 -- -- --
State and local taxes and other
fees.......................... 132,897 -- 9,845 -- -- --
Horsemen stakes, purses, and
awards........................ 38,463 -- 2,320 -- -- --
-------- ----- ------ ---- ---- ----
35,864 -- 2,220 -- -- --
Company share of non-live race
day handle and other ......... 4,292 -- 293 -- -- --
-------- ----- ------ ---- ---- ----
40,156 -- 2,513 -- -- --
======== ===== ====== ==== ==== ====
</TABLE>
15. 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.
F-38
<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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
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).
16. SUBSEQUENT EVENTS
[a] At September 30, 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.................................................. (542,070)
---------
$(545,888)
=========
</TABLE>
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.
On December 30, 1999, a further amendment to the Company's capital
structure was effected. On this date, MI Venture (Canada) Inc., a
wholly owned Canadian subsidiary of the Company, amended its Articles
of Incorporation to create a new class of shares, referred to as
Exchangeable Shares. Each Exchangeable Share may be exchanged by the
holder for one share of Class A Subordinate Voting Stock of the
Company. The Exchangeable Shares entitle holders to dividend and other
rights economically equivalent to shares of the Company's Class A
Subordinate Voting Stock and, through a Voting and Exchange Agreement
between Magna, the Company and MI Venture (Canada) Inc., to vote at
meetings of shareholders of the Company. If not previously exchanged by
holders for Class A Subordinate Voting Stock of the Company, the
Exchangeable Shares will remain outstanding until October 1, 2001 (or a
date after October 1, 2001 but prior to April 1, 2003, as determined by
the board of directors of MI Venture (Canada) Inc. upon notice to
holders of Exchangeable Shares), at which time any Exchangeable Shares
still outstanding will be automatically redeemed. The redemption price
at such time will be satisfied by the delivery of one share of Class A
Subordinate Voting Stock of the Company for each Exchangeable Share.
On December 30, 1999, 14,823,187 shares of the Company's Class B Stock
held by Magna were repurchased by the Company for $110,000,000. On this
same date, $110,000,000 was invested by Magna in MI Venture (Canada)
Inc. in return for 14,823,187 Exchangeable Shares. All of the common
shares of MI Venture (Canada) Inc. continue to be held by the Company.
Given that the Exchangeable Shares are economically equivalent to Class
A Subordinate Voting Shares of the Company, the Exchangeable Shares
will be included in shareholders' equity in the Company's consolidated
balance sheet.
F-39
<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 September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited)
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>
Nine-month
periods ended Five-month
September 30, 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 and
Exchangeable Shares:
Basic and diluted..... $ 0.04 $ (0.10) $ (0.05) $ (0.11) $ (0.02) $ (0.03)
Average number of shares
of Class A Subordinate
Voting and Class B
Stock and Exchangeable
Shares outstanding
during the period [in
thousands]:
Basic and diluted..... 78,535 78,535 78,535 78,535 78,535 78,535
</TABLE>
[b] On November 12, 1999, the Company completed the acquisition of 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 was paid in
cash and the balance of $4.5 million was paid through the issuance of
650,695 shares of Class A Subordinate Voting Stock.
[c] On December 10, 1999, the Company completed the acquisition of 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 was paid in cash, $7.0 million was paid through the
issuance of 1,012,195 shares of Class A Subordinate Voting Stock and
$20.0 million was 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.
[d] The Company has signed a definitive agreement to acquire the assets and
assume certain liabilities of Great Lakes Downs, Inc. racetrack in
Muskegon, Michigan for a purchase price of $1.7 million. The total
purchase price of $1.7 million will be paid by the issuance of 246,287
shares of Class A Subordinate Voting Stock. Prior to the proposed
acquisition, the Company's President and Chief Executive Officer was a
controlling shareholder of Great Lakes Downs, Inc.
[e] On January 14, 2000, the Company filed a registration statement with
the United States Securities and Exchange Commission and a 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 comprised of a combination of:
(i) Exchangeable Shares of MI Venture (Canada) Inc. to be distributed
to Magna shareholders resident in Canada; and
(ii) Class A Subordinate Voting Stock of the Company to be distributed
to Magna shareholders not resident in Canada.
Magna will convert the necessary amount of shares of Class B Stock to
shares of Class A Subordinate Voting Stock to effect the dividend.
[f] On December 22, 1999, the Company successfully completed the
negotiation of two credit facilities--a $63 million three year term
loan facility and a $10 million revolving line of credit, both of which
bear interest at rates ranging between the U.S. prime rate and LIBOR
plus 2.2% per annum.
F-40
<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-41
<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-42
<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-43
<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 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.
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 accounting principles
generally accepted in the United States.
Los Angeles, California Ernst & Young LLP
June 11, 1999 Certified Public Accountants
F-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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 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 some 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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
GULFSTREAM PARK RACING ASSOCIATION, INC.
AND SUBSIDIARY
For the years ended December 31, 1998, 1997 and 1996
F-58
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Gulfstream Park Racing Association, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Gulfstream
Park Racing Association, Inc. and Subsidiary (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of income, stockholders'
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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gulfstream
Park Racing Association, Inc. and Subsidiary 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
principles generally accepted in the United States.
Miami, Florida PricewaterhouseCoopers LLP
March 10, 1999, except for Note 9 as to Certified Public
which the date is September 1, 1999 Accountants
F-59
<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-60
<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
----------- ----------- ----------- ----------- -----------
43,312,430 41,897,274 41,873,461 41,537,453 39,067,883
Less: Stakes, purses,
trophies and awards.... 21,835,696 20,923,313 20,954,428 20,550,496 19,067,874
----------- ----------- ----------- ----------- -----------
Net pari-mutuel income 21,476,734 20,973,961 20,919,033 20,986,957 20,000,009
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
Other revenues.......... 664,396 632,813 839,849 560,876 749,476
----------- ----------- ----------- ----------- -----------
24,029,773 24,493,791 23,648,267 23,521,733 22,754,589
----------- ----------- ----------- ----------- -----------
EXPENSES:
Departmental expenses.. 11,983,727 11,663,616 14,343,052 13,977,248 12,981,229
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
----------- ----------- ----------- ----------- -----------
14,972,325 14,611,494 18,572,305 18,108,260 17,460,728
----------- ----------- ----------- ----------- -----------
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-61
<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-62
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight months ended
August 31, Year Ended December 31,
------------------------ ----------------------------------
1999 1998 1998 1997 1996
----------- ----------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 4,272,779 $4,068,386 $1,227,398 $1,105,815 $2,363,203
----------- ---------- ---------- ---------- ----------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 1,266,664 1,289,600 1,795,401 1,877,575 2,031,431
Amortization of
deferred financing
costs................. 25,176 42,889 64,334 64,334 64,334
Gain on sale of
property and
equipment............. -- -- (5,000) -- (1,818,422)
Provision for bad
debt.................. -- -- 63,378 21,535 45,485
Deferred income taxes.. 107,462 (478,470) (144,350) 153,819 520,245
Changes in assets and
liabilities:
Accounts receivable.... (34,996) (58,342) (56,688) (106,087) 42,798
Note receivable........ -- (193,250) (93,250) -- --
Restricted cash and
cash equivalents...... 128,837 353,491 299,564 (167,734) (334,587)
Prepaid expenses....... (460,220) 585,215 316,141 (126,981) (56,185)
Deposits............... -- -- 30 70,000 (70,000)
Accounts payable--
trade................. (1,117,545) (314,114) 790,019 (772,323) 800,308
Accounts payable--
unearned income....... 1,331,849 (343,164) 83,729 (100,874) 117,244
Mutuel tickets
outstanding........... 16,035 10,399 8,907 9,032 4,482
Accrued liabilities--
interest and other
accrued expenses...... 315,947 742,200 688 231,126 107,386
Accrued liabilities--
underpaid purses...... (128,837) (353,491) (299,564) 165,999 345,284
Income tax payable..... 1,106,965 2,216,745 399,454 (550,538) 431,191
----------- ---------- ---------- ---------- ----------
Total adjustments...... 2,557,337 3,499,708 3,222,793 768,883 2,230,994
----------- ---------- ---------- ---------- ----------
Net cash provided by
operating activities... 6,830,116 7,568,094 4,450,191 1,874,698 4,594,197
----------- ---------- ---------- ---------- ----------
Cash flows from
investing activities:
Proceeds from sale of
property and
equipment............. -- -- -- -- 3,291,126
Acquisition of property
and equipment......... (873,168) (351,335) (2,179,874) (1,774,061) (1,728,721)
----------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) investing
activities............. (873,168) (351,335) (2,179,874) (1,774,061) 1,562,405
----------- ---------- ---------- ---------- ----------
Cash flows from
financing activities:
Repayments of term note
payable............... (500,000) (500,000) (500,000) (1,500,000) (3,200,000)
Repayments under line
of credit............. -- -- -- -- (2,000,000)
----------- ---------- ---------- ---------- ----------
Net cash (used in)
financing activities... (500,000) (500,000) (500,000) (1,500,000) (5,200,000)
----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents............ 5,456,948 6,716,759 1,770,317 (1,399,363) 956,602
Cash and cash
equivalents, beginning
of period.............. 2,375,511 605,194 605,194 2,004,557 1,047,955
----------- ---------- ---------- ---------- ----------
Cash and cash
equivalents, end of
period................. $ 7,832,459 $7,321,953 $2,375,511 $ 605,194 $2,004,557
=========== ========== ========== ========== ==========
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for income
taxes.................. $ 1,068,072 $ 878,096 $ 896,831 $1,705,041 $ 589,000
=========== ========== ========== ========== ==========
Cash paid during the
period for interest.... $ 2,390,864 $1,889,306 $3,578,926 $3,882,003 $3,966,307
=========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-63
<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 principles 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-64
<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-65
<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-66
<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-67
<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-68
<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:
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-69
<PAGE>
FINANCIAL STATEMENTS
REMINGTON PARK, INC.
For the years ended December 31, 1998, 1997 and 1996
F-70
<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-71
<PAGE>
REMINGTON PARK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1999 1998 1997
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents--NOTE F.. $ 750,319 $ 697,037 $ 501,209
Restricted cash.................... 2,420,961 446,664 400,609
Trade accounts receivable, less
allowance for doubtful accounts of
$27,246 at September 30, 1999,
$26,433 at December 31, 1998 and
$0 at December 31, 1997........... 706,785 306,743 890,243
Inventories........................ 160,075 162,833 202,791
Prepaid expenses and other assets.. 222,212 180,268 270,056
------------ ------------ ------------
Total Current Assets............. 4,260,352 1,793,545 2,264,908
------------ ------------ ------------
PROPERTY AND EQUIPMENT--NOTES B AND I
Land improvements.................. 4,042,534 3,989,282 4,527,282
Buildings and structures........... 29,825,932 30,135,806 32,047,806
Machinery and equipment............ 7,996,937 7,953,549 7,921,772
Furniture and fixtures............. 1,654,963 1,649,747 1,638,081
------------ ------------ ------------
43,520,366 43,728,384 46,134,941
Less accumulated depreciation...... 34,763,202 34,621,473 32,078,706
------------ ------------ ------------
Net Property and Equipment....... 8,757,164 9,106,911 14,056,235
------------ ------------ ------------
OTHER ASSETS
Land lease and other costs less
amortization--NOTES E AND I....... 1,322,601 1,392,987 1,943,765
------------ ------------ ------------
$ 14,340,117 $ 12,293,443 $ 18,264,908
============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES
Accounts payable................... $ 1,886,155 $ 1,374,870 $ 2,851,255
Unredeemed pari-mutuel tickets..... 249,321 445,909 465,585
Advances payable to The Edward J.
DeBartolo Corporation--NOTE G..... 156,674 453,771 5,934,012
Accrued liabilities................ 1,176,728 926,162 782,715
Percentage entitlements in excess
of purses paid--NOTE C............ 1,916,210 292,293 700,911
Deferred revenue................... 517,925 6,972 90,974
------------ ------------ ------------
Total Current Liabilities........ 5,903,013 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............... (39,730,699) (39,198,952) (29,970,544)
------------ ------------ ------------
Total Stockholder's Equity
(Deficit)....................... 8,418,393 8,793,466 (22,560,544)
------------ ------------ ------------
$ 14,340,117 $ 12,293,443 $ 18,264,908
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-72
<PAGE>
REMINGTON PARK, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Pari-Mutuel income...... $ 21,471,901 $ 23,079,261 $ 29,095,338 $ 33,085,838 $ 33,461,803
------------ ------------ ------------ ------------ ------------
Less:
Purses paid to
horsemen............. 7,376,329 7,754,755 9,819,313 11,438,288 11,450,284
Amounts paid to the
State of Oklahoma.... 2,509,253 2,674,986 3,362,670 3,801,826 3,620,381
Breakage and breeders
awards paid to the
Oklahoma Breeding and
Development Revolving
Fund................. 690,455 778,825 990,960 1,157,359 775,645
Commissions paid to
host tracks.......... 2,824,435 2,779,730 3,420,305 3,680,734 2,833,637
------------ ------------ ------------ ------------ ------------
13,400,472 13,988,296 17,593,248 20,078,207 18,679,947
------------ ------------ ------------ ------------ ------------
Net Pari-Mutuel Income.. 8,071,429 9,090,965 11,502,090 13,007,631 14,781,856
Concession revenue...... 1,165,511 1,338,775 1,851,686 2,168,490 2,517,449
Other non-wagering
revenues............... 1,026,041 1,564,829 2,138,306 2,644,010 3,515,199
------------ ------------ ------------ ------------ ------------
Total Revenues........ 10,262,981 11,994,569 15,492,082 17,820,131 20,814,504
Operating costs and
expenses--
NOTES E and G......... 10,405,855 12,920,768 16,994,450 20,177,827 21,064,646
Depreciation and
amortization........... 486,871 2,029,313 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.... (629,745) (5,792,512) (7,045,915) (10,159,377) (3,050,823)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income....... 102,800 90,392 122,477 116,336 106,130
Interest expense--NOTE
G.................... (4,802) (1,907,474) (2,304,970) (2,539,923) (2,481,557)
------------ ------------ ------------ ------------ ------------
97,998 (1,817,082) (2,182,493) (2,423,587) (2,375,427)
------------ ------------ ------------ ------------ ------------
NET LOSS................ (531,747) (7,609,594) (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......... $(39,730,699) $(37,580,138) $(39,198,952) $(29,970,544) $(17,387,580)
============ ============ ============ ============ ============
Basic and diluted loss
per share of common
stock.................. $ (1,063) $ (15,219) $ (18,457) $ (25,166) $ ( 10,853)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-73
<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, nine months ended
September 30, 1999
(unaudited)................... -- -- (531,747) (531,747)
---- ----------- ------------ ------------
Balance at September 30, 1999
(unaudited)................... $500 $48,148,592 $(39,730,699) $ 8,418,393
==== =========== ============ ============
</TABLE>
See accompanying notes to financial statements
F-74
<PAGE>
REMINGTON PARK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------ --------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss............... $ (531,747) $(7,609,594) $(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.......... 486,871 2,029,313 2,706,547 2,723,763 2,800,681
Provision for doubtful
accounts.............. 27,246 25,000 26,433 -- --
Gain on sale of
equipment............. -- -- -- (8,341) --
(Increase) decrease in
restricted cash....... (1,974,297) (416,662) (46,055) 346,569 (97,411)
(Increase) decrease in
accounts receivable... (427,288) 282,266 557,067 (479,114) 14,450
Increase (decrease) in
inventories, prepaid
expenses and other
assets................ (39,861) (99,765) 129,746 32,081 (72,787)
Increase (decrease) in
accounts payable and
purse liability....... 2,127,673 (1,386,886) (1,885,003) 1,106,833 1,169,862
Increase (decrease) in
accrued liabilities
and unredeemed pari-
mutuel tickets........ 53,978 333,057 123,771 (43,980) 195,555
Increase in advances
due to The Edward J.
DeBartolo
Corporation........... (540,423) 1,825,165 2,502,177 2,164,757 2,481,557
Increase (decrease) in
deferred revenue...... 510,953 214,150 (84,002) (20,850) (35,090)
---------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) operating
activities............ (306,895) (1,966,956) (2,360,727) (1,683,328) 1,030,567
---------- ----------- ----------- ------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of
improvements and
equipment............. (66,063) (41,948) (43,445) (118,293) (326,020)
Proceeds from sale of
property and
equipment............. -- -- -- 292,770 --
---------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) investing
activities............ (66,063) (41,948) (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...... 26,240 -- -- -- (1,350,000)
---------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) financing
activities............ 426,240 2,600,000 2,600,000 900,000 (1,047,081)
---------- ----------- ----------- ------------ -----------
Net increase (decrease)
in cash and cash
equivalents............ 53,282 591,096 195,828 (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.......... $ 750,319 $ 1,092,305 $ 697,037 $ 501,209 $ 1,110,060
========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-75
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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 supplement purse escrow 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 is computed on the straight-line
method over the estimated useful lives of the assets:
<TABLE>
<S> <C>
Buildings................................................. 15 to 25 years
Improvements.............................................. 5 to 15 years
Furniture, fixtures and equipment......................... 5 to 10 years
</TABLE>
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-76
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
Nine months ended September 30 (unaudited):
1999........................................................... $ 749,011
1998........................................................... 1,268,719
</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.
Revenue Recognition:
The Company records revenues associated with horse racing on a daily basis.
Horse racing revenues are shown net of state and local taxes, stakes, purses
and awards.
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-77
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
September 30, 1999 and the results of operations and cash flows for the nine
months ended September 30, 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 September 30, 1999, purses were underpaid during the thoroughbred race
meeting which totalled $2,282,698. Also, at September 30, 1999, purses were
overpaid during the quarter horse race meeting which totalled $366,488. 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-78
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 1999 and 1998 are unaudited)
NOTE D--Income Taxes
Following is a summary of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
September 30, --------------------------
1999 1998 1997
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Provision for impairment of
long-lived assets............ $ 13,565,000 $ 13,565,000 $ 12,606,000
Net operating loss
carryforward................. 1,445,000 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....... 15,076,000 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............ 12,176,000 12,000,000 28,872,500
Valuation Allowance............. (12,176,000) (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-79
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
Nine months ended
September 30
(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
Nine months ended September 30 (unaudited):
1999........................................................... 1,458,933
1998........................................................... 1,549,651
</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-80
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
Nine months ended September 30 (unaudited):
1999............................................................. 81,097
1998............................................................. 181,063
</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
Nine months ended September 30 (unaudited):
1999........................................................... --
1998........................................................... 1,907,055
</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 nine months ended September 30, 1999.
F-81
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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 for 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
September 30, 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 September 30, 1999 in the accompanying financial statements.
F-82
<PAGE>
FINANCIAL STATEMENTS
THISTLEDOWN, INC.
For the years ended December 31, 1998, 1997 and 1996
F-83
<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-84
<PAGE>
THISTLEDOWN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1999 1998 1997
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............ $ 2,366,651 $ 1,779,565 $ 895,292
Restricted cash...................... 2,256,828 1,562,770 1,581,885
Trade accounts receivable (less
allowance for doubtful accounts of
$89,624 at September 30, 1999,
$89,830 at December 31, 1998 and
$56,599 at December 31, 1997)....... 2,296,486 2,027,847 1,665,173
Inventories.......................... 163,576 143,103 155,923
Purses paid in excess of percentage
entitlements--NOTE C................ 176,317 -- --
Prepaid expenses and other assets.... 32,295 176,061 50,123
----------- ----------- -----------
Total Current Assets................. 7,292,153 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.............. 2,319,321 2,209,950 2,104,442
----------- ----------- -----------
44,131,216 44,012,340 43,892,626
Less accumulated depreciation........ 34,439,953 33,359,365 31,893,794
----------- ----------- -----------
Net Property and Equipment........... 9,691,263 10,652,975 11,998,832
----------- ----------- -----------
Other Assets
Deferred racetrack improvement fund
rebate--NOTE B...................... 1,085,964 792,131 503,587
Deposits............................. 47,398 33,944 31,222
----------- ----------- -----------
Total other assets................... 1,133,362 826,075 534,809
----------- ----------- -----------
$18,116,778 $17,168,396 $16,882,037
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable..................... $ 3,579,044 $ 2,785,348 $ 2,737,170
Unredeemed pari-mutuel tickets....... 683,528 639,306 651,091
Due to The Edward J. DeBartolo
Corporation......................... 2,757 35,611 850,700
Accrued liabilities.................. 814,042 593,868 600,925
Percentage entitlements in excess of
purses paid--NOTE C................. -- 526,592 337,515
Deferred revenue..................... 11,872 1,684 6,822
----------- ----------- -----------
Total Current Liabilities............ 5,091,243 4,582,409 5,184,223
----------- ----------- -----------
Due to The Edward J. DeBartolo
Corporation--NOTES G and I........... 61,628,370 61,221,811 60,034,612
----------- ----------- -----------
Deferred Income Taxes--NOTE D......... 1,262,000 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.................. (49,965,335) (49,989,324) (49,437,298)
----------- ----------- -----------
Total Stockholder's Deficit.......... (49,864,835) (49,888,824) (49,336,798)
----------- ----------- -----------
$18,116,778 $17,168,396 $16,882,037
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-85
<PAGE>
THISTLEDOWN, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Pari-Mutuel income...... $ 25,781,914 $ 25,643,540 $ 34,283,820 $ 31,912,780 $ 26,933,567
------------ ------------ ------------ ------------ ------------
Less:
Purses paid to
horsemen.............. 9,170,440 9,040,027 12,115,337 10,970,292 9,509,854
State of Ohio pari-
mutuel taxes--net of
racetrack improvement
fund rebate........... 2,821,673 2,987,503 3,937,712 3,597,768 3,991,419
Breakage paid to
Thoroughbred Health
and Retirement Fund... 254,045 274,471 356,977 351,631 303,161
Amount paid to the
Horsemen's Benevolent
& Protection
Association........... 64,368 62,540 87,046 84,826 89,822
Commission paid to host
tracks................ 2,687,816 2,687,562 3,575,538 3,165,904 1,457,258
------------ ------------ ------------ ------------ ------------
14,998,342 15,052,103 20,072,610 18,170,421 15,351,514
------------ ------------ ------------ ------------ ------------
Net Pari-Mutuel Income.. 10,783,572 10,591,437 14,211,210 13,742,359 11,582,053
Non-wagering revenues... 2,654,188 2,537,033 3,469,119 3,345,817 3,332,165
------------ ------------ ------------ ------------ ------------
Total Revenues......... 13,437,760 13,128,470 17,680,329 17,088,176 14,914,218
Operating costs and
expenses--
NOTES E, G and H....... 12,020,154 12,275,347 16,027,163 16,234,915 14,903,093
Depreciation and
amortization........... 1,080,587 1,087,028 1,465,571 1,497,966 1,482,331
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM
OPERATIONS............. 337,019 (233,905) 187,595 (644,705) (1,471,206)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest earned........ 102,529 69,580 89,108 72,923 22,763
Interest expense--NOTE
G..................... (406,559) (448,910) (575,729) (742,836) (545,736)
------------ ------------ ------------ ------------ ------------
(304,030) (379,330) (486,621) (669,913) (522,973)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
INCOME TAXES........... 32,989 (613,235) (299,026) (1,314,618) (1,994,179)
Deferred income taxes--
NOTE D................. 9,000 168,667 253,000 354,000 321,000
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS)....... 23,989 (781,902) (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.......... $(49,965,335) $(50,219,200) $(49,989,324) $(49,437,298) $(47,768,680)
============ ============ ============ ============ ============
Basic and diluted
earnings (loss) per
share of common stock.. $ 96 $ (3,128) $ (2,208) $ (6,674) $ (9,261)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-86
<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, nine months ended
September 30, 1999
(unaudited).................... -- -- 23,989 23,989
---- -------- ------------ ------------
Balance at September 30, 1999
(unaudited).................... $500 $100,000 $(49,965,335) $(49,864,835)
==== ======== ============ ============
</TABLE>
See accompanying notes to financial statements
F-87
<PAGE>
THISTLEDOWN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 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)....... $ 23,989 $ (781,902) $ (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.......... 1,080,587 1,087,028 1,465,571 1,497,966 1,482,331
Provision for doubtful
accounts.............. 26,003 -- 39,098 46,467 19,560
Deferred income taxes.. 9,000 168,667 253,000 354,000 321,000
(Increase) decrease in
restricted cash....... (694,058) (315,496) 19,115 (241,656) (1,340,229)
Increase in accounts
receivable............ (294,642) (64,810) (401,773) (247,808) (1,082,062)
(Increase) decrease in
inventories........... (20,473) (16,251) 12,820 1,083 (11,185)
(Increase) decrease in
prepaid expenses...... 143,766 (32,265) (125,938) 47,845 (25,647)
Increase in purses paid
in excess of
percentage
entitlements.......... (176,317) -- -- -- --
Increase in other
assets................ (307,287) (193,712) (291,266) (372,160) (152,226)
Increase (decrease) in
accounts payable and
accrued liabilities... 1,013,870 287,022 41,121 (339,485) 2,192,388
Increase (decrease) in
unredeemed pari-mutuel
tickets............... 44,222 117,510 (11,785) 218,318 92,059
Increase (decrease) in
percentage
entitlements in excess
of purses paid........ (526,592) 345,742 189,077 1,733 335,782
Increase (decrease) in
deferred revenue...... 10,188 29,848 (5,138) 5,118 1,704
---------- ---------- ---------- ----------- -----------
Net cash provided by
(used in) operating
activities............ 332,256 631,381 631,876 (697,197) (481,704)
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property
and equipment......... (118,873) (117,318) (119,714) (228,315) (332,592)
---------- ---------- ---------- ----------- -----------
Net cash used in
investing activities.. (118,873) (117,318) (119,714) (228,315) (332,592)
---------- ---------- ---------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Net advances from The
Edward J. DeBartolo
Corporation........... 373,703 421,379 372,111 989,948 1,364,585
---------- ---------- ---------- ----------- -----------
Net cash provided by
financing activities.. 373,703 421,379 372,111 989,948 1,364,585
---------- ---------- ---------- ----------- -----------
Net Increase in cash
and cash equivalents.. 587,086 935,442 884,273 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.......... $2,366,651 $1,830,734 $1,779,565 $ 895,292 $ 830,856
========== ========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-88
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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 is computed on the
straight-line method over the estimated useful lives of the assets:
<TABLE>
<S> <C>
Buildings................................................. 15 to 25 years
Improvements.............................................. 5 to 15 years
Furniture, fixtures and equipment......................... 5 to 10 years
</TABLE>
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-89
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
Nine months ended September 30 (unaudited):
1999........................................................... 1,111,920
1998........................................................... 1,147,844
</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.
Revenue Recognition:
The Company records revenue associated with horse racing on a daily basis.
Horse racing revenues are shown net of state and local taxes, stakes, purses
and awards.
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-90
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
September 30, 1999 and the results of operations and cash flows for the nine
months ended September 30, 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
Nine months ended September 30
(unaudited):
1999............................... 7,551,298 1,124,985 831,115
1998............................... 9,063,184 1,049,096 862,403
</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-91
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
========
Purses were overpaid at the end of:
September 30, 1999 (unaudited)................................ $176,317
========
</TABLE>
NOTE D--Income Taxes
Following is a summary of deferred tax liabilities:
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------
1999 1998 1997
------------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Deferred tax liabilities:
Excess tax depreciation and
amortization over financial statement
reporting depreciation and
amortization......................... $ 893,000 $ 984,000 $ 829,000
Racetrack improvement fund rebate
recognized for financial statement
reporting in excess of tax
reporting............................ 369,000 269,000 171,000
---------- ---------- ----------
Total Deferred Tax Liabilities...... $1,262,000 $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
Nine months ended September 30 (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-92
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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
Nine months ended September 30 (unaudited):
1999........................................................... 1,283,199
1998........................................................... 1,295,697
</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
Nine months ended September 30
(unaudited):
1999........................... 5,807,765 373,517 6,181,282
1998........................... 6,061,420 703,048 6,764,468
</TABLE>
F-93
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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>
<CAPTION>
Long-
Current Portion term Portion
--------------- ------------
<S> <C> <C>
December 31, 1998............................... $ 35,611 $61,221,811
======== ===========
December 31, 1997............................... $850,700 $60,034,612
======== ===========
September 30, 1999 (unaudited).................. $ 2,757 $61,628,370
======== ===========
</TABLE>
The current portion of the amount payable to DeBartolo at September 30, 1999
is to be repaid. The long-term portion of the amount payable to DeBartolo at
September 30, 1999 will be contributed to additional paid-in capital (see Note
I).
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
Nine months ended September 30 (unaudited):
1999............................................................. 406,459
1998............................................................. 448,778
</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 $61,628,370 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-94
<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-95
<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.
Walnut Creek, California Ernst & Young LLP
October 4, 1999, except paragraph 1 of Note 5, Certified Public Accountants
as to which the date is
October 19, 1999
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)
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------
1999 1998 1997
------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 739,839 $ 714,691 $ 1,426,313
Equity in pooled cash and cash
equivalents......................... 45,991,536 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 September 30, 1999............... 822,479 3,100,143 3,661,060
Other current assets................. 127,386 479,827 779,343
------------ ----------- -----------
Total current assets............... 47,681,240 45,412,531 40,865,008
Racetrack properties and equipment,
net................................... 48,532,678 48,429,435 24,070,678
Intangible assets, net................. 2,473,259 3,044,009 14,380,010
------------ ----------- -----------
Total assets....................... $ 98,687,177 $96,885,975 $79,315,696
============ =========== ===========
Liabilities and stockholder's equity
Current liabilities:
Notes payable to affiliate, current
portion............................. $ 2,594,191 $ 1,448,415 $ --
Accounts payable..................... 703,270 4,055,475 4,301,635
Accrued compensation................. 1,265,620 1,743,079 1,772,730
Other accrued liabilities............ 2,216,315 1,213,890 1,440,484
Due to affiliates.................... 20,657,507 17,149,343 4,414,034
------------ ----------- -----------
Total current liabilities.......... 27,436,903 25,610,202 11,928,883
------------ ----------- -----------
Note payable to affiliate.............. 59,591,322 58,183,681 42,722,954
------------ ----------- -----------
Notes 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.................. (3,195,048) (1,761,908) (216,056)
------------ ----------- -----------
Total stockholder's equity......... 11,658,952 13,092,092 14,637,944
------------ ----------- -----------
Total liabilities and stockholder's
equity............................ $ 98,687,177 $96,885,975 $79,315,696
============ =========== ===========
</TABLE>
See accompanying notes.
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)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended September 30, Years ended December 31,
-------------------------------- -------------------------------------
1999 1998 1998 1997 1996
--------------- --------------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Mutual commission and
breakage............. $ 14,202,234 $ 12,470,873 $17,362,961 $16,555,897 $15,786,982
Admissions............ 982,313 1,026,560 1,347,652 1,717,753 1,923,166
Catering operations... 1,860,094 1,742,275 2,269,092 2,288,534 2,313,021
Parking............... 700,497 707,180 937,434 922,325 954,876
Programs.............. 959,955 905,408 1,227,601 1,272,416 1,269,256
Indirect revenues..... 2,194,208 2,142,788 2,506,497 2,754,653 2,684,698
--------------- --------------- ----------- ----------- -----------
20,899,301 18,995,084 25,651,237 25,511,578 24,931,999
--------------- --------------- ----------- ----------- -----------
Operating expenses:
Salaries, wages,
benefits and other
payroll-related
expenses............. 8,777,260 8,465,979 11,895,359 11,401,172 10,689,267
Rental of facilities
and equipment........ 277,386 501,806 654,927 749,870 1,661,174
Operating and
maintenance
services............. 2,821,788 2,756,420 4,997,209 4,508,930 3,921,650
Depreciation and
amortization......... 1,902,154 3,131,997 3,621,315 3,828,330 3,987,359
Taxes and licenses.... 677,488 615,012 726,613 789,325 707,031
Advertising and public
relations............ 1,371,491 968,036 1,269,124 1,301,954 1,294,999
General and
administrative....... 2,268,537 2,316,127 2,047,403 1,494,073 2,327,842
Charity days expense.. 66,841 64,183 86,976 96,815 98,356
--------------- --------------- ----------- ----------- -----------
18,162,945 18,819,560 25,298,926 24,170,469 24,687,678
--------------- --------------- ----------- ----------- -----------
Income from operations.. 2,736,356 175,524 352,311 1,341,109 244,321
Other income (expense):
Interest income,
principally from
affiliate............ 1,667,796 1,609,183 2,148,526 1,976,792 1,714,396
Interest expense to
affiliate............ (3,501,074) (2,648,491) (3,845,028) (2,516,408) (2,310,728)
--------------- --------------- ----------- ----------- -----------
Income (loss) before
income taxes........... 903,078 (863,784) (1,344,191) 801,493 (352,011)
Provision for federal
and state income
taxes.................. (2,336,218) (88,749) (201,661) (1,888,195) (1,000,490)
--------------- --------------- ----------- ----------- -----------
Net loss................ $ (1,433,140) $ (952,533) $(1,545,852) $(1,086,702) $(1,352,501)
=============== =============== =========== =========== ===========
</TABLE>
See accompanying notes.
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)
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)...... -- -- (1,433,140) (1,433,140)
---------- ----------- ----------- -----------
Balance at September 30,
1999 (unaudited)........... $1,494,000 $13,360,000 $(3,195,048) $11,658,952
========== =========== =========== ===========
</TABLE>
See accompanying notes.
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)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
------------------------ -------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(1,433,140) $ (952,533) $(1,545,852) $(1,086,702) $(1,352,501)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation........... 1,331,404 1,545,747 1,097,814 952,329 1,111,358
Amortization........... 570,750 1,586,250 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.... 2,277,664 2,661,289 345,219 (1,356,568) (1,672,357)
Other current assets... 352,441 175,602 299,516 (355,913) (79,900)
Accrued interest on
notes payable to
affiliate............. 3,405,136 2,648,491 3,363,540 2,502,802 1,882,816
Accounts payable....... (3,352,205) 199,610 (246,160) (1,409,619) 4,333,346
Accrued compensation... (477,459) 424,042 (29,651) 387,530 93,023
Other accrued
liabilities........... 1,002,425 441,023 (226,594) 141,458 283,112
Due to affiliates...... 2,220,046 (2,891,340) 2,709,394 1,608,121 534,269
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating activities... 5,897,062 5,838,181 8,506,425 4,272,678 8,009,167
----------- ----------- ----------- ----------- -----------
Investing activities
Purchase of racetrack
properties and
equipment.............. (998,248) (6,646,593) (16,644,071) (19,582,404) (1,910,089)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (998,248) (6,646,593) (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... 4,898,814 5,387,057 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................. $46,731,375 $41,811,662 $41,832,561 $36,424,605 $33,829,018
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
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
(All amounts as at September 30, 1999 and for the nine month periods ended
September 30, 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-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 September 30, 1999 and for the nine month periods ended
September 30, 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 $1.6 million and $1.6 million for the nine months ended
September 30, 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-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 September 30, 1999 and for the nine month periods ended
September 30, 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-103
<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 September 30, 1999 and for the nine month periods ended
September 30, 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 September 30, 1999 and for the nine-
month periods ended September 30, 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 nine months ended September
30, 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,
September --------------------------
30, 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.......................... 8,639,810 8,077,230 7,762,352
------------ ------------ ------------
61,018,942 59,584,299 34,127,728
Less accumulated depreciation...... (12,486,264) (11,154,864) (10,057,050)
------------ ------------ ------------
$ 48,532,678 $ 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-104
<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 September 30, 1999 and for the nine month periods ended
September 30, 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,
September 30, -------------------------
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....... (8,180,760) (7,610,010) (25,884,009)
----------- ----------- ------------
$ 2,473,259 $ 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 $225,282 in the nine months ended September 30, 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-105
<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 September 30, 1999 and for the nine month periods ended
September 30, 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
$62,185,513 at September 30, 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 nine months ended September 30, 1999 and 1998 was $1,870,764 and
$1,939,536, 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 $1,630,310 and $708,955 for the nine months ended
September 30, 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 $988,562 and $988,562 for
the nine months ended September 30, 1999 and 1998, respectively. Such amounts
are included in general and administrative expense in the accompanying
statements of operations.
F-106
<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 September 30, 1999 and for the nine month periods ended
September 30, 1999 and 1998 are unaudited)
6. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
------------------ ------------------------------
1999 1998 1998 1997 1996
---------- ------- -------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Currently payable:
Federal.................. $2,336,218 $ -- $ -- $1,227,683 $ 768,061
State.................... -- 88,749 201,661 660,512 232,429
---------- ------- -------- ---------- ----------
2,336,218 88,749 201,661 1,888,195 1,000,490
Deferred................... -- -- -- -- --
---------- ------- -------- ---------- ----------
$2,336,218 $88,749 $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>
Nine months ended
September 30, 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......... $ 307,000 $(294,000) $(457,000) $ 272,500 $ (119,700)
State taxes, allocated
by parent.............. -- 88,749 201,661 660,512 232,429
Unutilized net operating
losses................. 2,029,218 294,000 457,000 955,183 887,761
---------- --------- --------- ---------- ----------
Income tax provision.... $2,336,218 $ 88,749 $ 201,661 $1,888,195 $1,000,490
========== ========= ========= ========== ==========
</TABLE>
F-107
<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 September 30, 1999 and for the nine month periods ended
September 30, 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 $582,087 and $660,630 for the nine months ended September 30, 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-108
<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 September 30, 1999 and for the nine month periods ended
September 30, 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 $334,896 and $258,001 for the nine months ended September 30, 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).
As disclosed in Note 1, LRCA is not being acquired by MI Entertainment Corp.
The assets and liabilities of LRCA included in these financial statements but
that are not being acquired by MI Entertainment Corp. are $45,534,250 of equity
in pooled cash and cash equivalents, $8,591,500 of net race track properties
and equipment, $34,208 of accounts payable, $2,594,191 and $34,383,886
representing the current and long-term portion of notes payable to affiliate,
and ($3,214,577) representing the amount due to affiliates.
Prior to closing, Ladbroke Racing Corporation agreed to contribute to the
paid-in capital of PRA and LLH $25,207,436 representing the long-term portion
of notes payable to affiliate and $23,872,084 representing the amount due to
affiliates by PRA and LLH. The transaction will be accounted for under the
purchase method of accounting.
F-109
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+This is an amended non-offering preliminary prospectus, a copy of which has +
+been filed with the securities commissions or similar regulatory authorities +
+in the Provinces of British Columbia, Alberta, Saskatchewan, Ontario, Nova +
+Scotia, Newfoundland and Quebec, but which has not yet become final. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Alternate Page for Canadian Prospectus
AMENDED PRELIMINARY PROSPECTUS DATED FEBRUARY 8, 2000
This prospectus does not constitute a public offering of any securities. No
securities commission or similar authority has in any way passed upon any
information contained herein and any representation to the contrary is an
offence.
Non-Offering Prospectus
MAGNA ENTERTAINMENT CORP.
CLASS A SUBORDINATE VOTING STOCK
AND MEC HOLDINGS (CANADA) INC. EXCHANGEABLE SHARES
No securities are being offered pursuant to this Prospectus. This Prospectus
is being filed with provincial securities commissions in Canada to enable each
of Magna Entertainment Corp. ("MEC") and MEC Holdings (Canada) Inc.
("Exchangeco") to become reporting issuers pursuant to applicable securities
legislation in those provinces, notwithstanding that no sale of any securities
is contemplated herein. Since no securities are being offered pursuant to this
Prospectus, no proceeds will be raised and all expenses in connection with the
preparation and filing of this Prospectus will be paid by our parent company,
Magna International Inc. ("Magna") from its general funds.
We are filing this Prospectus to become reporting issuers to prepare for the
distribution of approximately 20% of the equity of MEC held by Magna in the
form of shares of MEC Class A Subordinate Voting Stock and Exchangeable Shares
of Exchangeco. On or about . , 2000, Magna will distribute to holders of its
Class A Subordinate Voting Shares and Class B Shares of record on . , 2000, by
way of special dividend, approximately 15.7 million shares comprised of our
Class A Subordinate Voting Stock and Exchangeable Shares. Magna shareholders
resident in Canada may elect to receive Exchangeable Shares of Exchangeco in
satisfaction of their entitlement to receive shares of Class A Subordinate
Voting Stock of MEC. Each Exchangeable Share may be exchanged by the holder at
any time for, and together with certain ancillary rights is economically
equivalent to, a share of Class A Subordinate Voting Stock of MEC. See
"Description of the Exchangeable Shares". It is expected that the Exchangeable
Shares will be "qualified investments" under the Income Tax Act (Canada) for
some investors and will not be "foreign property" under the Income Tax Act
(Canada). Registered holders of Magna shares resident in Canada will be deemed
to have elected to receive Exchangeable Shares in satisfaction of their
entitlement to receive shares of Class A Subordinate Voting Stock of MEC unless
they specifically advise Magna to the contrary prior to . , 2000 by following
the instructions for doing so enclosed with this prospectus. As a result of the
special dividend, Magna shareholders will receive one-fifth of one share of MEC
Class A Subordinate Voting Stock or one-fifth of one Exchangeable Share for
every one Class A Subordinate Voting Share or Class B Share of Magna that they
hold on the record date, provided that no registered holder will be entitled to
receive any fractional interests in Class A Subordinate Voting Stock of MEC or
in Exchangeable Shares. Magna will make a cash payment to such registered
holders equal to the fair market value of these fractional interests. Magna
will concurrently distribute to those holders its regular quarterly cash
dividend of $ . per share. In this Prospectus, we refer to the special
dividend and the 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
MEC Class A Subordinate Voting Stock of MEC held by Magna 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 MEC Class A Subordinate
Voting Stock or Exchangeable Shares 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. If you
are a beneficial holder of Magna shares and are resident in Canada, you should
advise the record holder of your shares prior to . , 2000 if you do not wish
to be deemed to be electing to receive Exchangeable Shares in lieu of the
shares of Class A Subordinate Voting Stock.
The capital stock of MEC consists of two classes - Class A Subordinate Voting
Stock and Class B Stock. Holders of the MEC Class A Subordinate Voting Stock
are entitled to one vote per share, holders of the MEC Class B Stock are
entitled to 20 votes per share and all holders vote together as a single class,
except where
<PAGE>
Alternate Page for Canadian Prospectus
separate class votes are required by law or by the Certificate of Incorporation
of MEC. Upon completion of the distribution, Magna will own all the MEC Class B
Stock (and none of the Class A Subordinate Voting Stock of MEC), which means
that Magna will be entitled to exercise approximately 99% of the total votes
attached to all outstanding MEC stock. Magna will therefore continue to be able
to elect all directors of MEC and continue to control MEC.
MEC has applied to The Nasdaq Stock Market, Inc. to approve its Class A
Subordinate Voting Stock for quotation and trading on the Nasdaq National
Market under the symbol "MIEC". The Toronto Stock Exchange has conditionally
approved the listing of the MEC Class A Subordinate Voting Stock and the
Exchangeable Shares under the symbols "MIE.A" and "MEH", respectively, subject
to fulfillment by MEC of the requirements of The Toronto Stock Exchange on or
before . , 2000. Exchangeco intends to apply for approval to list its
Exchangeable Shares on the Toronto Stock Exchange. Magna has advised us that it
will not complete the distribution until we receive these approvals.
IN REVIEWING THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
AFFECTING THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MEC AND THE
VALUE OF MEC CLASS A SUBORDINATE VOTING STOCK THAT THIS PROSPECTUS DESCRIBES IN
DETAIL UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 13.
SHAREHOLDER APPROVAL IS NOT REQUIRED FOR THE DISTRIBUTION OR ANY OF THE
OTHER TRANSACTIONS THAT THIS PROSPECTUS DESCRIBES. WE ARE NOT ASKING YOU FOR A
PROXY AND WE REQUEST THAT YOU NOT SEND ONE TO US.
In this prospectus, the terms "we" and "our" are used to refer to MEC as the
disclosure contained in this prospectus principally relates to the business and
affairs of MEC.
2
<PAGE>
Alternate Page for Canadian Prospectus
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Heading Page No.
- ------- --------
<S> <C>
Special Note Regarding Forward-Looking Information................... 3
Questions and Answers About the Distribution......................... 4
Summary.............................................................. 9
Risk Factors......................................................... 13
Distributing Company................................................. 20
The Special Dividend................................................. 20
Our Business......................................................... 23
Our Strategy......................................................... 30
Industry Overview.................................................... 32
Selected Financial and Operating Information......................... 36
Management's Discussion and Analysis of Financial Condition and
Operating Results................................................... 38
Quantitative and Qualitative Disclosures About Market Risk........... 47
Consolidated Capitalization.......................................... 48
Reorganization....................................................... 49
Recent Acquisitions.................................................. 52
Certain Income Tax Considerations.................................... 53
Directors and Executive Officers..................................... 61
Security Ownership of Certain Beneficial Owners and Management....... 65
Certain Relationships and Related Transactions....................... 66
Legal Proceedings.................................................... 68
Trading History and Dividend Record and Policy....................... 68
Description of Our Securities........................................ 68
Description of Exchangeable Shares................................... 72
Legal Matters........................................................ 79
Auditors, Transfer Agent and Registrar............................... 79
Promoter............................................................. 79
Financial Statements................................................. F-1
Certificates......................................................... C-1
</TABLE>
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 prospectus 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.
3
<PAGE>
Alternate Page for Canadian Prospectus
Agreement may not be amended without the approval of the holders of the
Exchangeable Shares given in the manner set forth above under "Description of
Exchangeable Shares--Amendment and Approval".
LEGAL MATTERS
Certain legal matters in connection with the distribution of shares of our
Class A Subordinate Voting Stock will be passed upon by Sidley & Austin, our
United States counsel. Certain legal matters in connection with the
distribution of the Exchangeable Shares will be passed upon by Osler, Hoskin &
Harcourt LLP, our Canadian counsel.
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
American Securities Transfer and Trust, Incorporated at its principal office in
Denver, Colorado and the co-transfer agent for our Class A Subordinate Voting
Stock is Montreal Trust Company of Canada at its principal office in Toronto,
Ontario. Montreal Trust Company of Canada at its principal office in Toronto,
Ontario is the transfer agent and registrar of the Exchangeable Shares.
PROMOTER
Since Magna took the initiative in substantially reorganizing our business
and capital, Magna may be a promoter of us, and a promoter of Exchangeco,
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".
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
We were incorporated under the laws of the State of Delaware and a
substantial number of our assets are located in, and a substantial number of
our directors and officers are residents of, jurisdictions other than Canada.
As a result, it may be difficult for Canadian investors to effect service
within Canada upon those directors or officers who are not residents of Canada,
or to realize in Canada upon judgments of courts of Canada predicated on the
civil liability of those directors or officers under Canadian securities laws.
There may be difficulties in enforcing in the United States, in original
actions or in actions for enforcement of judgments of Canadian courts,
liabilities predicated solely upon Canadian provincial securities laws against
us or any of our directors, officers or the experts named herein who are not
residents of Canada. We have appointed . as our agent for service of process
in Canada in respect of any civil suit or action brought against or involving
us in a Canadian court arising out of or related to or concerning the
distribution of our Class A Subordinate Voting Stock and the Exchangeable
Shares under this prospectus.
79
<PAGE>
Alternate Page for Canadian Prospectus
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
MAGNA ENTERTAINMENT CORP.
For the nine month period ended September 30, 1999 and
the year ended December 31, 1998
F-2
<PAGE>
Alternate Page for Canadian Prospectus
COMPILATION REPORT
To the Directors of
Magna Entertainment Corp.
We have reviewed, as to compilation only, the accompanying pro forma
consolidated balance sheet of Magna Entertainment Corp. as at September 30,
1999 and the pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the nine months ended September 30, 1999 and
for the year ended December 31, 1998, in accordance with the standards of The
Canadian Institute of Chartered Accountants.
These pro forma consolidated statements have been prepared for inclusion in
the Prospectus relating to the Class A Subordinate Voting Stock of the Company.
In our opinion, the unaudited pro forma consolidated balance sheet and the
unaudited pro forma consolidated statements of income (loss) and comprehensive
income (loss) have been properly compiled to give effect to the proposed
transactions and assumptions described in the notes thereto.
Los Angeles, California Certified Public Accountants
January 14, 2000
F-3
<PAGE>
Alternate Page for Canadian Prospectus
MAGNA ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
as at September 30, 1999
[Unaudited]
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
MI Remington Thistledown
Entertainment Remington Adjustments Thistledown Adjustments
Corp. (Note 2(c)(ii)) (Note 2(c)(iii)) (Note 2(d)(ii)) (Note 2(d)(iii))
------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ 23,544 $ 3,171 $(10,250) $ 4,624 $ (9,750)
Accounts
receivable..... 5,926 707 2,296
Inventories.... 527 160 164
Prepaid
expenses and
other.......... 3,028 222 208
Note receivable
from Magna..... 146,862
-------- -------- -------- -------- --------
179,887 4,260 (10,250) 7,292 (9,750)
Real estate
properties and
fixed assets,
net............. 451,329 8,757 9,691
Other assets,
net............. 62,239 1,323 1,832 1,134 4,143
Deferred income
taxes...........
-------- -------- -------- -------- --------
693,455 14,340 (8,418) 18,117 (5,607)
======== ======== ======== ======== ========
<CAPTION>
Golden Other Pro Forma
Golden Gate Pro Forma Consolidated
Gate Adjustments Adjustments Balance
(Note 2(e)(ii)) (Note 2(e)(iii)) (Notes 2(f) thru (i)) Sheet
--------------- ---------------- --------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $46,731 $(106,534) $111,622 $ 63,158
Accounts
receivable..... 823 9,752
Inventories.... 851
Prepaid
expenses and
other.......... 127 3,585
Note receivable
from Magna..... (146,862)
--------------- ---------------- --------------------- ------------
47,681 (106,534) (35,240) 77,346
Real estate
properties and
fixed assets,
net............. 48,533 36,328 554,638
Other assets,
net............. 2,473 28,547 101,691
Deferred income
taxes........... 3,041 3,041
--------------- ---------------- --------------------- ------------
98,687 (41,659) (32,199) 736,716
=============== ================ ===================== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
liabilities:
Bank
indebtedness... $ 7,774 $ $ $ $
Accounts
payable........ 4,373 1,886 3,579
Accrued
salaries and
wages.......... 1,474
Refundable
deposits....... 2,092
Other accrued
liabilities.... 8,957 3,499 1,500
Income taxes
payable........ 4,878
Long-term debt
due within one
year........... 10,157
Deferred
revenue........ 4,699 518 12
Note payable to
Magna.......... 35,240
-------- -------- -------- -------- --------
79,644 5,903 5,091
-------- -------- -------- -------- --------
Long-term debt.. 12,162 61,629 (61,629)
-------- -------- -------- -------- --------
Other long-term
liabilities..... 1,317 19
-------- -------- -------- -------- --------
Deferred income
taxes........... 54,444 1,262 1,657
-------- -------- -------- -------- --------
Magna's net
investment...... 545,888
Share capital... 48,149 (48,149) 100 4,400
Deficit......... (39,731) 39,731 (49,965) 49,965
-------- -------- -------- -------- --------
545,888 8,418 (8,418) (49,865) 54,365
-------- -------- -------- -------- --------
693,455 14,340 (8,418) 18,117 (5,607)
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
liabilities:
Bank
indebtedness... $ $ $ $ 7,774
Accounts
payable........ 21,361 (20,692) 10,507
Accrued
salaries and
wages.......... 1,474
Refundable
deposits....... 2,092
Other accrued
liabilities.... 3,482 17,438
Income taxes
payable........ 4,878
Long-term debt
due within one
year........... 2,594 (2,594) 10,157
Deferred
revenue........ 5,229
Note payable to
Magna.......... (35,240)
--------------- ---------------- --------------------- ------------
27,437 (23,286) (35,240) 59,549
--------------- ---------------- --------------------- ------------
Long-term debt.. 59,591 (42,261) 29,492
--------------- ---------------- --------------------- ------------
Other long-term
liabilities..... 1,336
--------------- ---------------- --------------------- ------------
Deferred income
taxes........... 28,547 6,859 92,769
--------------- ---------------- --------------------- ------------
Magna's net
investment...... (545,888)
Share capital... 14,854 (7,854) 542,070 553,570
Deficit......... (3,195) 3,195
--------------- ---------------- --------------------- ------------
11,659 (4,659) (3,818) 553,570
--------------- ---------------- --------------------- ------------
98,687 (41,659) (32,199) 736,716
=============== ================ ===================== ============
</TABLE>
On behalf of the Board:
(Signed) Vincent Galifi, Director
(Signed) James Nicol, Director
See accompanying notes
F-6
<PAGE>
Alternate Page for Canadian Prospectus
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 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.
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
November 8, 1999 Certified Public Accountants
[Except as to Note 16, which is as of January 14, 2000]
F-13
<PAGE>
Alternate Page for Canadian Prospectus
MI ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
Incorporated under the laws of the State of Delaware
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
July 31,
September 30, December 31, -----------------
Note 1999 1998 1998 1997
---- ------------- ------------ -------- --------
[unaudited]
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $ 23,544 $ 17,503 $ 295 $ 220
Accounts receivable........ 5,926 8,979 1,088 788
Inventories................ 527 1,050 461 438
Prepaid expenses and
other..................... 3,028 1,522 69 70
Note receivable from
Magna..................... 11 146,862
-------- -------- -------- --------
179,887 29,054 1,913 1,516
-------- -------- -------- --------
Real estate properties, net.. 3 441,797 326,690 181,003 109,500
-------- -------- -------- --------
Fixed assets, net............ 4 9,532 8,221 1,886 2,159
-------- -------- -------- --------
Other assets, net............ 5 62,239 -- -- --
-------- -------- -------- --------
Deferred income taxes........ 6 -- 177 -- --
-------- -------- -------- --------
693,455 364,142 184,802 113,175
======== ======== ======== ========
LIABILITIES AND MAGNA'S NET
INVESTMENT
Current liabilities:
Bank indebtedness.......... 7,774 11,889 165 4,277
Accounts payable........... 4,373 15,409 2,700 1,823
Accrued salaries and
wages..................... 1,474 518 410 334
Refundable deposits........ 2,092 2,008 1,695 989
Other accrued liabilities.. 8,957 6,955 2,067 1,718
Income taxes payable....... 6 4,878 -- -- --
Long-term debt due within
one year.................. 7 10,157 3,655 3,446 3,052
Deferred revenue........... 4,699 3,098 160 1,456
Note payable to Magna...... 11 35,240 -- -- --
-------- -------- -------- --------
79,644 43,532 10,643 13,649
-------- -------- -------- --------
Long-term debt............... 7 12,162 16,791 15,884 11,609
-------- -------- -------- --------
Other long-term liabilities.. 13 1,317 1,317 -- --
-------- -------- -------- --------
Deferred income taxes........ 6 54,444 -- -- --
-------- -------- -------- --------
Magna's net investment....... 545,888 302,502 158,275 87,917
-------- -------- -------- --------
$693,455 $364,142 $184,802 $113,175
======== ======== ======== ========
</TABLE>
- --------
Commitments and contingencies [notes 7, 11 and 12]
On behalf of the Board:
(Signed) Vincent Galifi (Signed) James Nicol
Director Director
See accompanying notes
F-20
<PAGE>
Alternate Page for Canadian Prospectus
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 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.
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 accounting principles
generally accepted in the United States.
Los Angeles, California
June 11, 1999 Certified Public Accountants
F-44
<PAGE>
Alternate Page for Canadian Prospectus
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>
On behalf of the Board:
(Signed) Frank Stronach (Signed) Lonny Powell
Director Director
See accompanying notes.
F-45
<PAGE>
Alternate Page for Canadian Prospectus
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Gulfstream Park Racing Association, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Gulfstream
Park Racing Association, Inc. and Subsidiary (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of income, stockholders'
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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gulfstream
Park Racing Association, Inc. and Subsidiary 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
principles generally accepted in the United States.
Miami, Florida
March 10, 1999, except for Note 9 as to Certified Public
which the date is September 1, 1999 Accountants
F-59
<PAGE>
Alternate Page for Canadian Prospectus
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>
On behalf of the Board:
(Signed) Vincent Galifi (Signed) James Nicol
Director Director
The accompanying notes are an integral part of these financial statements
F-60
<PAGE>
Alternate Page for Canadian Prospectus
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
February 19, 1999 Certified Public Accountants
(except Note K for
which the date is
October 21, 1999)
F-71
<PAGE>
Alternate Page for Canadian Prospectus
REMINGTON PARK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1999 1998 1997
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents--NOTE F.. $ 750,319 $ 697,037 $ 501,209
Restricted cash.................... 2,420,961 446,664 400,609
Trade accounts receivable, less
allowance for doubtful accounts of
$27,246 at September 30, 1999,
$26,433 at December 31, 1998 and
$0 at December 31, 1997........... 706,785 306,743 890,243
Inventories........................ 160,075 162,833 202,791
Prepaid expenses and other assets.. 222,212 180,268 270,056
------------ ------------ ------------
Total Current Assets............. 4,260,352 1,793,545 2,264,908
------------ ------------ ------------
PROPERTY AND EQUIPMENT--NOTES B AND I
Land improvements.................. 4,042,534 3,989,282 4,527,282
Buildings and structures........... 29,825,932 30,135,806 32,047,806
Machinery and equipment............ 7,996,937 7,953,549 7,921,772
Furniture and fixtures............. 1,654,963 1,649,747 1,638,081
------------ ------------ ------------
43,520,366 43,728,384 46,134,941
Less accumulated depreciation...... 34,763,202 34,621,473 32,078,706
------------ ------------ ------------
Net Property and Equipment....... 8,757,164 9,106,911 14,056,235
------------ ------------ ------------
OTHER ASSETS
Land lease and other costs less
amortization--NOTES E AND I....... 1,322,601 1,392,987 1,943,765
------------ ------------ ------------
$ 14,340,117 $ 12,293,443 $ 18,264,908
============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES
Accounts payable................... $ 1,886,155 $ 1,374,870 $ 2,851,255
Unredeemed pari-mutuel tickets..... 249,321 445,909 465,585
Advances payable to The Edward J.
DeBartolo Corporation--NOTE G..... 156,674 453,771 5,934,012
Accrued liabilities................ 1,176,728 926,162 782,715
Percentage entitlements in excess
of purses paid--NOTE C............ 1,916,210 292,293 700,911
Deferred revenue................... 517,925 6,972 90,974
------------ ------------ ------------
Total Current Liabilities........ 5,903,013 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............... (39,730,699) (39,198,952) (29,970,544)
------------ ------------ ------------
Total Stockholder's Equity
(Deficit)....................... 8,418,393 8,793,466 (22,560,544)
------------ ------------ ------------
$ 14,340,117 $ 12,293,443 $ 18,264,908
============ ============ ============
</TABLE>
On behalf of the Board:
(Signed) Vincent Galifi (Signed) James Nicol
Director Director
See accompanying notes to financial statements
F-72
<PAGE>
Alternate Page for Canadian Prospectus
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
October 12, 1999 (except Note I for Certified Public Accountants
which the date is October 21, 1999)
F-84
<PAGE>
Alternate Page for Canadian Prospectus
THISTLEDOWN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1999 1998 1997
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............ $ 2,366,651 $ 1,779,565 $ 895,292
Restricted cash...................... 2,256,828 1,562,770 1,581,885
Trade accounts receivable (less
allowance for doubtful accounts of
$89,624 at September 30, 1999,
$89,830 at December 31, 1998 and
$56,599 at December 31, 1997)....... 2,296,486 2,027,847 1,665,173
Inventories.......................... 163,576 143,103 155,923
Purses paid in excess of percentage
entitlements--NOTE C................ 176,317 -- --
Prepaid expenses and other assets.... 32,295 176,061 50,123
----------- ----------- -----------
Total Current Assets................. 7,292,153 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.............. 2,319,321 2,209,950 2,104,442
----------- ----------- -----------
44,131,216 44,012,340 43,892,626
Less accumulated depreciation........ 34,439,953 33,359,365 31,893,794
----------- ----------- -----------
Net Property and Equipment........... 9,691,263 10,652,975 11,998,832
----------- ----------- -----------
Other Assets
Deferred racetrack improvement fund
rebate--NOTE B...................... 1,085,964 792,131 503,587
Deposits............................. 47,398 33,944 31,222
----------- ----------- -----------
Total other assets................... 1,133,362 826,075 534,809
----------- ----------- -----------
$18,116,778 $17,168,396 $16,882,037
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Accounts payable..................... $ 3,579,044 $ 2,785,348 $ 2,737,170
Unredeemed pari-mutuel tickets....... 683,528 639,306 651,091
Due to The Edward J. DeBartolo
Corporation......................... 2,757 35,611 850,700
Accrued liabilities.................. 814,042 593,868 600,925
Percentage entitlements in excess of
purses paid--NOTE C................. -- 526,592 337,515
Deferred revenue..................... 11,872 1,684 6,822
----------- ----------- -----------
Total Current Liabilities............ 5,091,243 4,582,409 5,184,223
----------- ----------- -----------
Due to The Edward J. DeBartolo
Corporation--NOTES G and I........... 61,628,370 61,221,811 60,034,612
----------- ----------- -----------
Deferred Income Taxes--NOTE D......... 1,262,000 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.................. (49,965,335) (49,989,324) (49,437,298)
----------- ----------- -----------
Total Stockholder's Deficit.......... (49,864,835) (49,888,824) (49,336,798)
----------- ----------- -----------
$18,116,778 $17,168,396 $16,882,037
=========== =========== ===========
</TABLE>
On behalf of the Board:
(Signed) Vincent Galifi (Signed) James Nicol
Director Director
See accompanying notes to financial statements
F-85
<PAGE>
Alternate Page for Canadian Prospectus
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.
Walnut Creek, California
October 4, 1999, except paragraph 1 of Note 5, Certified Public Accountants
as to which the date is
October 19, 1999
F-96
<PAGE>
Alternate Page for Canadian Prospectus
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,
September 30, ------------------------
1999 1998 1997
------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 739,839 $ 714,691 $ 1,426,313
Equity in pooled cash and cash
equivalents......................... 45,991,536 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 September 30, 1999............... 822,479 3,100,143 3,661,060
Other current assets................. 127,386 479,827 779,343
------------ ----------- -----------
Total current assets............... 47,681,240 45,412,531 40,865,008
Racetrack properties and equipment,
net................................... 48,532,678 48,429,435 24,070,678
Intangible assets, net................. 2,473,259 3,044,009 14,380,010
------------ ----------- -----------
Total assets....................... $ 98,687,177 $96,885,975 $79,315,696
============ =========== ===========
Liabilities and stockholder's equity
Current liabilities:
Notes payable to affiliate, current
portion............................. $ 2,594,191 $ 1,448,415 $ --
Accounts payable..................... 703,270 4,055,475 4,301,635
Accrued compensation................. 1,265,620 1,743,079 1,772,730
Other accrued liabilities............ 2,216,315 1,213,890 1,440,484
Due to affiliates.................... 20,657,507 17,149,343 4,414,034
------------ ----------- -----------
Total current liabilities.......... 27,436,903 25,610,202 11,928,883
------------ ----------- -----------
Note payable to affiliate.............. 59,591,322 58,183,681 42,722,954
------------ ----------- -----------
Notes 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.................. (3,195,048) (1,761,908) (216,056)
------------ ----------- -----------
Total stockholder's equity......... 11,658,952 13,092,092 14,637,944
------------ ----------- -----------
Total liabilities and stockholder's
equity............................ $ 98,687,177 $96,885,975 $79,315,696
============ =========== ===========
</TABLE>
On behalf of the Board:
(Signed) Vincent Galifi (Signed) James Nicol
Director Director
See accompanying notes.
F-97
<PAGE>
Alternate Page for Canadian Prospectus
CERTIFICATE OF THE COMPANY AND OF THE PROMOTER
Dated: February 8, 2000
The foregoing constitutes full, true and plain disclosure of all material
facts relating to the securities previously issued by the issuer, as required
by the Securities Act (British Columbia), by Part 8 of the Securities Act
(Alberta), by Part XI of The Securities Act, 1988 (Saskatchewan), by Part XV of
the Securities Act (Ontario), by the Securities Act (Nova Scotia), and by Part
XIV of the Securities Act (Newfoundland) and the respective regulations
thereunder. This prospectus, as required by the Securities Act (Quebec) and the
regulations thereunder, does not contain any misrepresentation likely to affect
the value or market price of the securities already issued.
(Signed) Frank Stronach (Signed) Graham Orr
Chairman and Chief Executive Officer Executive Vice-President and Chief
Financial Officer
On behalf of the Board of Directors
(Signed) James Nicol (Signed) J. Brian Colburn
Director Director
PROMOTER
MAGNA INTERNATIONAL INC.
(Signed) Vincent J. Galifi
(Signed) J. Brian Colburn
Executive Vice-President, Finance Executive Vice-President, Special
and Chief Financial Officer Projects and Secretary
C-1
<PAGE>
Alternate Page for Canadian Prospectus
CERTIFICATE OF MEC HOLDINGS (CANADA) INC.
Dated: February 8, 2000
The foregoing constitutes full, true and plain disclosure of all material
facts relating to the securities previously issued by the issuer, as required
by the Securities Act (British Columbia), by Part 8 of the Securities Act
(Alberta), by Part XI of The Securities Act, 1988 (Saskatchewan), by Part XV of
the Securities Act (Ontario), by the Securities Act (Nova Scotia), and by Part
XIV of the Securities Act (Newfoundland) and the respective regulations
thereunder. This prospectus, as required by the Securities Act (Quebec) and the
regulations thereunder, does not contain any misrepresentation likely to affect
the value or market price of the securities already issued.
(Signed) James Nicol (Signed) Graham Orr
President and Chief Executive Officer Executive Vice-President and Chief
Financial Officer
On behalf of the Board of Directors
(Signed) Vincent J. Galifi (Signed) J. Brian Colburn
Director Director
C-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all expenses, other than the underwriting
discount, payable by the registrant in connection with the securities being
registered. All amounts shown are estimates except for the SEC registration fee
and the NASD filing fee.
<TABLE>
<CAPTION>
Amount to be Paid
-----------------
<S> <C>
SEC registration fee.................................... $
NASD filing fee.........................................
Blue Sky fees and expenses..............................
Printing and engraving expenses.........................
Accounting fees and expenses............................
Legal fees and expenses.................................
Miscellaneous...........................................
----
Total................................................... $
====
</TABLE>
Item 14. 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 that 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 that
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 violation of, or the enforcement of,
environmental laws and regulations.
Item 15. Recent Sales of Unregistered Securities
On November 12, 1999, we issued 650,695 shares of our Class A Subordinate
Voting Stock, par value $0.01, to Edward J. DeBartolo Corporation and Oklahoma
Racing LLC as partial consideration for the purchase of all the issued and
outstanding stock of Thistledown, Inc. The transaction involved the purchase of
all issued and outstanding stock of Thistledown, Inc. and Remington Park, Inc.
for an aggregate amount of $24.0 million of which $19.5 million was paid in
cash and $4.5 million was paid through the issuance of the Class A Subordinate
Voting Stock. This issuance was 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.
On December 10, 1999, we issued 1,012,195 shares of our Class A Subordinate
Voting Stock, par value $0.01 to Ladbroke Racing Corporation as partial
consideration for the purchase of all the issued and outstanding stock of
Ladbroke Land Holdings, Inc. and Pacific Racing Association Inc. The aggregate
amount of consideration for the transaction was $87.0 million of which $60.0
million was paid in cash $7.0 million was
II-1
<PAGE>
paid through the issuance of the Class A Subordinate Voting Stock and $20.0
million was paid by way of an interest-free promissory note. This issuance was
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.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1 Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now Magna Entertainment Corp.) and 1305272 Ontario Inc.
2.2 Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now Magna Entertainment Corp.) and Magna International Inc.
2.3 Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now Magna Entertainment Corp.) and 1346457 Ontario Inc.
3.1 Certificate of Incorporation of Magna Entertainment Corp.,
including amendments thereto
3.2 By-Laws of Magna Entertainment Corp.
4.1 Form of Stock Certificate for Class A Subordinate Voting Stock*
5.1 Opinion of Sidley & Austin*
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.
10.2 Stock Purchase Agreement dated as of June 30, 1999 between MI
Venture Inc. (now Magna Entertainment Corp.) and Gulfstream
Holdings Inc. of Illinois and Gulfstream Park Racing Association
Inc.
10.3 Stock Purchase Agreement dated as of October 21, 1999 between MI
Venture Inc. (now Magna Entertainment Corp.), The Edward J.
DeBartolo Corporation and Oklahoma Racing LLC
10.4 Stock Purchase Agreement dated as of November 5, 1999 between MI
Venture Inc. (now Magna Entertainment Corp.) and Ladbroke Racing
Corporation
10.5 Exchangeable Share Support Agreement dated as of December 30, 1999
between Magna Entertainment Corp. and MEC Holdings (Canada) Inc.
10.6 Voting and Exchange Agreement dated as of December 30, 1999 among
Magna International Inc., Magna Entertainment Corp. and MEC
Holdings (Canada) Inc.
10.7 Term Loan Credit Agreement dated as of November 15, 1999, as
amended from time to time, between The Santa Anita Companies, Inc
and Wells Fargo National Association
10.8 Revolving Credit Agreement dated as of November 15, 1999 between
Los Angeles Turf Club, Incorporated and Wells Fargo National Bank
10.9 Forebearance Agreement dated as of . , 2000 between Magna
International Inc. and Magna Entertainment Corp.
10.10 Access Agreement dated as of March 1, 1999 between Magna
International Inc. and Magna Entertainment Corp.*
10.11 Magna Entertainment Corp. Long-Term Incentive Plan*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.12 Employment Agreement with David A. Mitchell dated November 26,
1999 and accepted December 20, 1999*
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP in respect of the Audited
Consolidated Financial Statements of Magna Entertainment Corp.
23.2 Consent of Ernst & Young LLP in respect of the Audited Financial
Statements of Los Angeles Turf Club, Inc.
23.3 Consent of PricewaterhouseCoopers LLP in respect of the Audited
Consolidated Financial Statements of Gulfstream Park Racing
Association, Inc. and Subsidiary
23.4 Consent of Hill, Barth & King LLC in respect of the Audited
Financial Statements of Remington Park, Inc.
23.5 Consent of Hill, Barth & King LLC in respect of the Audited
Financial Statement of Thistledown, Inc.
23.6 Consent of Ernst & Young LLP in respect of the Audited Combined
Financial Statements of Golden Gate Fields
23.7 Consent of Jerry D. Campbell to act as director
23.8 Consent of William G. Davis to act as director
23.9 Consent of Peter M. George to act as director
23.10 Consent of Joseph W. Harper to act as director
23.11 Consent of J. Terrence Lanni to act as director
23.12 Consent of Edward C. Lunley to act as director
23.13 Consent of Earl I. Mack to act as director
23.14 Consent of Gino Roncelli to act as director
23.15 Consent of Andrew Stronach to act as director
23.16 Consent of Ronald J. Volkman to act as director
23.17 Consent of John C. York II to act as director
23.18 Consent of Sidley & Austin (included in Exhibit 5.1)
27.1 Financial Data Schedules
99.1 Provisions attaching to the Exchangeable Shares of MEC Holdings
(Canada) Inc.
</TABLE>
- --------
*To be filed by amendment
(b) Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation
II-3
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b), if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to that information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of our securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of our securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against these liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of that
issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Toronto, in Canada, on January 14, 2000.
MAGNA ENTERTAINMENT CORP.
(Registrant)
By: /s/ James Nicol
---------------------------------
Name: James Nicol
Title: Vice Chairman and President
By: /s/ J. Brian Colburn
---------------------------------
Name: J. Brian Colburn
Title: Executive Vice-President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Brian Colburn, Vincent Galifi, James Nicol,
and Graham Orr, and each of them (with full power to each of them to act
alone), his or her true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments pursuant to Rule 462(b) or otherwise) to
this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the U.S. Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Frank Stronach
- ------------------
Frank Stronach Chairman, Chief Executive Officer and Director January 14, 2000
/s/ Graham Orr
- ------------------
Graham Orr Executive Vice-President and Chief Financial Officer January 14, 2000
/s/ James Nicol
- ------------------
James Nicol Vice Chairman, President and Director January 14, 2000
/s/ James Bromby
- ------------------
James Bromby Corporate Controller January 14, 2000
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Vincent Galifi
- ----------------------
Vincent Galifi Executive Vice President, Finance and Director January 14, 2000
/s/ J. Brian Colburn
- ----------------------
J. Brian Colburn Executive Vice President and Secretary and Director January 14, 2000
/s/ Lonny Powell
- ----------------------
Lonny Powell Executive Vice President, Racing Operations January 14, 2000
/s/ Frank DeMarco, Jr.
- ----------------------
Frank DeMarco, Jr Vice-President, Regulatory Affairs January 14, 2000
</TABLE>
II-6
<PAGE>
II. INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1 Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now Magna Entertainment Corp.) and 1305272 Ontario Inc.
2.2 Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now Magna Entertainment Corp.) and Magna International Inc.
2.3 Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now Magna Entertainment Corp.) and 1346457 Ontario Inc.
3.1 Certificate of Incorporation of Magna Entertainment Corp.,
including amendments thereto
3.2 By-Laws of Magna Entertainment Corp.
4.1 Form of Stock Certificate for Class A Subordinate Voting Stock*
5.1 Opinion of Sidley & Austin*
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.
10.2 Stock Purchase Agreement dated as of June 30, 1999 between MI
Venture Inc. (now Magna Entertainment Corp.) and Gulfstream
Holdings Inc. of Illinois and Gulfstream Park Racing Association
Inc.
10.3 Stock Purchase Agreement dated as of October 21, 1999 between MI
Venture Inc. (now Magna Entertainment Corp.), The Edward J.
DeBartolo Corporation and Oklahoma Racing LLC
10.4 Stock Purchase Agreement dated as of November 5, 1999 between MI
Venture Inc. (now Magna Entertainment Corp.) and Ladbroke Racing
Corporation
10.5 Exchangeable Share Support Agreement dated as of December 30, 1999
between Magna Entertainment Corp. and MEC Holdings (Canada) Inc.
10.6 Voting and Exchange Agreement dated as of December 30, 1999 among
Magna International Inc., Magna Entertainment Corp. and MEC
Holdings (Canada) Inc.
10.7 Term Loan Credit Agreement dated as of November 15, 1999, as
amended from time to time, between The Santa Anita Companies, Inc
and Wells Fargo National Association
10.8 Revolving Credit Agreement dated as of November 15, 1999 between
Los Angeles Turf Club, Incorporated and Wells Fargo National Bank
10.9 Forebearance Agreement dated as of . , 2000 between Magna
International Inc. and Magna Entertainment Corp.
10.10 Access Agreement dated as of March 1, 1999 between Magna
International Inc. and Magna Entertainment Corp.*
10.11 Magna Entertainment Corp. Long-Term Incentive Plan*
10.12 Employment Agreement with David A. Mitchell dated November 26,
1999 and accepted December 20, 1999*
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP in respect of the Audited
Consolidated Financial Statements of Magna Entertainment Corp.
23.2 Consent of Ernst & Young LLP in respect of the Audited Financial
Statements of Los Angeles Turf Club, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
23.3 Consent of PricewaterhouseCoopers LLP in respect of the Audited
Consolidated Financial Statements of Gulfstream Park Racing
Association, Inc. and Subsidiary
23.4 Consent of Hill, Barth & King LLC in respect of the Audited
Financial Statements of Remington Park, Inc.
23.5 Consent of Hill, Barth & King LLC in respect of the Audited
Financial Statement of Thistledown, Inc.
23.6 Consent of Ernst & Young LLP in respect of the Audited Combined
Financial Statements of Golden Gate Fields
23.7 Consent of Jerry D. Campbell to act as director
23.8 Consent of William G. Davis to act as director
23.9 Consent of Peter M. George to act as director
23.10 Consent of Joseph W. Harper to act as director
23.11 Consent of J. Terrence Lanni to act as director
23.12 Consent of Edward C. Lunley to act as director
23.13 Consent of Earl I. Mack to act as director
23.14 Consent of Gino Roncelli to act as director
23.15 Consent of Andrew Stronach to act as director
23.16 Consent of Ronald J. Volkman to act as director
23.17 Consent of John C. York II to act as director
23.18 Consent of Sidley & Austin (included in Exhibit 5.1)
27.1 Financial Data Schedules
99.1 Provisions attaching to the Exchangeable Shares of MEC Holdings
(Canada) Inc.
</TABLE>
- --------
*To be filed by amendment
<PAGE>
DRAFT: February 7, 2000
------------------------
EXCHANGEABLE SHARE SUPPORT AGREEMENT
------------------------------------
THIS AGREEMENT is made as of the day of ,
B E T W E E N:
MAGNA ENTERTAINMENT CORP.
a corporation existing under the laws of the State of
Delaware ("MEC")
- and -
MEC HOLDINGS (CANADA) INC.
a corporation existing under the laws of the Province
of Ontario ("Exchangeco")
WHEREAS by Articles of Amendment dated December 30, 1999 Exchangeco is
authorized to issue Exchangeable Shares shares in its capital, each such share
exchangeable for one share of MEC in accordance with the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares (the "Share
Provisions");
AND WHEREAS MEC is the holder of all of the issued and outstanding common
shares of Exchangeco;
AND WHEREAS this Agreement evidences certain obligations of MEC to
Exchangeco to ensure that Exchangeco will at all times be able to satisfy its
obligations to the holders of Exchangeable Shares under the Share Provisions;
NOW THEREFORE for good and valuable consideration, the receipt and adequacy
of which is hereby mutually acknowledged, the parties hereto covenant and agree
as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Definitions.
As used herein, the following terms shall have the following meanings:
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by, or under common control of, that Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as applied to any
Person, means the possession by another Person, directly or indirectly, of the
power to direct or cause the direction of the management and policies of that
first mentioned Person, whether through the ownership of voting securities, by
contract or otherwise.
"Share Provisions" has the meaning set forth in the first recital to this
Agreement.
<PAGE>
-2-
Other capitalized terms which are not defined in this Agreement have the meaning
ascribed to such terms in the Share Provisions.
1.2 Interpretation Not Affected by Headings.
The division of this Agreement into Articles, sections and other portions and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation of this Agreement. Unless otherwise
indicated, all references to an "Article" or "section" followed by a number
and/or a letter refer to the specified Article or section of this Agreement.
The terms "this Agreement", "hereof", "herein" and "hereunder" and similar
expressions refer to this agreement and not to any particular Article, section
or other portion hereof and include any agreement or instrument supplementary or
ancillary hereto.
1.3 Number, Gender.
Words importing the singular number only shall include the plural and vice
versa. Words importing any gender shall include all genders.
1.4 Date for any Action.
If any date on which any action is required to be taken under this Agreement is
not a Business Day, such action shall be required to be taken on the next
succeeding Business Day.
ARTICLE 2
COVENANTS OF MEC AND EXCHANGECO
2.1 Covenants Regarding Exchangeable Shares.
So long as any Exchangeable Shares not owned by MEC or a subsidiary of MEC are
outstanding, MEC will:
(a) not declare or pay any dividend on the MEC Class A Shares unless (i)
Exchangeco shall (w) simultaneously declare or pay, as the case may be, an
equivalent dividend (as provided for in the Share Provisions) on the
Exchangeable Shares (an "Equivalent Dividend"), and (x) have sufficient
money or other assets or authorized but unissued securities available to
enable the due declaration and the due and punctual payment, in accordance
with applicable law, of any Equivalent Dividend, or (ii) in the case of a
stock dividend by MEC, Exchangeco shall (y) subdivide the Exchangeable
Shares in lieu of a stock dividend thereon (as provided for in the Share
Provisions) (an "Equivalent Stock Subdivision"), and (z) have sufficient
authorized but unissued securities available to enable the Equivalent Stock
Subdivision;
(b) advise Exchangeco sufficiently in advance of the declaration by MEC of
any dividend on MEC Class A Shares and take all such other actions as are
reasonably necessary, in co-operation with Exchangeco, to ensure that (i)
the respective declaration date, record date and payment date for an
Equivalent Dividend shall be the same as the declaration date, record date
and payment date for the corresponding dividend on the MEC Class A Shares
or, (ii) the record date and effective date for an Equivalent Stock
<PAGE>
-3-
Subdivision shall be the same as the record date and payment date for the
corresponding stock dividend on the MEC Class A Shares;
(c) ensure that the record date for any dividend declared on MEC Class A
Shares is not less than 10 Business Days after the declaration date of such
dividend;
(d) take all such actions and do all such things as are reasonably
necessary or desirable to enable and permit Exchangeco, in accordance with
applicable law, to pay and otherwise perform its obligations with respect
to the satisfaction of the Liquidation Amount, the Retraction Price or the
Redemption Price in respect of each issued and outstanding Exchangeable
Share upon the liquidation, dissolution or winding-up of Exchangeco, the
delivery of a Retraction Request by a holder of Exchangeable Shares or a
redemption of Exchangeable Shares by Exchangeco, as the case may be,
including without limitation all such actions and all such things as are
necessary or desirable to enable and permit Exchangeco to cause to be
delivered MEC Class A Shares to the holders of Exchangeable Shares in
accordance with the provisions of Article 5, 6 or 7, as the case may be, of
the Share Provisions;
(e) take all such actions and do all such things as are reasonably
necessary or desirable to enable and permit MEC, in accordance with
applicable law, to perform its obligations arising upon the exercise by it
of the Liquidation Call Right, the Retraction Call Right or the Redemption
Call Right, including without limitation all such actions and all such
things as are necessary or desirable to enable and permit MEC to deliver
MEC Class A Shares to the holders of Exchangeable Shares in accordance with
the provisions of the Liquidation Call Right, the Retraction Call Right or
the Redemption Call Right, as the case may be; and
(f) if MEC becomes a "specified financial institution" (as such term is
defined in the Income Tax Act (Canada)) or does not deal at arm's length
with such a person, take all such actions and do all such things as are
reasonably necessary or desirable to exercise the Retraction Call Right if
requested to do so by a holder of Exchangeable Shares making a Retraction
Request.
2.2 Segregation of Funds.
MEC will cause Exchangeco to deposit a sufficient amount of funds in a separate
account of Exchangeco and segregate a sufficient amount of such other assets and
property as is necessary to enable Exchangeco to pay dividends when due and to
pay or otherwise satisfy its respective obligations under Article 5, 6 or 7 of
the Share Provisions, as applicable.
2.3 Reservation of MEC Class A Shares.
MEC hereby represents, warrants and covenants in favour of Exchangeco that MEC
will, at all times while any Exchangeable Shares (other than Exchangeable Shares
held by MEC or its subsidiaries) are outstanding, keep available, free from pre-
emptive and other rights, out of its authorized and unissued capital stock such
number of MEC Class A Shares (or other shares or securities into which MEC Class
A Shares may be reclassified or changed as contemplated by
<PAGE>
-4-
section 2.7 hereof) (a) as is equal to the sum of (i) the number of Exchangeable
Shares issued and outstanding from time to time and (ii) the number of
Exchangeable Shares issuable upon the exercise of all rights to acquire
Exchangeable Shares outstanding from time to time and (b) as are now and may
hereafter be required to enable and permit MEC to meet its obligations under the
Voting and Exchange Agreement and under any other security or commitment
pursuant to which MEC may now or hereafter be required to issue MEC Class A
Shares, to enable and permit MEC to meet its obligations under each of the
Liquidation Call Right, the Retraction Call Right and the Redemption Call Right
and to enable and permit Exchangeco to meet its obligations hereunder and under
the Share Provisions.
2.4 Notification of Certain Events.
In order to assist MEC to comply with its obligations hereunder and to permit
MEC to exercise the Liquidation Call Right, the Retraction Call Right and the
Redemption Call Right, Exchangeco will notify MEC of each of the following
events at the time set forth below:
(a) in the event of any determination by the Board of Directors of
Exchangeco to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to Exchangeco or to effect any other distribution
of the assets of Exchangeco among its shareholders for the purpose of
winding up its affairs, at least 60 days prior to the proposed effective
date of such liquidation, dissolution, winding-up or other distribution;
(b) promptly, upon the earlier of receipt by Exchangeco of notice of and
Exchangeco otherwise becoming aware of any threatened or instituted claim,
suit, petition or other proceedings with respect to the involuntary
liquidation, dissolution or winding-up of Exchangeco or to effect any other
distribution of the assets of Exchangeco among its shareholders for the
purpose of winding up its affairs;
(c) immediately, upon receipt by Exchangeco of a Retraction Request;
(d) on the same date on which notice of redemption is given to holders of
Exchangeable Shares, upon the determination of a Redemption Date in
accordance with the Share Provisions; and
(e) as soon as practicable upon the issuance by Exchangeco of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
2.5 Delivery of MEC Class A Shares to Exchangeco.
In furtherance of its obligations under sections 2.1(d) and (e) hereof, upon
notice from Exchangeco of any event that requires Exchangeco to cause to be
delivered MEC Class A Shares to any holder of Exchangeable Shares, MEC shall
forthwith issue and deliver or cause to be delivered to Exchangeco the requisite
number of MEC Class A Shares to be received by, and issued to or to the order
of, the former holder of the surrendered Exchangeable Shares, as Exchangeco
shall direct. All such MEC Class A Shares shall be duly authorized and validly
issued as fully paid and non-assessable and shall be free and clear of any lien,
claim or encumbrance. In consideration of the issuance and delivery of each
such MEC Class A Share,
<PAGE>
-5-
Exchangeco shall issue to MEC, or as MEC shall direct, common shares of
Exchangeco having equivalent value.
2.6 Qualification of MEC Class A Shares.
If any MEC Class A Shares (or other shares or securities into which MEC Class A
Shares may be reclassified or changed as contemplated by section 2.7 hereof) to
be issued and delivered hereunder require registration or qualification with or
approval of or the filing of any document, including any prospectus or similar
document or the taking of any proceeding with or the obtaining of any order,
ruling or consent from any governmental or regulatory authority under any
Canadian or United States federal, provincial or state securities or other law
or regulation or pursuant to the rules and regulations of any securities or
other regulatory authority or the fulfilment of any other United States or
Canadian legal requirement before such shares (or such other shares or
securities) may be issued by MEC and delivered by MEC at the direction of
Exchangeco, if applicable, to the holder of surrendered Exchangeable Shares or
in order that such shares (or such other shares or securities) may be freely
traded thereafter (other than any restrictions of general application on
transfer by reason of a holder being a "control person" of MEC for purposes of
Canadian provincial securities law or an "affiliate" of MEC for purposes of
United States federal or state securities law), MEC will in good faith
expeditiously take all such actions and do all such things as are necessary or
desirable to cause such MEC Class A Shares (or such other shares or securities)
to be and remain duly registered, qualified or approved under United States
and/or Canadian law, as the case may be. MEC will in good faith expeditiously
take all such actions and do all such things as are reasonably necessary or
desirable to cause all MEC Class A Shares (or such other shares or securities)
to be delivered hereunder to be listed, quoted or posted for trading on all
stock exchanges and quotation systems on which outstanding MEC Class A Shares
(or such other shares or securities) have been listed by MEC and remain listed
and are quoted or posted for trading at such time.
2.7 Economic Equivalence.
(a) MEC will not without prior approval of Exchangeco and the prior approval of
the holders of the Exchangeable Shares given in accordance with section 10.2 of
the Share Provisions:
(i) issue or distribute MEC Class A Shares (or securities exchangeable for
or convertible into or carrying rights to acquire MEC Class A Shares) to
the holders of all or substantially all of the then outstanding MEC Class A
Shares by way of stock dividend or other distribution, other than an issue
of MEC Class A Shares (or securities exchangeable for or convertible into
or carrying rights to acquire MEC Class A Shares) to holders of MEC Class A
Shares who exercise an option to receive dividends in MEC Class A Shares
(or securities exchangeable for or convertible into or carrying rights to
acquire MEC Class A Shares) in lieu of receiving cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of all
or substantially all of the then outstanding MEC Class A Shares entitling
them to subscribe for or to purchase MEC Class A Shares (or securities
exchangeable for or convertible into or carrying rights to acquire MEC
Class A Shares); or
<PAGE>
-6-
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding MEC Class A Shares: (A) shares or securities of MEC of
any class other than MEC Class A Shares (other than shares convertible into
or exchangeable for or carrying rights to acquire MEC Class A Shares), (B)
rights, options or warrants other than those referred to in section
2.7(a)(ii) above, (C) evidences of indebtedness of MEC or (D) assets of
MEC,
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable Shares, in which case,
for greater certainty, no approval of the holders of Exchangeable Shares is
required; provided that, for greater certainty, the above restrictions shall not
apply to any securities issued or distributed by MEC pursuant to the Share
Provisions, the provisions of this Agreement or the provisions of the Voting and
Exchange Agreement.
(b) MEC will not without the prior approval of Exchangeco and the prior
approval of the holders of the Exchangeable Shares given in accordance with
section 10.2 of the Share Provisions:
(i) subdivide, redivide or change the then outstanding MEC Class A Shares
into a greater number of MEC Class A Shares; or
(ii) reduce, combine, consolidate or change the then outstanding MEC Class
A Shares into a lesser number of MEC Class A Shares; or
(iii) reclassify or otherwise change MEC Class A Shares or effect an
amalgamation, merger, reorganization or other transaction affecting MEC
Class A Shares,
unless the same or an economically equivalent change shall simultaneously be
made to, or in the rights of the holders of, the Exchangeable Shares, in which
case, for greater certainty, no approval of the holders of Exchangeable Shares
is required.
(c) MEC will ensure that the record date for any event referred to in section
2.7(a) or 2.7(b) above, or (if no record date is applicable for such event) the
effective date for any such event, is not less than five Business Days after the
date on which such event is declared or announced by MEC (with contemporaneous
notification thereof by MEC to Exchangeco).
(d) The Board of Directors of Exchangeco shall determine, in good faith and in
its sole discretion, economic equivalence for the purposes of any event referred
to in section 2.7(a) or 2.7(b) above and each such determination shall be
conclusive and binding on MEC. In making each such determination, the following
factors shall, without excluding other factors determined by the Board of
Directors of Exchangeco to be relevant, be considered by the Board of Directors
of Exchangeco:
(i) in the case of any stock dividend or other distribution payable in MEC
Class A Shares, the number of such shares issued in proportion to the
number of MEC Class A Shares previously outstanding;
(ii) in the case of the issuance or distribution of any rights, options or
warrants to subscribe for or purchase MEC Class A Shares (or securities
exchangeable for or
<PAGE>
-7-
convertible into or carrying rights to acquire MEC Class A Shares), the
relationship between the exercise price of each such right, option or
warrant and the current market value (as determined by the Board of
Directors of Exchangeco in the manner above contemplated) of an MEC Class A
Share;
(iii) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of MEC of
any class other than MEC Class A Shares, any rights, options or warrants
other than those referred to in section 2.7(d)(ii) above, any evidences of
indebtedness of MEC or any assets of MEC), the relationship between the
fair market value (as determined by the Board of Directors of Exchangeco in
the manner above contemplated) of such property to be issued or distributed
with respect to each outstanding MEC Class A Share and the current market
value (as determined by the Board of Directors of Exchangeco in the manner
above contemplated) of an MEC Class A Share;
(iv) in the case of any subdivision, redivision or change of the then
outstanding MEC Class A Shares into a greater number of MEC Class A Shares
or the reduction, combination, consolidation or change of the then
outstanding MEC Class A Shares into a lesser number of MEC Class A Shares
or any amalgamation, merger, reorganization or other transaction affecting
MEC Class A Shares, the effect thereof upon the then outstanding MEC Class
A Shares; and
(iv) in all such cases, the general taxation consequences of the relevant
event to holders of Exchangeable Shares to the extent that such
consequences may differ from the taxation consequences to holders of MEC
Class A Shares as a result of differences between taxation laws of Canada
and the United States (except for any differing consequences arising as a
result of differing marginal taxation rates and without regard to the
individual circumstances of holders of Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of any
security listed and traded or quoted on a securities exchange shall be the
average of the closing bid and ask prices of such security during a period of
not less than 20 consecutive trading days ending not more than three trading
days before the date of determination on the principal securities exchange on
which such securities are listed and traded or quoted; provided, however, that
if in the opinion of the Board of Directors of Exchangeco the public
distribution or trading activity of such securities during such period does not
create a market which reflects the fair market value of such securities, then
the current market value thereof shall be determined by the Board of Directors
of Exchangeco, in good faith and in its sole discretion, and provided further
that any such determination by the Board of Directors of Exchangeco shall be
conclusive and binding on MEC.
(e) Exchangeco agrees that, to the extent required, upon due notice from MEC,
Exchangeco will use its best efforts to take or cause to be taken such steps as
may be necessary for the purposes of ensuring that appropriate dividends are
paid or other distributions are made by Exchangeco, or subdivisions, redivisions
or changes are made to the Exchangeable Shares, in order to implement the
required economic equivalence with respect to the MEC Class A Shares and
Exchangeable Shares as provided for in this section 2.7.
<PAGE>
-8-
2.8 Tender Offers.
In the event that a tender offer, share exchange offer, issuer bid, take-over
bid or similar transaction with respect to MEC Class A Shares (an "Offer") is
proposed by MEC or is proposed to MEC or its shareholders and is recommended by
the Board of Directors of MEC, or is otherwise effected or to be effected with
the consent or approval of the Board of Directors of MEC, and the Exchangeable
Shares are not redeemed by Exchangeco or purchased by MEC pursuant to the
Redemption Call Right, MEC will use its reasonable efforts expeditiously and in
good faith to take all such actions and do all such things as are necessary or
desirable to enable and permit holders of Exchangeable Shares to participate in
such Offer to the same extent and on an economically equivalent basis as the
holders of MEC Class A Shares, without discrimination. Without limiting the
generality of the foregoing, MEC will use its reasonable efforts expeditiously
and in good faith to ensure that holders of Exchangeable Shares may participate
in all such Offers without being required to retract Exchangeable Shares as
against Exchangeco (or, if so required, to ensure that any such retraction shall
be effective only upon, and shall be conditional upon, the closing of the Offer
and only to the extent necessary to tender or deposit to the Offer). Nothing
herein shall affect the rights of Exchangeco to redeem (or MEC to purchase
pursuant to the Redemption Call Right) Exchangeable Shares, as applicable, in
the event of an MEC Control Transaction.
2.9 Ownership of Outstanding Shares.
Without the prior approval of Exchangeco and the prior approval of the holders
of the Exchangeable Shares given in accordance with section 10.2 of the Share
Provisions, MEC covenants and agrees in favour of Exchangeco that, as long as
any outstanding Exchangeable Shares are owned by any person or entity other than
MEC or any of its subsidiaries, MEC will be and remain the direct or indirect
beneficial owner of all issued and outstanding voting shares in the capital of
Exchangeco and MEC.
2.10 MEC and Subsidiaries Not to Vote Exchangeable Shares.
MEC covenants and agrees that it will appoint and cause to be appointed
proxyholders with respect to all Exchangeable Shares held by it and its
subsidiaries for the sole purpose of attending each meeting of holders of
Exchangeable Shares in order to be counted as part of the quorum for each such
meeting. MEC further covenants and agrees that it will not, and will cause its
subsidiaries not to, exercise any voting rights which may be exercisable by
holders of Exchangeable Shares from time to time pursuant to the Share
Provisions or pursuant to the provisions of the OBCA (or any successor or other
corporate statute by which Exchangeco may in the future be governed) with
respect to any Exchangeable Shares held by it or by its subsidiaries in respect
of any matter considered at any meeting of holders of Exchangeable Shares.
2.11 Rule 10b-18 Purchases.
For greater certainty, nothing contained in this Agreement, including without
limitation the obligations of MEC contained in section 2.8 hereof, shall limit
the ability of MEC or Exchangeco
<PAGE>
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to make a "Rule l0b-18 Purchase" of MEC Class A Shares pursuant to Rule 10b-18
of the U.S. Securities Exchange Act of 1934, as amended, or any successor
provisions thereof.
2.12 Stock Exchange Listing.
MEC covenants and agrees in favour of Exchangeco that, as long as any
outstanding Exchangeable Shares are owned by any person or entity other than MEC
or any of its subsidiaries, MEC will use its reasonable best efforts to maintain
a listing for such Exchangeable Shares on a Canadian stock exchange.
ARTICLE 3
MEC SUCCESSORS
3.1 Certain Requirements in Respect of Combination, etc.
MEC shall not consummate any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other person or, in the case of a merger, of the
continuing corporation resulting therefrom unless, but may do so if:
(a) such other person or continuing corporation (the "MEC Successor") by
operation of law, becomes, without more, bound by the terms and provisions
of this Agreement or, if not so bound, executes, prior to or
contemporaneously with the consummation of such transaction, an Agreement
supplemental hereto and such other instruments (if any) as are reasonably
necessary or advisable to evidence the assumption by the MEC Successor of
liability for all moneys payable and property deliverable hereunder and the
covenant of such MEC Successor to pay and deliver or cause to be delivered
the same and its Agreement to observe and perform all the covenants and
obligations of MEC under this Agreement; and
(b) such transaction shall be upon such terms and conditions as
substantially to preserve and not to impair in any material respect any of
the rights, duties, powers and authorities of the other parties hereunder
or the holders of Exchangeable Shares.
3.2 Vesting of Powers in Successor.
Whenever the conditions of section 3.1 have been duly observed and performed,
the parties, if required by section 3.1, shall execute and deliver a
supplemental agreement hereto and thereupon MEC Successor shall possess and from
time to time may exercise each and every right and power of MEC under this
Agreement in the name of MEC or otherwise and any act or proceeding by any
provision of this Agreement required to be done or performed by the Board of
Directors of MEC or any officers of MEC may be done and performed with like
force and effect by the directors or officers of such MEC Successor.
3.3 Wholly-Owned Subsidiaries.
Nothing herein shall be construed as preventing the amalgamation or merger of
any wholly-owned direct or indirect subsidiary of MEC with or into MEC or the
winding-up,
<PAGE>
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liquidation or dissolution of any wholly-owned subsidiary of MEC provided that
all of the assets of such subsidiary are transferred to MEC or another
wholly-owned direct or indirect subsidiary of MEC and any such transactions are
expressly permitted by this Article 3.
ARTICLE 4
GENERAL
4.1 Term.
This Agreement shall come into force and be effective as of the date hereof and
shall terminate and be of no further force and effect at such time as no
Exchangeable Shares (or securities or rights convertible into or exchangeable
for or carrying rights to acquire Exchangeable Shares) are held by any person or
entity other than MEC and any of its subsidiaries.
4.2 Changes in Capital of MEC and Exchangeco.
At all times after the occurrence of any event contemplated pursuant to sections
2.7 and 2.8 hereof or otherwise, as a result of which either MEC Class A Shares
or the Exchangeable Shares or both are in any way changed, this Agreement shall
forthwith be amended and modified as necessary in order that it shall apply with
full force and effect, mutatis mutandis, to all new securities into which MEC
Class A Shares or the Exchangeable Shares or both are so changed and the parties
hereto shall execute and deliver an Agreement in writing giving effect to and
evidencing such necessary amendments and modifications.
4.3 Severability.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule or law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the fullest extent possible.
4.4 Amendments, Modifications.
This Agreement may not be amended or modified except by an Agreement in writing
executed by Exchangeco, MEC and MEC and approved by the holders of the
Exchangeable Shares in accordance with section 10.2 of the Share Provisions.
4.5 Ministerial Amendments.
Notwithstanding the provisions of section 4.4, the parties to this Agreement may
in writing at any time and from time to time, without the approval of the
holders of the Exchangeable Shares, amend or modify this Agreement for the
purposes of:
<PAGE>
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(a) adding to the covenants of any or all parties provided that the Board
of Directors of each of Exchangeco and MEC shall be of the good faith
opinion that such additions will not be prejudicial to the rights or
interests of the holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters or
questions which, in the good faith opinion of the Board of Directors of
each of Exchangeco and MEC, it may be expedient to make, provided that each
such Board of Directors shall be of the good faith opinion that such
amendments or modifications will not be prejudicial to the rights or
interests of the holders of the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of counsel to
Exchangeco and MEC, are required for the purpose of curing or correcting
any ambiguity or defect or inconsistent provision or clerical omission or
mistake or manifest error, provided that the Boards of Directors of each of
Exchangeco and MEC shall be of the good faith opinion that such changes or
corrections will not be prejudicial to the rights or interests of the
holders of the Exchangeable Shares.
4.6 Meeting to Consider Amendments.
Exchangeco, at the request of MEC, shall call a meeting or meetings of the
holders of the Exchangeable Shares for the purpose of considering any proposed
amendment or modification requiring approval pursuant to section 4.4 hereof.
Any such meeting or meetings shall be called and held in accordance with the
bylaws of Exchangeco, the Share Provisions and all applicable laws.
4.7 Amendments Only in Writing.
No amendment to or modification or waiver of any of the provisions of this
Agreement otherwise permitted hereunder shall be effective unless made in
writing and signed by all of the parties hereto.
4.8 Enurement.
This Agreement shall be binding upon and enure to the benefit of the parties
hereto and their respective successors and assigns. All holders of
Exchangeable Shares, whether acquired prior or subsequent to the date hereof,
shall be intended third-party beneficiaries of this Agreement.
4.9 Notices to Parties
All notices and other communications between the parties to this Agreement shall
be in writing and shall be deemed to have been given if delivered personally or
by confirmed telecopy to the parties at the following addresses (or at such
other address for any such party as shall be specified in like notice):
(a) if to Exchangeco:
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337 Magna Drive
Aurora, Ontario
L4G 7K1
Attention: President
Telecopier No.: (905) 726-7164
(b) if to MEC:
285 West Huntington Drive
Arcadia, California
90017
Attention: President
Telecopier No.: (626) 574-6306
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of confirmed receipt thereof
unless such day is not a Business Day in which case it shall be deemed to have
been given and received upon the immediately following Business Day.
4.10 Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an
original, and all of which taken together shall constitute one and the same
instrument.
4.11 Jurisdiction.
This Agreement shall be governed by and construed in accordance with the laws of
the Province of Ontario and the laws of Canada applicable therein.
4.12 Attornment.
MEC agrees that any action or proceeding arising out of or relating to this
Agreement may be instituted in the courts of Ontario, waives any objection which
it may have now or hereafter to the venue of any such action or proceeding,
irrevocably submits to the jurisdiction of the said courts in any such action or
proceeding, agrees to be bound by any judgment of the said courts and not to
seek, and hereby waives, any review of the merits of any such judgment by the
courts of any other jurisdiction and hereby appoints Exchangeco at its
registered office in the Province of Ontario as attorney for service of process.
IN WITNESS OF WHICH, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
<PAGE>
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MAGNA ENTERTAINMENT CORP.
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
MEC HOLDINGS (CANADA) INC.
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
<PAGE>
Draft of February 7, 2000
-------------------------
VOTING AND EXCHANGE AGREEMENT
-----------------------------
THIS AGREEMENT is made as of the day of ,
A M O N G:
MAGNA INTERNATIONAL INC.
a corporation existing under the laws of the Province
of Ontario ("Magna")
- and -
MAGNA ENTERTAINMENT CORP.
a corporation existing under the laws of the State of
Delaware ("MEC")
- and -
MEC HOLDINGS (CANADA) INC.
a corporation existing under the laws of the Province
of Ontario ("Exchangeco")
WHEREAS by Articles of Amendment dated December 30, 1999 Exchangeco is
authorized to issue Exchangeable Shares in its capital, each such share
exchangeable for one share of MEC in accordance with the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares (the "Share
Provisions");
AND WHEREAS MEC is the holder of all of the issued and outstanding common
shares of Exchangeco;
AND WHEREAS Magna is the holder of approximately % of the equity of MEC,
and all of the Exchangeable Shares;
AND WHEREAS Magna has determined to distribute approximately 20% of the
equity of MEC held by it to the holders of Magna's Class A Subordinate Voting
Shares and Class B Shares by way of a dividend-in-kind, and to satisfy the
payment of such dividend to certain Canadian residents by the transfer to them
of Exchangeable Shares;
AND WHEREAS this Agreement evidences certain obligations of MEC to
Exchangeco to ensure that Exchangeco will at all times be able to satisfy its
obligations to the holders of Exchangeable Shares under the Share Provisions;
AND WHEREAS this Agreement evidences certain obligations of Magna to the
holders from time to time of the Exchangeable Shares in respect of the voting of
certain shares of MEC held by Magna;
<PAGE>
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NOW THEREFORE for good and valuable consideration, the receipt and adequacy
of which is hereby mutually acknowledged, the parties hereto covenant and agree
as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Definitions.
In this Agreement, the following terms shall have the following meanings:
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by, or under control with, that Person. For the purposes
of this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as applied to any Person,
means the possession by another Person, directly or indirectly, of the power to
direct or cause the direction of the management and policies of that first
mentioned Person, whether through the ownership of voting securities, by
contract or otherwise.
"Automatic Exchange Right" means the benefit of the obligation of MEC to effect
the automatic exchange of MEC Class A Shares for Exchangeable Shares pursuant to
section 3.11(c).
"Exchange Right" has the meaning ascribed thereto in section 3.1.
"Holder" means a Person who is the registered holder of an Exchangeable Share,
but does not include Magna, MEC or any subsidiary of MEC.
"Exchangeco Insolvency Event" means the institution by Exchangeco of any
proceeding to be adjudicated a bankrupt or insolvent or to be wound up, or the
consent of Exchangeco to the institution of bankruptcy, insolvency or winding-up
proceedings against it, or the filing of a petition, answer or consent seeking
dissolution or winding-up under any bankruptcy, insolvency or analogous laws,
including without limitation the Companies Creditors' Arrangement Act (Canada)
and the Bankruptcy and Insolvency Act (Canada), and the failure by Exchangeco to
contest in good faith any such proceedings commenced in respect of Exchangeco
within 30 days of becoming aware thereof, or the consent by Exchangeco to the
filing of any such petition or to the appointment of a receiver, or the making
by Exchangeco of a general assignment for the benefit of creditors, or the
admission in writing by Exchangeco of its inability to pay its debts generally
as they become due, or Exchangeco not being permitted, pursuant to solvency
requirements of applicable law, to redeem any Retracted Shares pursuant to
section 6.6 of the Share Provisions.
"Liquidation Event" has the meaning ascribed thereto in section 3.11(a).
"Liquidation Event Effective Date" has the meaning ascribed thereto in section
3.11(c).
"List" has the meaning ascribed thereto in section 2.9.
"MEC Class A Shares" means the shares of Class A Subordinate Voting Stock of
MEC.
<PAGE>
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"MEC Class B Shares" means the shares of Class B Stock of MEC.
"MEC Class Vote" means a matter to be considered by holders of shares of MEC
Class A Shares as a separate class, whether at an MEC Meeting or in connection
with an MEC Consent.
"MEC Consent" means a written consent sought by MEC from its shareholders
including the holders of MEC Class A Shares.
"MEC Meeting" means a meeting of shareholders of MEC at which holders of MEC
Class A Shares are entitled to vote.
"MEC Shares" means the MEC Class A Shares and the MEC Class B Shares,
collectively.
"MEC Successor" has the meaning ascribed thereto in section 5.1(a).
"MEC Votes" means the voting rights attaching to the MEC Shares held by Magna,
either as exercised by Magna in accordance with Voting Instructions or as
exercised by or on behalf of a Holder in person or by proxy.
"Record Date" means the record date established by MEC or by applicable law for
purposes of determining shareholders entitled to vote at an MEC Meeting or to
provide consent for the purposes of an MEC Consent.
"Retracted Shares" has the meaning ascribed thereto in section 3.6.
"Share Provisions" has the meaning set forth in the first recital to this
Agreement.
"Voting Instructions" means the instructions provided by a Holder to Magna with
respect to the exercise of the Voting Rights.
"Voting Rights" has the meaning ascribed thereto in section 2.1.
Other capitalized terms which are not defined in this Agreement have the meaning
ascribed to such terms in the Share Provisions.
1.2 Interpretation Not Affected by Headings, etc.
The division of this Agreement into Articles, sections and other portions and
the insertion of headings are for convenience of reference only and should not
affect the construction or interpretation of this agreement. Unless otherwise
indicated, all references to an "Article" or "section" refer to the specified
Article or section of this Agreement. The terms "this Agreement", "hereof",
"herein" and "hereunder" and similar expressions refer to this Agreement and not
to any particular Article, section or other portion hereof and include any
agreement or instrument supplementary or ancillary hereto.
1.3 Number, Gender, etc.
Words importing the singular number only shall include the plural and vice
versa. Words importing any gender shall include all genders.
<PAGE>
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1.4 Date for any Action.
If any date on which any action is required to be taken under this Agreement is
not a Business Day, such action shall be required to be taken on the next
succeeding Business Day.
ARTICLE 2
VOTING RIGHTS OF HOLDERS IN SHARES OF MEC
2.1 Grant of Voting Rights.
Magna hereby grants each Holder of Exchangeable Shares the right (the "Voting
Rights") to cast and exercise, in person or by proxy, one vote attaching to an
MEC Share held by Magna in respect of each Exchangeable Share held by the Holder
on the Record Date, on any matters, questions, proposals or propositions
whatsoever that may properly come before the shareholders of MEC at an MEC
Meeting or in connection with an MEC Consent. Magna may satisfy this obligation
by exercising voting rights attaching to MEC Class A Shares or MEC Class B
Shares held by and registered in the name of Magna, except in the case of a
Class Vote in which case Magna shall satisfy this obligation by exercising votes
attaching to MEC Class A Shares held by and registered in the name of Magna.
2.2 Magna to Hold Sufficient Shares.
Until the termination of this Agreement, Magna covenants and agrees that it
shall retain ownership of, and hold registered in its name, a sufficient number
of MEC Shares to comply with its obligations pursuant to section 2.1 hereof. In
the event of a Class Vote, Magna shall convert MEC Class B Shares held by it
into MEC Class A Shares, if and to the extent necessary to enable Magna to cast
one vote attaching to an MEC Class A Share for each Exchangeable Share in
respect of which it has received Voting Instructions, or to deliver a proxy in
respect of an MEC Class A Share to each Holder who has validly requested one.
2.3 Magna Not to Exercise Voting Rights Independently.
In respect of each MEC Meeting or MEC Consent, Magna will determine the number
of Exchangeable Shares outstanding on the Record Date in respect of which no
Voting Instructions were validly and timely provided to Magna and in respect of
which no proxies were delivered to Holders (the "Unvoted Exchangeable Shares").
Magna will forebear from casting that number of votes attaching to the MEC
Shares held by it as is equal to the number of Unvoted Exchangeable Shares. For
greater certainty, other than the MEC Shares voted in accordance with Voting
Instructions received from holders of Exchangeable Shares, and other than the
MEC Shares which Magna forebears from voting in respect of Unvoted Exchangeable
Shares, Magna shall have the right to cast all other voting rights attaching to
the MEC Shares owned by it, or under its direction and control, at its sole
discretion.
2.4 Minority Approval Requirements.
Magna will use its best efforts to secure any regulatory approvals necessary or
desirable from any securities regulatory authority, stock exchange or other
regulatory body having jurisdiction so that all votes cast by Magna at an MEC
Meeting, and all MEC Consents given by Magna
<PAGE>
-5-
pursuant to Voting Instructions received from holders of Exchangeable Shares,
may be treated as votes cast by the Holder of such Exchangeable Shares, and not
as votes cast by Magna, for the purposes of determining the satisfaction of any
applicable minority shareholder approval requirements.
2.5 Legended Share Certificates.
Exchangeco will cause each certificate representing Exchangeable Shares to bear
an appropriate legend notifying the holder of its right to instruct Magna with
respect to the exercise of voting rights attaching to MEC Shares.
2.6 Mailings to Shareholders.
With respect to each MEC Meeting and MEC Consent, MEC shall use its reasonable
efforts to mail or cause to be mailed (or otherwise communicate in the same
manner as MEC utilizes in communications to holders of MEC Class A Shares) to
each of the Holders, such mailing or communication to commence on the same day
as the mailing or notice (or other communication) with respect thereto is
commenced by MEC to its shareholders:
(a) a copy of such notice, together with any related materials to be
provided to shareholders of MEC;
(b) a statement that such Holder is entitled to instruct Magna as to the
exercise of the MEC Votes with respect to such MEC Meeting or MEC Consent
or to attend such MEC Meeting and to exercise personally the MEC Votes
thereat;
(c) a statement as to the manner in which such instructions may be given
to Magna, including an express indication that instructions may be given to
Magna to give:
(i) a proxy to such Holder or his designee to exercise personally the
MEC Votes; or
(ii) a proxy to a designated agent or other representative of the
management of MEC to exercise such MEC Votes;
(d) a statement that if no such instructions are received from the Holder,
the MEC Votes to which such Holder is entitled will not be exercised by
Magna;
(e) a form of direction whereby the Holder may so direct and instruct
Magna as contemplated herein; and
(f) a statement of the time and date by which such instructions must be
received by Magna in order to be binding upon it, which in the case of an
MEC Meeting shall not be earlier than the close of business on the second
Business Day prior to such meeting, and of the method for revoking or
amending such instructions.
For the purpose of determining MEC Votes to which a Holder is entitled in
respect of any MEC Meeting or MEC Consent, the number of Exchangeable Shares
owned of record by the Holder
<PAGE>
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shall be determined at the close of business on the Record Date. MEC will notify
Magna of any decision of the Board of Directors of MEC with respect to the
calling of any MEC Meeting and shall provide all necessary information and
materials to Magna in each case promptly and in any event in sufficient time to
enable Magna to perform its obligations contemplated by this Agreement.
2.7 Copies of Shareholder Information.
MEC will send to Holders all proxy materials (including notices of MEC Meetings,
but excluding proxies to vote MEC Class A Shares), information statements,
reports (including without limitation, all interim and annual financial
statements) and other written communications that, in each case, are to be
distributed from time to time to holders of MEC Class A Shares at the same time
as such materials are first sent to holders of MEC Class A Shares.
2.8 Other Materials.
As soon as reasonably practicable after receipt by MEC or shareholders of MEC
(if such receipt is known by MEC) of any material sent or given by or on behalf
of a third party to holders of MEC Class A Shares generally, including without
limitation, dissident proxy and information circulars (and related information
and material) and tender and exchange offer circulars (and related information
and material), MEC shall use its reasonable efforts to obtain and deliver to
each Holder such material as soon as possible thereafter (unless the same has
been provided directly to Holders by such third party).
2.9 List of Persons Entitled to Vote.
Exchangeco shall: (a) prior to each annual, general and special MEC Meeting or
the seeking of any MEC Consent; and (b) forthwith upon each request made at any
time by MEC or Magna in writing, prepare or cause to be prepared a list (a
"List") of the names and addresses of the Holders arranged in alphabetical order
and showing the number of Exchangeable Shares held of record by each such
Holder, in each case at the close of business on the date specified by Magna or
MEC in such request or, in the case of a List prepared in connection with an MEC
Meeting or an MEC Consent, at the close of business on the record date
established by MEC or pursuant to applicable law for determining the holders of
MEC Class A Shares entitled to receive notice of and/or to vote at such MEC
Meeting or to give consent in connection with such MEC Consent. Each such List
shall be delivered to Magna promptly after receipt by Exchangeco of such request
or the record date for such meeting or seeking of consent, as the case may be.
MEC agrees to give Exchangeco and Magna written notice of the calling of any MEC
Meeting or the seeking of any MEC Consent, together with the record dates
therefor, sufficiently prior to the date of the calling of such meeting or
seeking of such consent so as to enable Exchangeco to perform its obligations
under this section 2.9.
2.10 Entitlement to Direct Votes.
Any Holder named in a List prepared in connection with any MEC Meeting or MEC
Consent will be entitled: (a) to instruct Magna in the manner described in
section 2.6 with respect to the exercise of the MEC Votes to which such Holder
is entitled; or (b) to attend such meeting and
<PAGE>
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personally exercise thereat, as the proxy of Magna, the MEC Votes to which such
Holder is entitled.
2.11 Voting by Magna, and Attendance of Magna Representative at Meeting.
(a) In connection with each MEC Meeting and MEC Consent, Magna shall
exercise, either in person or by proxy, in accordance with the instructions
received from a Holder pursuant to section 2.6, the MEC Votes as to which such
Holder is entitled to direct the vote (or any lesser number thereof as may be
set forth in the instructions); provided, however, that such written
instructions are received by Magna from the Holder prior to the time and date
fixed by Magna for receipt of such instructions in the notice given by Magna to
the Holder pursuant to section 2.6.
(b) Magna shall cause a representative who is empowered by it to sign and
deliver, on behalf of Magna, proxies for Voting Rights to attend each MEC
Meeting. Upon submission by a Holder (or its designee) of identification
satisfactory to Magna's representative, and at the Holder's request, such
representative shall sign and deliver to such Holder (or its designee) a proxy
to exercise personally the MEC Votes as to which such Holder is otherwise
entitled hereunder to direct the vote, if such Holder either: (i) has not
previously given Magna instructions pursuant to section 2.6 in respect of such
meeting; or (ii) submits to such representative written revocation of any such
previous instructions. At such meeting, the Holder exercising such MEC Votes
shall have the same rights as Magna to speak at the meeting in favour of any
matter, question, proposal or proposition, to vote by way of ballot at the
meeting in respect of any matter, question, proposal or proposition, and to vote
at such meeting by way of a show of hands in respect of any matter, question or
proposition.
2.12 Distribution of Written Materials.
Any written materials distributed by MEC pursuant to this Agreement shall be
sent by mail (or otherwise communicated in the same manner as MEC utilizes in
communications to holders of MEC Class A Shares) to each Holder at its address
as shown on the books of Exchangeco. Exchangeco shall provide or cause to be
provided to MEC for this purpose, on a timely basis, a current List and, upon
the request of MEC, mailing labels.
2.13 Termination of Voting Rights.
All of the rights of a Holder with respect to the MEC Votes exercisable in
respect of the Exchangeable Shares held by such Holder, including the right to
instruct Magna as to the voting of or to vote personally such MEC Votes, shall
be deemed to be surrendered by the Holder, and such MEC Votes and the Voting
Rights represented thereby shall cease immediately upon the delivery by such
holder to Exchangeco or MEC of the certificates representing such Exchangeable
Shares in connection with the exercise by the Holder of the Exchange Right or
the automatic exchange of Exchangeable Shares for MEC Class A Shares (unless, in
either case, MEC shall not have delivered the requisite MEC Class A Shares
issuable in exchange therefor to the Holders), or upon the redemption of
Exchangeable Shares pursuant to Article 6 or 7 of the Share Provisions, or upon
the effective date of the liquidation, dissolution or winding-up of Exchangeco
pursuant to Article 5 of the Share Provisions, or upon the purchase of
Exchangeable
<PAGE>
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Shares from the holder thereof by MEC pursuant to the exercise by MEC of the
Retraction Call Right, the Redemption Call Right or the Liquidation Call Right.
ARTICLE 3
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
3.1 Grant and Ownership of the Exchange Right.
MEC hereby grants to the Holders the right (the "Exchange Right"), upon the
occurrence and during the continuance of an Exchangeco Insolvency Event, to
require MEC to purchase from each or any Holder all or any part of the
Exchangeable Shares held by the Holder and the Automatic Exchange Rights, all in
accordance with the provisions of this Agreement. MEC hereby acknowledges
receipt of good and valuable consideration (and the adequacy thereof) for the
grant of the Exchange Right and the Automatic Exchange Rights by MEC to the
Holders.
3.2 Legended Share Certificates.
Exchangeco will cause each certificate representing Exchangeable Shares to bear
an appropriate legend notifying the Holders of the Exchange Rights and the
Automatic Exchange Rights.
3.3 Purchase Price.
The total purchase price payable by MEC for each Exchangeable Share to be
purchased by MEC under the Exchange Right shall be an amount per share equal to:
(a) the Current Market Price of an MEC Class A Share on the last Business Day
prior to the day of closing of the purchase and sale of such Exchangeable Share
under the Exchange Right, which shall be satisfied in full by MEC causing to be
sent to such holder one MEC Class A Share; plus (b) to the extent not paid by
Exchangeco, an additional amount equivalent to the full amount of all declared
and unpaid dividends on each such Exchangeable Share held by such holder on any
dividend record date which occurred prior to the closing of the purchase and
sale. The total purchase price for each such Exchangeable Share so purchased may
be satisfied only by MEC issuing and delivering or causing to be delivered, to
the relevant Holder, one MEC Class A Share and on the applicable payment date a
cheque for the balance, if any, of the purchase price without interest (but less
any amounts withheld pursuant to section 3.12).
3.4 Exercise Instructions.
Subject to the terms and conditions herein set forth, a Holder shall be
entitled, upon the occurrence and during the continuance of an Exchangeco
Insolvency Event, to exercise the Exchange Right with respect to all or any part
of the Exchangeable Shares registered in the name of such Holder on the books of
Exchangeco. To exercise the Exchange Right, the Holder shall deliver to MEC, in
person or by mail, [at its principal office in Toronto, Ontario] or at such
other place or places in Canada or the United States as MEC may from time to
time designate by written notice to the Holders, the certificates representing
the Exchangeable Shares which such Holder desires MEC to purchase, duly endorsed
in blank for transfer, and accompanied by such other documents and instruments
as may be required to effect a transfer of Exchangeable Shares under the OBCA
and the by-laws of Exchangeco and such additional documents and instruments as
MEC or Exchangeco may reasonably require together with: (a) a duly completed
form of
<PAGE>
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notice of exercise of the Exchange Right, contained on the reverse of or
attached to the Exchangeable Share certificates, stating: (i) that the Holder
thereby exercises the Exchange Right so as to require MEC to purchase from the
Holder the number of Exchangeable Shares specified therein; (ii) that such
Holder has good title to and owns all such Exchangeable Shares to be acquired by
MEC free and clear of all liens, claims, security interests, adverse claims and
encumbrances; (iii) the names in which the certificates representing MEC Class A
Shares issuable in connection with the exercise of the Exchange Right are to be
issued; and (iv) the names and addresses of the persons to whom such new
certificates should be delivered; and (b) payment (or evidence satisfactory to
Exchangeco and MEC of payment) of the taxes (if any) payable as contemplated by
section 3.7 of this Agreement. If only a part of the Exchangeable Shares
represented by any certificate or certificates delivered to Magna are to be
purchased by MEC under the Exchange Right, a new certificate for the balance of
such Exchangeable Shares shall be issued to the holder at the expense of
Exchangeco.
3.5 Delivery of MEC Class A Shares; Effect of Exercise.
Promptly after receipt of the certificates representing the Exchangeable Shares
which the Holder desires MEC to purchase under the Exchange Right, together with
such documents and instruments of transfer and a duly completed form of notice
of exercise of the Exchange Right (and payment of taxes, if any, payable as
contemplated by section 3.7 or evidence thereof), duly endorsed for transfer to
MEC, MEC shall promptly thereafter deliver or cause to be delivered to the
Holder of such Exchangeable Shares (or to such other persons, if any, properly
designated by such Holder) the number of MEC Class A Shares issuable in
connection with the exercise of the Exchange Right, and on the applicable
payment date cheques for the balance, if any, of the total purchase price
therefor without interest (but less any amounts withheld pursuant to section
3.12); provided, however, that no such delivery shall be made unless and until
the Holder requesting the same shall have paid (or provided evidence
satisfactory to Exchangeco and MEC of the payment of) the taxes (if any) payable
as contemplated by section 3.7 of this Agreement. Immediately upon the issuance
by MEC of the MEC Class A Shares that are issuable upon the exercise of the
Exchange Right as provided in this section 3.5, the closing of the transaction
of purchase and sale contemplated by the Exchange Right shall be deemed to have
occurred and the holder of such Exchangeable Shares shall be deemed to have
transferred to MEC all of such holder's right, title and interest in and to such
Exchangeable Shares and shall cease to be a holder of such Exchangeable Shares
and shall not be entitled to exercise any of the rights of a holder in respect
thereof, other than the right to receive his proportionate part of the total
purchase price therefor (together with a cheque for the balance, if any, of the
total purchase price therefor without interest), unless the requisite number of
MEC Class A Shares is not allotted, issued and delivered by MEC to Magna within
five Business Days of the date of the giving of such notice by Magna, in which
case the rights of the Holder shall remain unaffected until such MEC Class A
Shares are so allotted, issued and delivered by MEC and any such cheque is
delivered and paid. Concurrently with a Holder ceasing to be a holder of
Exchangeable Shares, the Holder shall be considered and deemed for all purposes
to be the holder of the MEC Class A Shares delivered to it pursuant to the
Exchange Right.
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3.6 Exercise of Exchange Right Subsequent to Retraction.
In the event that a Holder has exercised its right under Article 6 of the Share
Provisions to require Exchangeco to redeem any or all of the Exchangeable Shares
held by the Holder (the "Retracted Shares") and is notified by Exchangeco
pursuant to section 6.6 of the Share Provisions that Exchangeco will not be
permitted as a result of solvency requirements of applicable law to redeem all
such Retracted Shares, and provided that MEC shall not have exercised the
Retraction Call Right with respect to the Retracted Shares and that the Holder
has not revoked the retraction request delivered by the Holder to Exchangeco
pursuant to section 6.1 of the Share Provisions, the retraction request will
constitute and will be deemed to constitute notice from the Holder exercising
the Exchange Right with respect to those Retracted Shares that Exchangeco is
unable to redeem. In any such event, Exchangeco hereby agrees with MEC and in
favour of the Holder to immediately notify MEC of such prohibition against
Exchangeco redeeming all of the Retracted Shares and promptly to forward or
cause to be forwarded to MEC all relevant materials delivered by the Holder to
Exchangeco or to the transfer agent of the Exchangeable Shares (including
without limitation, a copy of the retraction request delivered pursuant to
section 6.1 of the Share Provisions) in connection with such proposed redemption
of the Retracted Shares and MEC will thereupon purchase, pursuant to the
Exchange Right in accordance with the provisions of this Article 5, the
Retracted Shares that Exchangeco is not permitted to redeem.
3.7 Stamp or Other Transfer Taxes.
Upon any sale of Exchangeable Shares to MEC pursuant to the Exchange Right or
the Automatic Exchange Rights, the share certificate or certificates
representing MEC Class A Shares to be delivered in connection with the payment
of the total purchase price therefor shall be issued in the name of the Holder
of the Exchangeable Shares so sold or in such names as such Holder may otherwise
direct in writing without charge to the holder of the Exchangeable Shares so
sold; provided, however, that such Holder: (a) shall pay (and none of MEC,
Exchangeco or Magna shall be required to pay) any documentary, stamp, transfer
or other taxes that may be payable in respect of any transfer involved in the
issuance or delivery of such shares to a Person other than such Holder; or (b)
shall have evidenced to the satisfaction of MEC and Exchangeco that such taxes,
if any, have been paid.
3.8 Notice of Insolvency Event.
As soon as practicable following the occurrence of an Exchangeco Insolvency
Event, or any event that with the giving of notice or the passage of time or
both would be an Exchangeco Insolvency Event, Exchangeco shall give written
notice thereof to Magna and MEC. As soon as practicable following the
occurrence of an Exchangeco Insolvency Event, MEC will mail to each Holder, at
the expense of MEC, a notice of such Exchangeco Insolvency Event, which notice
shall contain a brief statement of the rights of the Holders with respect to the
Exchange Right.
3.9 Qualification of MEC Class A Shares.
MEC covenants that if any MEC Class A Shares to be issued and delivered pursuant
to the Exchange Right or the Automatic Exchange Right require registration or
qualification with or
<PAGE>
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approval of or the filing of any document, including any prospectus or similar
document, or the taking of any proceeding with or the obtaining of any order,
ruling or consent from any governmental or regulatory authority under any
Canadian or United States federal, provincial or state law or regulation or
pursuant to the rules and regulations of any regulatory authority or the
fulfilment of any other Canadian or United States federal, provincial or state
legal requirement before such shares may be issued and delivered by MEC to the
initial holder thereof or in order that such shares may be freely traded
thereafter (other than any restrictions of general application on transfer by
reason of a holder being a "control person" of MEC for purposes of Canadian
provincial securities law or an "affiliate" of MEC for purposes of United States
federal or state securities law), MEC will in good faith expeditiously take all
such actions and do all such things as are necessary or desirable to cause such
MEC Class A Shares to be and remain duly registered, qualified or approved. MEC
will in good faith expeditiously take all such actions and do all such things as
are reasonably necessary or desirable to cause all MEC Class A Shares to be
delivered pursuant to the Exchange Right or the Automatic Exchange Rights to be
listed, quoted or posted for trading on all stock exchanges and quotation
systems on which outstanding MEC Class A Shares have been listed by MEC and
remain listed and are quoted or posted for trading at such time.
3.10 MEC Class A Shares.
MEC hereby represents, warrants and covenants that the MEC Class A Shares
issuable as described herein will be duly authorized and validly issued as fully
paid and non-assessable and shall be free and clear of any lien, claim or
encumbrance.
3.11 Automatic Exchange on Liquidation of MEC.
(a) MEC will give Holders written notice of each of the following
events (each, a "Liquidation Event") at the time set forth below:
(i) in the event of any determination by the Board of Directors
of MEC to institute voluntary liquidation, dissolution or winding-up
proceedings with respect to MEC or to effect any other distribution of
assets of MEC among its shareholders for the purpose of winding up its
affairs, at least 60 days prior to the proposed effective date of such
liquidation, dissolution, winding-up or other distribution; and
(ii) as soon as practicable following the earlier of (A) receipt
by MEC of notice of, and (B) MEC otherwise becoming aware of, any
threatened or instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution or winding-up of MEC
or to effect any other distribution of assets of MEC among its
shareholders for the purpose of winding up its affairs, in each case where
MEC has failed to contest in good faith any such proceeding commenced in
respect of MEC within 30 days of becoming aware thereof.
(b) The notice to Holders delivered upon the occurrence of a
Liquidation Event shall include a brief description of the automatic exchange of
Exchangeable Shares for MEC Class A Shares provided for in section 3.11(c).
<PAGE>
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(c) In order that the Holders will be able to participate on a pro rata
basis with the holders of MEC Class A Shares in the distribution of assets of
MEC in connection with a Liquidation Event, on the fifth Business Day prior to
the effective date (the "Liquidation Event Effective Date") of a Liquidation
Event all of the then outstanding Exchangeable Shares shall be automatically
exchanged for MEC Class A Shares. To effect such automatic exchange, MEC shall
purchase on the fifth Business Day prior to the Liquidation Event Effective Date
each Exchangeable Share then outstanding and held by Holders, and each Holder
shall sell the Exchangeable Shares held by it at such time, for a total purchase
price per share equal to: (a) the Current Market Price of an MEC Class A Share
on the fifth Business Day prior to the Liquidation Event Effective Date, which
shall be satisfied in full by MEC issuing to the Holder one MEC Class A Share,
and (b) to the extent not paid by Exchangeco, an additional amount equivalent to
the full amount of all declared and unpaid dividends on each such Exchangeable
Share held by such holder on any dividend record date which occurred prior to
the date of the exchange.
(d) On the fifth Business Day prior to the Liquidation Event Effective
Date, the closing of the transaction of purchase and sale contemplated by the
automatic exchange of Exchangeable Shares for MEC Class A Shares shall be deemed
to have occurred, and each Holder shall be deemed to have transferred to MEC all
of the Holder's right, title and interest in and to such Holder's Exchangeable
Shares and shall cease to be a holder of such Exchangeable Shares, and MEC shall
issue to the Holder the MEC Class A Shares issuable upon the automatic exchange
of Exchangeable Shares for MEC Class A Shares and on the applicable payment date
shall deliver to the Holder a cheque for the balance, if any, of the total
purchase price for such Exchangeable Shares without interest but less any
amounts withheld pursuant to section 5.13. Concurrently with such Holder ceasing
to be a holder of Exchangeable Shares, the Holder shall be considered and deemed
for all purposes to be the holder of the MEC Class A Shares issued pursuant to
the automatic exchange of Exchangeable Shares for MEC Class A Shares and the
certificates held by the Holder previously representing the Exchangeable Shares
exchanged by the Holder with MEC pursuant to such automatic exchange shall
thereafter be deemed to represent MEC Class A Shares issued to the Holder by MEC
pursuant to such automatic exchange. Upon the request of a Holder and the
surrender by the Holder of Exchangeable Share certificates deemed to represent
MEC Class A Shares, MEC shall deliver or cause to be delivered to the Holder
certificates representing MEC Class A Shares of which the Holder is the holder.
3.12 Withholding Rights.
MEC shall be entitled to deduct and withhold from any consideration otherwise
payable under this Agreement to any Holder such amounts as MEC is required or
permitted to deduct and withhold with respect to such payment under the Income
Tax Act (Canada), the United States Internal Revenue Code of 1986 or any
provision of provincial, state, local or foreign tax law, in each case as
amended or succeeded. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes as having been paid to the holder of
the shares in respect of which such deduction and withholding was made, provided
that such withheld amounts are actually remitted to the appropriate taxing
authority. To the extent that the amounts so required or permitted to be
deducted or withheld from any payment to a holder exceeds the cash portion of
the consideration otherwise payable to the holder, MEC is hereby authorized to
sell or otherwise dispose of such portion of the consideration as is necessary
to provide sufficient funds
<PAGE>
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to MEC to enable it to comply with such deduction or withholding requirements
and MEC shall notify the holder thereof and remit to such holder any unapplied
balance of the net proceeds of such sale. MEC represents and warrants that,
based upon facts currently known to it, it has no current intention, as at the
date of this Agreement, to deduct or withhold from any dividend paid to holders
of Exchangeable Shares any amounts under the United States Internal Revenue Code
of 1986.
ARTICLE 4
GENERAL
4.1 Action of Holders.
No Holder shall have the right to institute any action, suit or proceeding or to
exercise any other remedy authorized by this Agreement for the purpose of
enforcing any of its rights hereunder against MEC or Exchangeco unless the
Holder has requested MEC, in the case of the enforcement of a right against
Exchangeco, or Exchangeco, in the case of enforcement of a right against MEC, to
take or institute such action, suit or proceeding and such other party shall
have failed to act within a reasonable time thereafter. In such case, but not
otherwise, the Holder shall be entitled to take proceedings in any court of
competent jurisdiction such as such other party might have taken; it being
understood and intended that no one or more Holders shall have any right in any
manner whatsoever to affect, disturb or prejudice the rights hereby created by
any such action, or to enforce any right hereunder or the Voting Rights, the
Exchange Rights or the Automatic Exchange Rights, except subject to the
conditions and in the manner herein provided.
4.2 Conflicting Claims.
If conflicting claims or demands are made or asserted with respect to any
interest of any Holder in any Exchangeable Shares, including any disagreement
between the heirs, representatives, successors or assigns succeeding to all or
any part of the interest of any Holder in any Exchangeable Shares, resulting in
conflicting claims or demands being made in connection with such interest, then
MEC, Magna and Exchangeco shall each be entitled, at its sole discretion, to
refuse to recognize or to comply with any such claims or demands. In so
refusing, MEC, Magna or Exchangeco may elect not to exercise any MEC Votes,
Exchange Rights or Automatic Exchange Rights subject to such conflicting claims
or demands and, in so doing, it shall not be or become liable to any Person on
account of such election or its failure or refusal to comply with any such
conflicting claims or demands. MEC, Magna and Exchangeco shall be entitled to
continue to refrain from acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the MEC Votes,
Exchange Rights or Automatic Exchange Rights subject to such conflicting claims
or demands have been adjudicated by a final judgment of a court of competent
jurisdiction and all rights of appeal have expired; or
(b) all differences with respect to the MEC Votes, Exchange Rights or
Automatic Exchange Rights subject to such conflicting claims or demands have
been conclusively settled by a valid written agreement binding on all such
adverse claimants, and Magna shall have been furnished with an executed copy of
such agreement certified to be in full force and effect.
<PAGE>
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If MEC, Magna or Exchangeco elects to recognize any claim or comply with any
demand made by any such adverse claimant, it may in its discretion require such
claimant to furnish such surety bond or other security satisfactory to it as it
shall deem appropriate to fully indemnify it as between all conflicting claims
or demands.
ARTICLE 5
MEC SUCCESSORS
5.1 Certain Requirements in Respect of Combination, etc.
MEC shall not consummate any transaction (whether by way of reconstruction,
reorganization, consolidation, merger, transfer, sale, lease or otherwise)
whereby all or substantially all of its undertaking, property and assets would
become the property of any other Person or, in the case of a merger, of the
continuing corporation resulting therefrom unless, but may do so if:
(a) such other Person or continuing corporation (herein called the "MEC
Successor"), by operation of law, becomes, without more, bound by the terms and
provisions of this Agreement or, if not so bound, executes, prior to or
contemporaneously with the consummation of such transaction, an Agreement
supplemental hereto and such other instruments (if any) as are reasonably
necessary or advisable to evidence the assumption by the MEC Successor of
liability for all moneys payable and property deliverable hereunder and the
covenant of such MEC Successor to pay and deliver or cause to be delivered the
same and its agreement to observe and perform all the covenants and obligations
of MEC under this Agreement; and
(b) such transaction shall preserve and not impair in any material respect
any of the rights, duties, powers and authorities of the Holders hereunder.
5.2 Wholly-Owned Subsidiaries.
Nothing herein shall be construed as preventing the amalgamation or merger of
any wholly-owned direct or indirect subsidiary of MEC with or into MEC or the
winding-up, liquidation or dissolution of any wholly-owned subsidiary of MEC
provided that all of the assets of such subsidiary are transferred to MEC or
another wholly-owned direct or indirect subsidiary of MEC, and any such
transactions are expressly permitted by this Article 5.
ARTICLE 6
AMENDMENTS
6.1 Amendments, Modifications, etc.
This Agreement may not be amended or modified except by an agreement in writing
executed by MEC, Exchangeco and Magna and approved by the Holders in accordance
with section 10.2 of the Share Provisions.
<PAGE>
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6.2 Ministerial Amendments.
Notwithstanding the provisions of section 6.1, the parties to this Agreement may
in writing, at any time and from time to time, without the approval of the
Holders, amend or modify this Agreement for the purposes of:
(a) adding to the covenants of any or all parties hereto for the protection
of the Holders hereunder provided that the Board of Directors of each of
Exchangeco and MEC shall be of the good faith opinion that such additions will
not be prejudicial to the rights or interests of the Holders;
(b) making such amendments or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters or questions
which, in the good faith opinion of the Board of Directors of each of MEC and
Exchangeco and in the opinion of counsel to Magna, having in mind the best
interests of the Holders, it may be expedient to make, provided that such Boards
of Directors shall be of the opinion that such amendments and modifications will
not be prejudicial to the interests of the Holders; or
(c) making such changes or corrections which, on the advice of counsel to
MEC, Exchangeco and Magna, are required for the purpose of curing or correcting
any ambiguity or defect or inconsistent provision or clerical omission or
mistake or manifest error, provided that the Board of Directors of each of MEC
and Exchangeco shall be of the opinion that such changes or corrections will not
be prejudicial to the rights and interests of the Holders.
6.3 Meeting to Consider Amendments.
Exchangeco, at the request of MEC, shall call a meeting or meetings of the
Holders for the purpose of considering any proposed amendment or modification
requiring approval pursuant hereto. Any such meeting or meetings shall be called
and held in accordance with the by-laws of Exchangeco, the Share Provisions and
all applicable laws.
6.4 Changes in Capital of MEC and Exchangeco.
At all times after the occurrence of any event contemplated pursuant to section
2.7 or 2.8 of the Exchangeable Share Support Agreement or otherwise, as a result
of which either MEC Class A Shares or the Exchangeable Shares or both are in any
way changed, this Agreement shall forthwith be amended and modified as necessary
in order that it shall apply with full force and effect, mutatis mutandis, to
all new securities into which MEC Class A Shares or the Exchangeable Shares or
both are so changed and the parties hereto shall execute and deliver a
supplemental Agreement giving effect to and evidencing such necessary amendments
and modifications.
6.5 Execution of Amendments.
No amendment to or modification or waiver of any of the provisions of this
Agreement otherwise permitted hereunder shall be effective unless made in
writing and signed by each of Magna, MEC and Exchangeco. From time to time
Exchangeco, MEC and Magna may, subject to the provisions of these presents, and
they shall, when so directed by these presents, execute and
<PAGE>
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deliver by their proper officers, Agreements or other instruments supplemental
hereto, which thereafter shall form part hereof, for any one or more of the
following purposes:
(a) evidencing the succession of MEC Successors and the covenants of and
obligations assumed by each such MEC Successor;
(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange Right or the
Automatic Exchange Rights which, in the opinion of Magna relying on the advice
of counsel, will not be prejudicial to the interests of the Holders or are, in
the opinion of counsel to Magna, necessary or advisable in order to incorporate,
reflect or comply with any legislation the provisions of which apply to MEC,
Exchangeco, Magna or this Agreement; and
(c) for any other purposes not inconsistent with the provisions of this
Agreement, including without limitation, to make or evidence any amendment or
modification to this Agreement as contemplated hereby, provided that, in the
opinion of MEC and Exchangeco, relying on the advice of counsel, the rights of
Holders will not be prejudiced thereby.
ARTICLE 7
TERMINATION
7.1 Term.
This Agreement shall continue to be in force and effect until the earliest to
occur of the following events, but not thereafter:
(a) at any time following the distribution of Exchangeable Shares to
Holders, no outstanding Exchangeable Shares continue to be held by any Holder;
(b) each of MEC and Exchangeco elects in writing to terminate this
Agreement and such termination is approved by the Holders in accordance with
section 10.2 of the Share Provisions; and
(c) 21 years from the date of this Agreement.
7.2 Survival of Agreement.
This Agreement shall continue until there are no Exchangeable Shares outstanding
held by a Holder.
ARTICLE 8
GENERAL
8.1 Severability.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule or law, or public policy, all other
conditions and provisions of this Agreement shall
<PAGE>
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nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled to the fullest
extent possible.
8.2 Enurement.
This Agreement shall be binding upon and enure to the benefit of the parties
hereto and their respective successors and permitted assigns and to the benefit
of the Holders. The Holders shall be intended third-party beneficiaries of this
Agreement.
8.3 Notices to Parties.
All notices and other communications between the parties hereunder shall be in
writing and shall be deemed to have been given if delivered Personally or by
confirmed telecopy to the parties at the following addresses (or at such other
address for such party as shall be specified in like notice):
(a) if to Exchangeco:
337 Magna Drive
Aurora, Ontario
L4G 7K1
Attention: President
Telecopier No.: (905) 726-7126
(b) if to MEC:
285 West Huntington Drive
Arcadia, California
90017
Attention: President
Telecopier No.: (626) 574-6306
(c) if to Magna:
337 Magna Drive
Aurora, Ontario
L4G 7K1
Attention: Executive Vice-President, Special Projects and Secretary
Telecopier No.: (905) 726-2603
<PAGE>
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Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a Business Day in which case it shall be deemed to have been
given and received upon the immediately following Business Day.
8.4 Notice to Holders.
Any and all notices to be given and any documents to be sent to any Holders may
be given or sent to the address of such Holder shown on the register of holders
of Exchangeable Shares in any manner permitted by the by-laws of Exchangeco from
time to time in force in respect of notices to shareholders and shall be deemed
to be received (if given or sent in such manner) at the time specified in such
by-laws, the provisions of which by-laws shall apply mutatis mutandis to notices
or documents as aforesaid sent to such Holders.
8.5 Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
8.6 Jurisdiction.
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York without regard to the conflict of laws principles thereof.
8.7 Attornment.
Each of MEC, Exchangeco and Magana agree that any action or proceeding arising
out of or relating to this Agreement may be instituted in the courts of the
State of New York, waives any objection which it may have now or hereafter to
the venue of any such action or proceeding, irrevocably submits to the
jurisdiction of the said courts in any such action or proceeding, agrees to be
bound by any judgment of the said courts and agrees not to seek, and hereby
waives, any review of the merits of any such judgment by the court of any other
jurisdiction and hereby appoints at its registered office in as its attorney
for service of process.
IN WITNESS OF WHICH, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
MAGNA INTERNATIONAL INC.
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
<PAGE>
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MAGNA ENTERTAINMENT CORP.
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
MEC HOLDINGS (CANADA) INC.
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.7
Execution Copy
TERM LOAN CREDIT AGREEMENT
THIS AGREEMENT is entered into as of November 15, 1999 (as amended from
time to time, this "Agreement"), by and between THE SANTA ANITA COMPANIES, INC.,
a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
R E C I T A L
- - - - - - -
The Borrower has requested from the Bank the credit accommodation described
below, and the Bank has agreed to provide said credit accommodation to the
Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Bank and the Borrower hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS.
The following terms with initial capital letters have the following
meanings:
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such first Person. The term
"control" means the possession, directly or indirectly, of the power, whether or
not exercised, (i) to vote 20% or more of the securities having voting power for
the election of directors (or Persons performing similar functions) of such
Person or (ii) to direct or cause the direction of the management or policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise, and the terms "controlled" and "common control" have correlative
meanings. Unless otherwise indicated, "Affiliate" refers to an Affiliate of the
Borrower. Notwithstanding the foregoing, in no event shall the Bank or any
Affiliate of the Bank be deemed to be an Affiliate of the Borrower.
"Applicable Law" means all applicable provisions of all (i) constitutions,
treaties, statutes, laws, rules, regulations and ordinances of any Governmental
Authority, (ii) Governmental Approvals and (iii) orders, decisions, judgments,
awards and decrees of any Governmental Authority (including common law and
principles of public policy).
"Appraised Value of the Mortgaged Property" means the appraised value of
the Mortgaged Property as determined by the Bank pursuant to the appraisal
conducted by, or on behalf of, the Bank in form and substance satisfactory to
the Bank.
"Approved Subordination Terms" means the terms of subordination set forth
in Exhibit G.
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"Asset Disposition" means any sale or other disposition, in any single
transaction or series of related transactions, by the Borrower or any Subsidiary
of the Borrower, of any of its assets (including (x) by way of a Sale-Leaseback
Transaction and (y) in the case of a Subsidiary of the Borrower, any issuance of
any Capital Stock of such Subsidiary to any Person other than the Borrower or a
Wholly-Owned Subsidiary of the Borrower (other than directors qualifying
shares)); except that "Asset Disposition" shall not include (A) any disposition
of assets or issuance of Capital Stock by any Subsidiary to the Borrower or a
Wholly-Owned Subsidiary of the Borrower, (B) a merger or consolidation permitted
pursuant to Section 6.6 or (C) sales of inventory held or purchased for sale to
others or dispositions of other property that has become obsolete or worn out,
in each case in the ordinary course of business.
"Assignment of Leases and Rents" means the Assignment of Leases and Rents
between the Borrower and the Bank in substantially the form of Exhibit F, as
amended from time to time.
"Bankruptcy Code" means Title 11 of the United States Code (11 U.S.C.
Section 101 et seq.), as amended from time to time.
"Base LIBOR" means the rate per annum for Dollar deposits quoted by the
Bank as the Inter-Bank Market Offered Rate, with the understanding that such
rate is quoted by the Bank for the purpose of calculating effective rates of
interest for loans making reference thereto, on the first day of an Interest
Period for delivery of funds on said date for a period of time approximately
equal to the number of days in such Interest Period and in an amount
approximately equal to the principal amount to which such Interest Period
applies. The Borrower understands and agrees that the Bank may base its
quotation of the Inter-Bank Market Offered Rate upon such offers or other market
indicators of the Inter-Bank Market as the Bank in its discretion deems
appropriate including, but not limited to, the rate offered for Dollar deposits
on the London Inter-Bank Market.
"Benefit Plan" means a defined benefit plan as defined in Section 3(35) of
ERISA (other than a Multiemployer Plan) in respect of which the Borrower or any
ERISA Affiliate is, or within the immediately preceding six (6) years was, an
"employer" as defined in Section 3(5) of ERISA.
"Borrower Pledge Agreement" means the Pledge Agreement between the Borrower
and the Bank in substantially the form of Exhibit B, as amended from time to
time.
"Business Day" means any day that is not a Saturday, Sunday or other day on
which banks in Los Angeles, California are authorized or obligated to close.
"Capital Expenditures" means, for any period, expenditures (whether paid in
cash or accrued as liabilities and including Capital Leases entered into during
the period) of the Borrower and its Subsidiaries during such period that are
required in accordance with GAAP to be capitalized on the consolidated balance
sheet of the Borrower.
"Capital Leases" means all leases of the Borrower and its Subsidiaries of
real or personal property that are required to be capitalized on the
consolidated balance sheet of the Borrower. The amount of any Capital Lease
shall be the capitalized amount thereof.
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"Capital Stock" means, with respect to any Person, all (i) shares,
interests, participations or other equivalents (howsoever designated) of capital
stock and other equity interests of such Person and (ii) rights (other than
Indebtedness securities convertible into capital stock or other equity
interests), warrants or options to acquire any such capital stock or other
equity interests.
"Change of Control" means the failure by the Parent to continue to hold all
of the outstanding shares of all classes of the Capital Stock of the Borrower.
"Closing Date" means November 15, 1999.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral" means all property in which a Lien is created or conveyed in
or under the Loan Documents, or any of them, in favor of the Bank.
"Commitment" means the lesser of (i) $63,000,000 or (ii) the amount equal
to fifty percent (50%) of the Appraised Value of the Mortgaged Property as
determined in the appraisal referred to in Section 4.1(h).
"Commitment Termination Date" means January 15, 2000.
"Contingent Obligation" means, as to any Person, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) with respect to any
Indebtedness or other obligation of another Person, including any direct or
indirect guarantee of such Indebtedness (other than any endorsement for
collection in the ordinary course of business) or any other direct or indirect
obligation, by agreement or otherwise, to purchase or repurchase any such
Indebtedness or obligation or any security therefor, or to provide funds for the
payment or discharge of any such Indebtedness or obligation (whether in the form
of loans, advances, stock purchases, capital contributions or otherwise), (ii)
to provide funds to maintain the financial condition of any other Person, if the
primary purpose of such obligation is to provide assurance that the Indebtedness
or other obligations of such other Person will be paid or discharged or the
holders of such Indebtedness or other obligations will be protected against
loss, or (iii) otherwise to assure or hold harmless the holders of Indebtedness
or other obligations of another Person against loss in respect thereof, or (iv)
under Hedging Contracts. The amount of any Contingent Obligation under clause
(i) or (ii) shall be the lesser of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made and (b) the maximum amount for which such Person
may be liable pursuant to the terms of the instrument embodying such Contingent
Obligation, unless such primary obligation and the maximum amount for which such
Person may be liable are not stated or determinable, in which case the amount of
such Contingent Obligation shall be such Person's maximum reasonably anticipated
liability in respect thereof.
"Contractual Obligation" means, as applied to any Person, any provision of
any security issued by that Person or of any agreement or other instrument to
which that Person is a party or by which it or any of the properties owned or
leased by it is bound or otherwise subject.
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"Current Portion of Long-Term Debt" means, as of any date of determination
and without duplication, the current portion of all Indebtedness due more than
one year from the date of determination that would properly be classified as a
current liability of the Borrower and its Subsidiaries as of such date,
determined on a consolidated basis in accordance with GAAP.
"D&M Environmental Report" means the "Phase I Environmental Assessment
Update" prepared by Dames & Moore dated December 1998, as modified by that
certain letter from Dames & Moore to the Bank dated as of June 14, 1999.
"Deed of Trust" means the Deed of Trust and Assignment of Rents and Leases
executed by the Borrower for the benefit of the Bank, in substantially the form
of Exhibit E, as amended from time to time.
"Default" means any condition or event that, with the giving of notice or
lapse of time or both, would, unless cured or waived, become an Event of
Default.
"DOL" means the United States Department of Labor and any Person succeeding
to the functions thereof.
"Dollars" and "$" means lawful money of the United States of America.
"EBITDA" means, for any period on a consolidated basis for the Borrower and
its Subsidiaries (i) the sum of (a) Net Income, (b) Interest Expense deducted in
the determination of Net Income, (c) income tax expense deducted in the
determination of Net Income, (d) depreciation and amortization expense deducted
in determining Net Income, and (e) extraordinary losses included in the
determination of Net Income, in each case, for such period, minus (ii)
extraordinary gains included in the determination of Net Income, for such
period.
"EBITDA Coverage Ratio" means, on the last day of any fiscal quarter, the
ratio of (i) EBITDA for the period of four consecutive fiscal quarters ending on
such date to (ii) the sum of (a) the Current Portion of Long-Term Debt as of the
first day of such four-quarter period, (b) Interest Expense for such four-
quarter period and (c) the aggregate amount of Capital Expenditures (other than
Parent-Funded Capital Expenditures) made during such four-quarter period.
"Environmental Damages" means all claims, judgments, damages, losses,
penalties, liabilities (including strict liability), costs and expenses,
including costs of investigation, remediation, defense, settlement and
reasonable attorneys' fees and consultants' fees, that are incurred at any time
as a result of the existence of Hazardous Material upon, about or beneath the
Mortgaged Property or any other real property owned by the Borrower or any of
its Subsidiaries or migrating or threatening to migrate to or from any such real
property, or arising from any investigation, proceeding or remediation of any
location at which the Borrower, any of its Subsidiaries or any predecessors are
alleged to have directly or indirectly disposed of Hazardous Materials or
arising in any manner whatsoever out of any violation of Environmental
Requirements.
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"Environmental Lien" means a Lien in favor of any Governmental Authority
for Environmental Damages.
"Environmental Requirements" means all Applicable Laws relating to
Hazardous Materials or the protection of human health or the environment,
including all requirements pertaining to reporting, permitting, investigation
and remediation of releases or threatened releases of Hazardous Materials into
the environment, or relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, any
amendments thereto, any successor statutes, and any regulations promulgated
thereunder.
"ERISA Affiliate" means (i) any corporation which is a member of the same
controlled group of corporations (within the meaning of Section 414(b) of the
Code) as the Borrower; (ii) any trade or business (whether or not incorporated)
which is under common control (within the meaning of Section 414(c) of the Code)
with the Borrower; and (iii) a member of the same affiliated service group
(within the meaning of Section 414(m) of the Code) as the Borrower, any
corporation described in clause (i) above or any trade or business described in
clause (ii) above or (iv) any other Person which is required to be aggregated
with the Borrower pursuant to regulations promulgated under Section 414(o) of
the Code.
"Event of Default" is defined in Section 7.1.
"Extended Maturity Date" means November 30, 2004.
"Extension Date" is defined in Section 2.2(b).
"Extension Notice" is defined in Section 2.2(b).
"Fair Market Value" means, with respect to any asset or property, the sale
value that could be obtained in an arm's-length transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under pressure or
compulsion to complete the transaction.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System, or any successor thereto.
"Fees" means, collectively, the fees described or referenced in Section
2.5.
"Fiscal Year" means the fiscal year of the Borrower, which shall be the 12
month-period ending on December 31 in each year or such other period as the
Borrower may designate and the Bank may approve in writing (which approval shall
not be unreasonably withheld or delayed). "Fiscal Quarter" or "fiscal quarter"
means any quarter of a Fiscal Year.
"Funding Date " is defined in Section 2.1(a).
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as in effect from time to time.
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"Governmental Approval" means an authorization, consent, approval, permit
or license issued by, or a registration or filing with, any Governmental
Authority.
"Governmental Authority" means any nation and any state or political
subdivision thereof and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government and any
tribunal or arbitrator of competent jurisdiction.
"Hazardous Materials" means any substance (i) the presence of which
requires investigation or remediation under any Applicable Law; (ii) that is or
becomes defined as a "hazardous waste" or "hazardous substance" under any
Applicable Law, including the Comprehensive Environmental Response, Compensation
and Liability Act (42 U.S.C. Section 9601 et seq.) or the Resource Conservation
and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii) that is toxic,
explosive, corrosive, inflammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is or becomes regulated by any
Governmental Authority; (iv) the presence of which on the Mortgaged Property or
any other real property owned by the Borrower or any of its Subsidiaries causes
or threatens to cause a nuisance upon such real property or to adjacent
properties or poses or threatens to pose a hazard to any such real property or
to the health or safety of Persons on or about any such real property; or (v)
without limitation, that contains gasoline or other petroleum hydrocarbons,
polychlorinated biphenyls or asbestos.
"Hedging Contract" means, for any Person, any interest rate, commodity,
foreign exchange or other hedging agreement (including swaps, collars, caps and
forward contracts) between such Person and one or more financial institutions
providing for the transfer or mitigation of fluctuations of interest rates,
exchange rates or other prices either generally or under specific contingencies.
"Indebtedness", as applied to any Person, means, at any time, without
duplication, (a) all Indebtedness, obligations or other liabilities of such
Person (i) for borrowed money or evidenced by debt securities, debentures,
acceptances, notes or other similar instruments, and any past due interest, fees
and charges relating thereto, (ii) payable under profit payment agreements or in
respect of obligations to redeem, repurchase or exchange any securities of such
Person or to pay dividends in respect of any Capital Stock, (iii) with respect
to letters of credit issued for such Person's account, (iv) to pay the deferred
purchase price of property or services, except accounts payable and accrued
expenses arising in the ordinary course of business or (v) in respect of Capital
Leases; (b) all Contingent Obligations of such Person; (c) all Indebtedness,
obligations or other liabilities of such person or others secured by a Lien on
any property of such Person, whether or not such Indebtedness, obligations or
liabilities are assumed by such Person, all as of such time; and (d) all
Indebtedness, obligations or other liabilities of such Person in respect of
Hedging Contracts, net of liabilities owed to such Person by the counterparties
thereon.
"Intangible Assets" means assets of the Borrower or any Subsidiary that are
classified as "intangible assets" in accordance with GAAP.
"Intercompany Debt" means any Indebtedness of any Subsidiary that is owed
to any Wholly-Owned Subsidiary or the Borrower.
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"Interest Expense" means, for any period, consolidated interest expense of
the Borrower and its Subsidiaries, determined in accordance with GAAP, including
Fees and the portion of any Capital Lease obligations allocable to interest
expense.
"Interest Period" means, with respect to each LIBOR Loan, the period
commencing on the date specified in the related Notice of Borrowing or Notice of
Conversion/Continuation (or telephonic notice in lieu thereof) and ending on the
numerically corresponding day in the calendar month that is one, two, three or
six months thereafter, as the Borrower may elect pursuant to Section 2.1 or
Section 2.4; provided that (i) in the case of immediately successive Interest
Periods, the succeeding Interest Period shall commence on the day on which the
preceding Interest Period expires; (ii) any Interest Period (A) that would
otherwise end on a day that is not a Business Day shall be extended to the next
succeeding Business Day, unless such succeeding Business Day falls in another
calendar month, in which case such Interest Period shall end on the next
preceding Business Day or (B) that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the last
Business Day of the calendar month at the end of such Interest Period; (iii) the
Borrower may not select an Interest Period with respect to any portion of the
principal of the Term Loan which extends beyond a date on which the Borrower is
required to make a scheduled payment of such portion of principal; and (iv) no
Interest Period for the Term Loan shall end after the Maturity Date.
"Investment" means, with respect to any Person, (i) any direct or indirect
purchase or other acquisition by that Person of Capital Stock or securities, or
any beneficial interest in Capital Stock or other securities, of any other
Person, any partnership (whether general or limited) or limited liability
company interest in any other Person, or all or any substantial part of the
business or assets of any other Person, and (ii) any direct or indirect loan,
advance or capital contribution by that Person to any other Person, including
all Indebtedness and accounts receivable from that other Person that are not
current assets or did not arise from sales to that other Person in the ordinary
course of business. The amount of any Investment shall be the original cost of
such Investment plus the cost of all additions thereto, without any adjustments
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment.
"LA Turf Club" means the Los Angeles Turf Club, Incorporated, a California
corporation and a Wholly-Owned Subsidiary of the Borrower.
"Leases" is defined in Section 3.21.
"LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) equal to a fraction, the nominator of which shall equal
Base LIBOR and the denominator of which shall equal 100% minus the LIBOR Reserve
Percentage.
"LIBOR Loan" means a loan which bears interest at a rate determined by
reference to a LIBOR as provided in Section 2.3.
"LIBOR Reserve Percentage" means the reserve percentage prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency liabilities" (as
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defined in Regulation D of the Federal Reserve Board, as amended), adjusted by
Bank for expected changes in such reserve percentage during the applicable Fixed
Rate Term.
"Lien" means any lien, mortgage, pledge, security interest, charge, or
encumbrance of any kind (including any conditional sale or other title retention
agreement or any lease in the nature thereof) and any agreement to give or
refrain from giving any lien, mortgage, pledge, security interest, charge, or
other encumbrance of any kind.
"Loan Account" is defined in Section 2.2.
"Loan Documents" means, collectively, this Agreement, the Note, the Deed of
Trust, the Borrower Pledge Agreement, the Parent Pledge Agreement, the Santa
Anita Guaranty, the Subsidiary Guaranty, the Assignment of Leases and Rents and
any other agreement, instrument or other writing executed or delivered by the
Borrower or any Subsidiary in connection herewith, and all amendments, exhibits
and schedules to any of the foregoing.
"Magna International" means Magna International Inc., a corporation
incorporated under the laws of the province of Ontario, Canada.
"Margin Regulations" means Regulations U and X of the Federal Reserve
Board, as amended from time to time.
"Margin Stock" means "margin stock" as defined in the Margin Regulations.
"Material Adverse Effect" or "Material Adverse Change" means the occurrence
of an event or events, or the existence of facts or circumstances, that has or
have a material adverse effect on, or result in a material adverse change in, as
the case may be, any one or more of the following:
(A) the ability of the Borrower or of any Subsidiary to conduct a
Racetrack Business at the Track; or
(B) the ability of the Borrower and its Subsidiaries to perform their
respective obligations under the Loan Documents; or
(C) the validity, legality or enforceability of any Loan Document, any
material provision therein, or the rights and remedies of the Bank
thereunder; or
(D) the validity, enforceability, perfection or priority of any of the
Liens in favor of the Bank arising or created under the Loan Documents or
any of them.
"Material Adverse Effect" or "Material Adverse Change" shall also include the
occurrence of an event or events or the existence of facts or circumstances that
could reasonably be expected to adversely affect the business, assets, results
of operations, financial condition or financial prospects of the Borrower and
its Subsidiaries, taken as a whole, and thereby:
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(i) result in the incurrence by the Borrower or a Subsidiary of a
liability or liabilities, or require an expenditure or expenditures, in an
aggregate amount in excess of $2,000,000;
(ii) impair or diminish the value of any asset or assets of the
Borrower or a Subsidiary in an aggregate amount in excess of $2,000,000; or
(iii) reduce the actual or projected operating revenue or cash flow in
the Fiscal Year in which such event occurs, or in which such facts or
circumstances occur, or in the next succeeding Fiscal Year, by 10% or more
in relation to the respective amounts thereof (x) in the Fiscal Year
preceding the Fiscal Year in which such event occurs, or in which such
facts or circumstances occur, or (y) reflected in the forecast most
recently delivered in respect of such Fiscal Years pursuant to Section
5.1(h) hereof.
"Material Environmental Amount" means an amount payable by the Borrower or
any of its Subsidiaries in excess of $1,500,000 in respect of any Environmental
Damage or in connection with the violation or alleged violation of, or
compliance or attempted compliance with, any Environmental Requirement.
"Maturity Date" means (i) November 30, 2002 or (ii) if provisions of
Section 2.2(b) have been satisfied, the Extended Maturity Date.
"Mortgaged Property" means the Borrower's real property located at 285 West
Huntington Drive, Arcadia, California 91066 and known as the Santa Anita Race
Track (and the surrounding land) as described more fully in the Deed of Trust.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years
was, contributed to by the Borrower or any ERISA Affiliate.
"Net Income" means, for any period, net income (or loss) after taxes of the
Borrower and its Subsidiaries on a consolidated basis for such period determined
in accordance with GAAP.
"Note" means a Term Loan Promissory Note made by the Borrower payable to
the order of the Bank in substantially the form of Exhibit A, as amended from
time to time.
"Notice of Borrowing" is defined in Section 2.1.
"Notice of Conversion/Continuation" is defined in Section 2.4.
"Oak Tree" means Oak Tree Racing Association, a California non-profit
corporation.
"Obligations" means all present and future obligations and liabilities of
the Borrower or any of its Subsidiaries of every type and description arising
under or in connection with the Loan Documents due or to become due to the Bank
or any Person entitled to indemnification under the Loan Documents, or any of
their respective successors, transferees or assigns, whether for principal,
interest, letter of credit or other reimbursement obligations, cash collateral
cover, Fees, expenses, indemnities or other amounts (including attorneys' fees
and expenses).
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"Operating Lease" means, as applied to any Person, any lease of any
property (whether real, personal, or mixed) under which such Person is the
lessee and that is not capitalized on the balance sheet of such Person.
"Parent" means MI Entertainment Corp., a Delaware corporation.
"Parent-Funded Capital Expenditures" means Capital Expenditures funded
directly out of the proceeds of issuance by Borrower of Subordinated Debt to the
Parent or by the purchase by the Parent of common Capital Stock of the Borrower
or by a contribution made by the Parent to the capital of the Borrower.
"Parent Pledge Agreement" means the Pledge Agreement between the Parent and
the Bank in substantially the form of Exhibit C, as amended from time to time.
"PBGC" means the Pension Benefit Guaranty Corporation and any Person
succeeding to the functions thereof.
"Permitted Acquisition" means any acquisition by the Borrower of assets
from, or shares or other equity interests in, any Person, provided that: (i) at
the time thereof and immediately after giving effect thereto, no Default or
Event of Default shall have occurred and be continuing; (ii) all transactions
related thereto shall be consummated in accordance with Applicable Laws; (iii)
in the case of any acquisition of shares or other equity interests in any
Person, such acquisition is an acquisition of 100% of the shares or other equity
interests of such Person; (iv) all actions required to be taken, if any, with
respect to any acquired or newly formed Subsidiary under Section 5.8 shall have
been taken or shall be simultaneously taken; (v) such assets, shares or other
equity interests pertain to a line of business in which the Borrower or any of
its Subsidiaries is engaged on the date hereof or as contemplated in the
business plan delivered to the Bank pursuant to Section 4.1; (vi) after giving
effect to such acquisition, the Borrower shall be in compliance, on a pro forma
basis, with the covenants set forth in Sections 6.17 and 6.18, as if such
acquisition had occurred on the first day of the relevant period; and (vii) the
aggregate total consideration (including cash purchase price, deferred or
financed purchase price (including the maximum amount of any earn-out
obligations) and assumed liabilities) for Permitted Acquisitions consummated in
any Fiscal Year shall not exceed $10,000,000.
"Permitted Liens" means, with respect to any asset, the Liens (if any)
permitted to exist on such asset under Section 6.2.
"Person" means an individual, a corporation, a partnership, a limited
liability company, a trust, an unincorporated organization or any other entity
or organization, including a government or any agency or political subdivision
thereof.
"Plan" means an employee benefit plan defined in Section 3(3) of ERISA in
respect of which the Borrower or any ERISA Affiliate is, or within the
immediately preceding six years was, an "employer" as defined in Section 3(5) of
ERISA.
"Prime Rate" means at any time the rate of interest most recently announced
within the Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of
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the Bank's base rates and serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto, and is
evidenced by the recording thereof in such internal publication or publications
as the Bank may designate. Each change in the rate of interest shall become
effective on the date each Prime Rate change is announced within the Bank.
"Prime Rate Loan" means a loan which bears interest at a rate determined by
reference to the Prime Rate.
"Racetrack Business" means the operation of the Track and all horseracing,
gaming, entertainment, and other activities associated therewith in a manner
consistent with past practices of the Track.
"Racing Day" means any day with respect to which horseracing and associated
gaming, entertainment, and other associated activities have been authorized to
be conducted at the Track pursuant to a valid Racing License.
"Racing License" means a license or permit issued by the California Horse
Racing Board, or such other relevant Governmental Authority, pursuant to which
the licensee or permitee is authorized to hold horseracing and related events on
a specified number of days during any calendar year at a specified location.
"Regulation D" means Regulation D of the Federal Reserve Board, as amended
from time to time.
"Regulatory Change" means (i) the adoption or becoming effective after the
date hereof of any treaty, law, rule or regulation, (ii) any change in any such
treaty, law, rule or regulation (including Regulation D), or any change in the
administration or enforcement thereof, by any Governmental Authority, central
bank or other monetary authority charged with the interpretation or
administration thereof, in each case after the date hereof, or (iii) compliance
by the Bank (or, in the case of capital adequacy requirements, any holding
company of the Bank) with, any interpretation, directive, request, order or
decree (whether or not having the force of law) of any such Governmental
Authority, central bank or other monetary authority issued or made after the
date hereof.
"Reportable Event" means any of the events described in Section 4043 of
ERISA.
"Restricted Payment" means (i) any dividend, distribution or payment,
direct or indirect, to or for the benefit of any holder of any Capital Stock of
the Borrower now or hereafter outstanding, except (a) a dividend or other
distribution payable solely in shares of the same class of Capital Stock of the
Person paying such dividend or making such distribution, (b) the issuance of
Capital Stock upon the exercise of outstanding warrants, options or other
rights, or (ii) any redemption, retirement, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, of any Capital
Stock of the Borrower now or hereafter outstanding, or (iii) any payment of
principal of or interest on, or any payment made to redeem, repurchase, defease
(by way either of in-substance or legal defeasance) or otherwise acquire or
retire for value, (a) any Subordinated Debt of the Borrower or (b) any
Contingent Obligation with respect to any such
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Subordinated Debt, except, so long as no Default or Event of Default has
occurred and is continuing, any payment of accrued interest when due in
accordance with the terms of the documents or instruments governing or
evidencing such Subordinated Debt, or (iv) any payment of principal of or
interest on any Indebtedness or other obligation (other than Subordinated Debt
and Intercompany Debt) owing by the Borrower or any Subsidiary to the Parent or
any other Affiliate of the Borrower.
"Revolving Credit Agreement" means the Revolving Credit Agreement dated as
of the date hereof between LA Turf Club and the Bank.
"Revolving Credit Documents" means the "Loan Documents" as such term is
defined in the Revolving Credit Agreement.
"Sale-Leaseback Transaction" means any arrangement with any Person
providing for the leasing by the Borrower of any real or personal property that,
or of any property similar to and used for substantially the same purposes as
any other property that, has been or is to be sold or otherwise transferred by
the Borrower to such Person with the intention of entering into such a lease.
"SEC" means the United States Securities and Exchange Commission, and any
successor.
"Senior Officer" means, with respect to the Borrower, the Chairman of the
Board of Directors, the President, the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer, the Treasurer or any Vice
President.
"Subordinated Debt" means any Indebtedness of the Borrower existing on the
date hereof or hereafter incurred that is subordinated to the Obligations on the
Approved Subordination Terms or on other terms approved in advance in writing by
the Bank and which (i) is unsecured, (ii) has an effective interest rate not
greater than the interest rate that is applicable to the Term Loan at the time
such Indebtedness is incurred (if such Indebtedness bears interest at a fixed
rate) or from time to time (if such Indebtedness bears interest at a floating
rate), (iii) has a stated maturity date no earlier than one year following the
Extended Maturity Date, (iv) contains no financial or operating covenants, (v)
does not require any payment of principal prior to the Extended Maturity Date,
and (vi) (x) is governed and evidenced only by a promissory note in
substantially the form of Exhibit I hereto or (y) has other terms and provisions
that are reasonably satisfactory to the Bank.
"Subsidiary" means, with respect to any Person, (i) any other Person of
which more than 50% of the total voting power of the Capital Stock entitled to
vote in the election of the board of directors (or other Persons performing
similar functions) is at the time directly or indirectly owned by such first
Person and (ii) any other Person the accounts of which would be consolidated
with those of such Person in a consolidated balance sheet of such Person
prepared in accordance with GAAP. Unless otherwise indicated, "Subsidiary"
refers to a Subsidiary of the Borrower.
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"Subsidiary Guaranty" means the guaranty of the Obligations by LA Turf Club
and each other Subsidiary of the Borrower, in substantially form of Exhibit D,
as amended from time to time.
"Tangible Net Worth" means, at any date of determination, the consolidated
stockholders' equity of the Borrower and its Subsidiaries, as determined in
accordance with GAAP, as of such date plus the outstanding principal amount of
the Borrower's Subordinated Debt at such date minus the aggregate book value of
the Intangible Assets of the Borrower and its Subsidiaries as of such date.
"Taxes" means any present or future income, stamp and other taxes, charges,
fees, levies, duties, imposts, withholdings or other assessments, together with
any interest and penalties, additions to tax and additional amounts imposed by
any federal, state, local or foreign taxing authority upon any Person.
"Termination Event" means (i) a Reportable Event with respect to any
Benefit Plan; (ii) the withdrawal of the Borrower or any ERISA Affiliate from a
Benefit Plan during a plan year in which the Borrower or such ERISA Affiliate
was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or the
cessation of operations which results in the termination of employment of at
least 20% of Benefit Plan participants who are employees of the Borrower or any
ERISA Affiliate; (iii) the imposition of an obligation on the Borrower or any
ERISA Affiliate under Section 4041 of ERISA to provide affected parties written
notice of intent to terminate a Benefit Plan in a distress termination described
in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to
terminate a Benefit Plan; (v) any event or condition which could reasonably
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan; or (vi) the partial or
complete withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer
Plan.
"Track" means the race track located on the Mortgaged Property and commonly
known as the Santa Anita Race Track.
"Uniform Commercial Code" means the Uniform Commercial Code as enacted in
the State of California, as it may be amended from time to time.
"Wholly-Owned" means, with respect to any Subsidiary, that all the Capital
Stock (except for directors' qualifying shares) of such Subsidiary is directly
or indirectly owned by the Borrower.
SECTION 1.2. RELATED MATTERS.
(a) Construction. Unless the context of this Agreement clearly requires
------------
otherwise, references to the plural include the singular, the singular includes
the plural, the part includes the whole, "including" is not limiting, and "or"
has the inclusive meaning represented by the phrase "and/or." The words
"hereof," "herein," "hereby," "hereunder" and similar terms in this Agreement
refer to this Agreement as a whole (including the Preamble, the Recitals, the
Schedules and the Exhibits) and not to any particular provision of this
Agreement. Article, section, subsection, exhibit, schedule, recital and
preamble references in this Agreement are to
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this Agreement unless otherwise specified. References in this Agreement to any
agreement, other document or law "as amended" or "as amended from time to time,"
or to amendments of any document or law, shall include any amendments,
supplements, replacements, renewals, waivers or other modifications not
prohibited by the Loan Documents. References in this Agreement to any law (or
any part thereof) include any rules and regulations promulgated thereunder (or
with respect to such part) by the relevant Governmental Authority, as amended
from time to time.
(b) Determinations. Any determination or calculation contemplated by this
--------------
Agreement that is made by the Bank shall be final and conclusive and binding
upon the Borrower in the absence of manifest error. References in this
Agreement to any "determination" by the Bank include good faith estimates by the
Bank (in the case of quantitative determinations), and good faith beliefs by the
Bank (in the case of qualitative determinations).
(c) Accounting Terms and Determinations. Unless otherwise specified herein
-----------------------------------
(and whether or not expressly stated), all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with GAAP, as in effect from time to time; provided, however, that if
there occurs after the date hereof any change in GAAP that affects in any
respect the calculation of any covenant contained in Article VI, the Bank and
the Borrower shall negotiate in good faith amendments to the provisions of this
Agreement that relate to the calculation of such covenant with the intent of
having the respective positions of the Bank and the Borrower after such change
in GAAP conform as nearly as possible to their respective positions as of the
date of this Agreement and, until any such amendments have been agreed upon, the
Borrower's compliance with the covenants in Article VI shall be determined as if
no such change in GAAP has occurred.
ARTICLE II
THE LOAN
SECTION 2.1. TERM LOAN.
(a) Amount of Term Loan. Subject to the terms and conditions set forth
-------------------
herein, the Bank agrees to make, in a single borrowing made on or prior to the
Commitment Termination Date (the date of such borrowing being referred to herein
as the "Funding Date"), a term loan (the "Term Loan"), in Dollars, to the
Borrower in a principal amount not in excess of the Commitment.
(b) Notice of Borrowing in respect of Term Loan. The Borrower shall
-------------------------------------------
deliver to the Bank a Notice of Borrowing (a "Notice of Borrowing"), signed by
the Borrower, on the Funding Date (or if the Term Loan, or any portion thereof,
is to be drawn as a LIBOR Loan on the Funding Date, at least three Business Days
prior to the Funding Date). Such Notice of Borrowing shall specify (i) the
aggregate amount of the Term Loan, (ii) instructions for the disbursement of the
proceeds of the Term Loan, (iii) whether the Term Loan, or any portion thereof,
is to be a Prime Rate Loan or a LIBOR Loan, and (iv) if the Term Loan, or any
portion thereof, is to be one or more LIBOR Loans, the length of the initial
Interest Period or Interest
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Periods with respect thereto, provided that (x) each LIBOR Loan shall be
incurred in a minimum principal amount of $2,000,000 and integral multiples of
$1,000,000 in excess thereof and (y) there shall be no more that six (6)
Interest Periods created on the Funding Date. Any Notice of Borrowing given
pursuant to this Section shall be irrevocable.
(c) Making of Term Loan. Subject to the fulfillment of the conditions
-------------------
precedent set forth in Section 4.1, on the Funding Date the Bank shall make the
proceeds of the Term Loan available to the Borrower or shall disburse such
proceeds in accordance with the Borrower's disbursement instructions set forth
in such Notice of Borrowing.
(d) Use of Proceeds of Term Loan. The proceeds of the Term Loan may be
----------------------------
used solely for the following purposes: (i) to make distributions to the Parent
in respect of the Borrower's Capital Stock, (ii) to repay in whole or in part
any Indebtedness of the Borrower owed to the Parent on the Funding Date, (iii)
to pay transaction costs, including any Fees, of the Borrower incurred with
respect to this Agreement and the other Loan Documents, (iv) for working
capital, and (v) for general corporate purposes in the ordinary course of the
Borrower's business (including to make Permitted Acquisitions); provided that
the aggregate amount of (x) any distributions in respect of the Borrower's
Capital Stock permitted under clause (i) above and (y) any repayments of
Indebtedness of the Borrower to Parent pursuant to clause (ii) above shall not
exceed the amount thereof permitted under Section 6.3.
SECTION 2.2. REPAYMENT OF TERM LOAN; EVIDENCE OF INDEBTEDNESS.
(a) Repayment of the Term Loan. The Borrower shall make monthly principal
--------------------------
payments in respect to the Term Loan on the last day of each calendar month in
installments of Three Hundred Fifty Thousand Dollars ($350,000) each, commencing
on the last day of the calendar month in which the Funding Date occurs, and
continuing up to an including the calendar month immediately prior to the
Maturity Date, with a final installment consisting of all the remaining unpaid
principal due and payable in full on the Maturity Date.
(b) Extension of Maturity Date. The Maturity Date may be extended to the
--------------------------
Extended Maturity Date at the election of the Borrower, subject to the following
conditions (the first date upon which all such conditions have been satisfied
being referred to herein as the "Extension Date"):
(i) on any Business Day between December 31, 2000 and December 31, 2001,
the Borrower shall have delivered to the Bank a notice that the Borrower wishes
to extend the Maturity Date to the Extended Maturity Date (an "Extension
Notice");
(ii) following the receipt of such Extension Notice, the Bank shall conduct
an appraisal of the Mortgaged Property and, if the Bank is satisfied, in its
reasonable judgment, that the Appraised Value of the Mortgaged Property at such
time is equal to or greater than 200% of the outstanding principal amount of the
Term Loan at such time, the Bank shall so notify the Borrower;
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(iii) no Default or Event of Default shall have occurred and be continuing
at the time of the Borrower's Extension Notice or on the Extension Date;
provided, however, that, notwithstanding the occurrence of the Extension Date,
the extension of the maturity of the Term Loan to the Extended Maturity Date
shall not be effective until the Borrower pays to the Bank the fee provided in,
and reimburses to the Bank its expenses required by, Section 2.5(b).
(c) Prepayments. In addition to the scheduled payments on the Term Loan,
-----------
the Borrower may make the voluntary prepayments of principal of the Term Loan
pursuant to Section 2.6 and shall make the mandatory prepayments of principal of
the Term Loan prescribed in the Deed of Trust. Any amount paid in respect of
the Term Loan may not be reborrowed.
(d) Note. The Borrower shall execute and deliver to the Bank on the
----
Closing Date the Note evidencing the Term Loan.
(e) Loan Account. The Bank shall maintain in accordance with its usual
------------
practice an account or accounts (a "Loan Account") evidencing the Indebtedness
of the Borrower to the Bank resulting from the Term Loan owing to the Bank from
time to time, including the amount of principal and interest payable and paid to
the Bank from time to time hereunder and under the Note.
SECTION 2.3. INTEREST; INTEREST PAYMENTS.
(a) Interest. The Term Loan shall bear interest on the unpaid principal
--------
amount thereof, from and including the Closing Date to and excluding the
Maturity Date or the date of any repayment in full thereof, at the following
rates per annum: (i) for so long as and to the extent that the Term Loan, or
any portion thereof, is a Prime Rate Loan, at the Prime Rate (as in effect from
time to time) for each day on which all or such portion of the Term Loan is a
Prime Rate Loan; and (i) for so long as and to the extent that the Term Loan, or
any portion thereof, is a LIBOR Loan, at LIBOR for each day during each Interest
Period applicable thereto plus 2.20%. When interest is determined in relation
to the Prime Rate, each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank.
(b) Interest Payments. Accrued interest shall be payable (i) in arrears on
-----------------
the last day of each calendar month, (ii) in the case of any interest accrued at
the rate specified in Section 2.3(c) below, on demand; and (iii) when the Term
Loan shall become due (whether at maturity, by reason of prepayment,
acceleration or otherwise).
(c) Default Interest. Notwithstanding the rates of interest specified in
----------------
Section 2.3(a) or elsewhere herein, if all or a portion of the principal of the
Term Loan or any interest thereon or any other amount that is due and payable
hereunder or under any other Loan Document is not paid when due (whether at
stated maturity, by acceleration or otherwise), the Borrower shall pay interest
on such overdue amount of the principal of the Term Loan, interest or other
amount owing to the Bank hereunder or under any other Loan Document, on demand
from time to time, to the extent permitted by law, (i) in the case of overdue
principal, at the rate otherwise applicable to the Term Loan plus two percent
(2%) per annum and (ii) in the case of all other
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amounts owing to the Bank, at a rate per annum equal to the Prime Rate plus two
percent (2%), in each case, from and including such date of non-payment to but
excluding the date on which such amount is paid in full (after as well as before
judgment).
(d) Computation of Interest. Interest on all Obligations shall be computed
-----------------------
on the basis of the actual number of days elapsed in the period during which
interest accrues and a year of 360 days. In computing interest on the Term
Loan, or any portion thereof, the first day of any applicable Interest Period
shall be included and the last day of such Interest Period shall be excluded.
SECTION 2.4. CONVERSION/CONTINUATION; LIBOR PROVISIONS.
(a) Conversion or Continuation. (i) The Borrower shall have the option (A)
--------------------------
at any time the Term Loan, or any portion thereof, is a Prime Rate Loan, to
convert all or any portion of the outstanding principal amount of the Term Loan,
or such portion thereof, to a LIBOR Loan; and (B) in the event that the Term
Loan, or any portion thereof, is a LIBOR Loan, on the last day of the Interest
Period applicable thereto, (1) to convert all or any portion of the outstanding
principal amount of the Term Loan, or such portion thereof, to a Prime Rate
Loan, or (2) continue the outstanding principal amount of the Term Loan, or any
portion thereof, as a LIBOR Loan; provided that (A) neither the Term Loan, nor
any portion thereof, may be continued as, or be converted into, a LIBOR Loan if
(1) the continuation of, or the conversion into, would violate any of the
provisions of this Section or (2) an Event of Default or Default would occur or
has occurred and is continuing, (B) the principal amount of the Term Loan, or
any portion thereof, continued as, or converted into, a LIBOR Loan shall be in a
minimum principal amount of $2,000,000 and integral multiples of $1,000,000 in
excess thereof and (C) at no time shall there be more than six (6) Interest
Periods in effect. If no Notice of Conversion/Continuation in respect of a
LIBOR Loan is received by the Bank in accordance with Section 2.4(a)(ii), then
such LIBOR Loan automatically should be converted into a Prime Rate Loan on the
last day of the Interest Period applicable thereto.
(ii) To continue the Term Loan, or any portion thereof, as, or convert the
Term Loan, or any portion thereof, into, a LIBOR Loan, or to convert the Term
Loan, or any portion thereof, into a Prime Rate Loan, under Section 2.4(a)(i),
the Borrower shall deliver a Notice of Conversion/Continuation (a "Notice of
Conversion/Continuation") to the Bank no later than 11:00 a.m. (Los Angeles
time) at least (x) one Business Day in the case of conversion into a Prime Rate
Loan or (y) three (3) Business Days in the case of continuation as, or
conversion into, a LIBOR Loan, in advance of the proposed
conversion/continuation date. A Notice of Conversion/Continuation shall specify
(A) the proposed conversion/continuation date (which shall be a Business Day),
(B) whether the Term Loan, or any portion thereof, shall be converted into a
Prime Rate Loan or converted into or continued as a LIBOR Loan, and (C) in the
case of a conversion into, or continuation of, a LIBOR Loan, the requested
Interest Period. In lieu of delivering a Notice of Conversion/Continuation, the
Borrower may give the Bank telephonic notice of any proposed
conversion/continuation by the time required under this Section, and such notice
shall be confirmed in writing delivered to the Bank promptly (but in no event
later than 3:00 p.m. (Los Angeles time) on the same day). Any Notice of
Conversion/Continuation for conversion to, or continuation of, the Term Loan, or
any portion thereof, (or telephonic notice in
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lieu thereof) shall be irrevocable, and the Borrower shall be bound to convert
or continue in accordance therewith.
(b) Changes; Legal Restrictions. If after the date hereof the Bank
---------------------------
determines that the adoption or implementation of or any change in or in the
interpretation or administration of any law or regulation or any guideline or
request from any central bank or other Governmental Authority or quasi-
governmental authority exercising jurisdiction, power or control over the Bank
or over banks or financial institutions generally (whether or not having the
force of law), compliance with which, in each case after the date hereof:
(i) subjects the Bank to charges (other than Taxes) of any kind in
respect of the Term Loan or changes the basis of taxation of payments to the
Bank of principal, fees, interest, or any other amount payable hereunder with
respect to LIBOR Loans; or
(ii) imposes, modifies, or holds applicable, any reserve (other than
reserves taken into account in calculating the LIBOR), special deposit,
compulsory loan, FDIC insurance or similar requirement against assets held by,
or deposits or other liabilities in or for the account of, advances or loans by,
commitments made, or other credit extended by, or any other acquisition of funds
by, the Bank;
and the result of any of the foregoing is to increase the cost to the Bank of
making, converting or continuing the Term Loan, or any portion thereof, as a
LIBOR Loan, or reduce any amount receivable thereunder; then, in such case, the
Borrower shall, within fourteen (14) days after written demand by the Bank, pay
to the Bank from time to time as specified by the Bank, such amount or amounts
as may be necessary to compensate the Bank (in the form of an increased rate of
or different method for calculating interest or otherwise) for any such
additional cost incurred or reduced amount received. Such demand shall be
accompanied by a statement as to the amount of such compensation and include a
summary of the basis for such demand (it being agreed that such summary, showing
in reasonable detail the basis for the calculation of such compensation, shall,
absent clearly demonstrable error, be final and conclusive and binding upon the
Borrower).
(c) Confirmation of LIBOR. Upon the reasonable request of the Borrower
---------------------
from time to time, the Bank shall promptly provide to the Borrower such
information with respect to the applicable LIBOR as may be so requested.
(d) Interest Rate Unascertainable, Inadequate or Unfair. In the event that
---------------------------------------------------
at least one (1) Business Day before any Interest Period in which the Term Loan,
or any portion thereof, is to be converted into, or continued as, a LIBOR Loan:
(i) the Bank determines that adequate and fair means do not exist for
ascertaining the applicable interest rates by reference to which the LIBOR then
being determined is to be fixed; or
(ii) the Bank determines that Dollar deposits in the outstanding
principal amount of the Term Loan, or such portion thereof, at such time are not
generally available in the London interbank market for a period equal to such
proposed Interest Period;
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then the Bank shall forthwith give written notice thereof to the Borrower,
whereupon (until the Bank notifies the Borrower that the circumstances giving
rise to such suspension no longer exist) the right of the Borrower to elect to
have the Term Loan, or such portion thereof, bear interest based upon the LIBOR
shall be suspended and the Term Loan, or such portion thereof, (if already a
LIBOR Loan) shall be converted into a Prime Rate Loan on the last day of the
then current Interest Period therefor.
(e) Illegality. (i) If at any time the Bank determines (which
----------
determination shall, absent manifest error, be final and conclusive and binding
upon all parties) that the conversion of the Term Loan, or any portion thereof,
into or the making or continuation of the Term Loan, or any portion thereof, as
a LIBOR Loan has become unlawful or impermissible by compliance by the Bank with
any law, governmental rule, regulation or order of any Governmental Authority
(whether or not having the force of law and whether or not failure to comply
therewith would be unlawful or would result in costs or penalties), then, and in
any such event, the Bank may give notice of that determination, in writing, to
the Borrower.
(ii) When notice is given by the Bank under this Section, the
Borrower's right to request from the Bank and the Bank's obligation, if any, to
convert the Term Loan, or any portion thereof, into, or make or continue the
Term Loan, or such portion thereof, as, a LIBOR Loan shall be immediately
suspended, and, if the Term Loan, or any portion thereof, is then a LIBOR Loan,
the Borrower shall immediately, or if permitted by applicable law, no later than
the date permitted thereby, upon at least one (1) Business Day's prior written
notice to the Bank, convert the Term Loan, or such portion thereof, into a Prime
Rate Loan.
(iii) If at any time after the Bank gives notice under this Section
the Bank determines that it may lawfully make LIBOR Loans, the Bank shall
promptly give notice of that determination, in writing, to the Borrower. The
Borrower's right to request, and the Bank's obligation, if any, to convert the
Term Loan, or any portion thereof, into, or make or continue the Term Loan, or
any portion thereof, as, a LIBOR Loan shall thereupon be restored.
(f) Compensation. In addition to all amounts required to be paid by the
------------
Borrower pursuant to this Agreement, the Borrower shall compensate the Bank,
within fourteen (14) days after written demand by the Bank, for all losses,
expenses and liabilities (including, without limitation, any loss or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by the Bank to fund or maintain the Term Loan, or any portion thereof,
as a LIBOR Loan) which the Bank may sustain (i) if for any reason the borrowing
of the Term Loan, any conversion of the Term Loan, or any portion thereof, into,
or continuation of the Term Loan, or any portion thereof, as, a LIBOR Loan does
not occur on a date specified therefor in a Notice of Borrowing or a Notice of
Conversion/Continuation given by the Borrower or in a telephonic request by it
for borrowing or conversion/continuation or a successive Interest Period does
not commence after notice therefor is given pursuant to this Section 2.4,
including, without limitation, pursuant to Section 2.4(d), (ii) if for any
reason a LIBOR Loan is prepaid (including, without limitation, pursuant to
Section 2.6) on a date that is not the last day of the applicable Interest
Period, (iii) as a consequence of a required conversion of the Term Loan, or any
portion thereof, when it is a LIBOR Loan to a Prime Rate Loan as a result of any
of the events indicated in Section 2.4(d) or (e), or (iv) as a consequence of
any failure by the Borrower to repay the
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Term Loan, or any portion thereof, when it is a LIBOR Loan when required by the
terms hereof. The Bank shall deliver to the Borrower concurrently with such
demand a written statement in reasonable detail as to such losses, expenses and
liabilities, and this statement shall be conclusive as to the amount of
compensation due to the Bank, absent manifest error.
SECTION 2.5. FEES.
(a) Commitment Fee. The Borrower shall pay to the Bank on the Closing Date
--------------
a commitment fee equal to one-quarter of one percent (0.25%) of the Commitment
plus all out-of-pocket costs and expenses of the Bank (including, without
limitation, (i) disbursements and reasonable fees of outside legal counsel to
the Bank and (ii) expenses incurred by the Bank in connection with any appraisal
of the Mortgaged Property and the review of existing environmental reports with
respect thereto) incurred in connection with this Agreement.
(b) Maturity Extension Fee. In the event that the Maturity Date is
----------------------
extended to the Extended Maturity Date pursuant to Section 2.2(b), the Borrower
shall pay to the Bank on the Extension Date, a maturity extension fee equal to
fifteen one-hundredths of one percent (0.15%) of the outstanding principal
amount of the Term Loan at such time plus any and all out-of-pocket costs and
expenses of the Bank (including, without limitation, (i) disbursements and
reasonable legal fees of outside legal counsel to the Bank and (ii) expenses
incurred by the Bank in connection with any appraisal of the Mortgaged Property
initiated pursuant to such extension of the Maturity Date, provided that such
appraisal costs shall not exceed $5,000) incurred by the Bank in connection with
the extension of the Maturity Date.
(c) Calculation and Payment of Fees. All Fees shall be payable in addition
-------------------------------
to, and not in lieu of, interest, expense reimbursements, indemnification and
other Obligations. Fees shall be payable to the Bank's Account in accordance
with Section 2.7 except as otherwise provided by the Bank in writing. All Fees
shall be fully earned and nonrefundable when paid (other than with respect to
the $50,000 advance paid by the Borrower to the Bank to be applied toward
expenses incurred by the Bank in connection herewith, which, to the extent that
such advance exceeds the Bank's expenses hereunder, the remainder shall be
applied toward the Commitment Fee).
SECTION 2.6. PREPAYMENTS.
(a) Voluntary Prepayments. Upon at least two (2) Business Days' notice to
---------------------
the Bank, the Borrower may prepay the Term Loan in whole or in part if the Term
Loan is then a Prime Rate Loan. If the Term Loan, or any portion thereof, is
then a LIBOR Loan, the Term Loan, or any such portion thereof, may be prepaid
(A) in whole or in part on the expiration date of the then applicable Interest
Period and (B) on any other Business Day upon at least three (3) Business Days'
prior written notice to the Bank and only upon payment of the amounts described
in Section 2.4(f). Unless the aggregate outstanding principal balance of the
Term Loan is to be prepaid in full, voluntary prepayments of the Term Loan shall
be in an aggregate minimum amount of $2,000,000 and integral multiples of
$1,000,000 in excess of that amount. Any notice of prepayment given to the Bank
under this Section 2.6 shall specify, in accordance with the terms hereof, the
date (which shall be a Business Day) of prepayment, and the aggregate principal
amount of the prepayment. When notice of prepayment is delivered as provided
herein,
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the principal amount of the Term Loan specified in the notice shall become due
and payable on the prepayment date specified in such notice.
(b) Mandatory Prepayments. The Borrower shall make prepayments of the Term
---------------------
Loan required by and in accordance with the terms of the Deed of Trust.
(c) Application of Prepayments. Prepayments of any portion of the
--------------------------
principal of the Term Loan made pursuant to this Section shall be applied to
scheduled installment payments of principal and the principal amount due on the
Maturity Date in inverse order of maturity thereof.
SECTION 2.7. MANNER OF PAYMENT.
(a) Except as otherwise expressly provided, the Borrower shall make each
payment under the Loan Documents to the Bank in Dollars and in immediately
available funds, without any deduction whatsoever, including any deduction for
any setoff, recoupment, counterclaim or Taxes, by depositing such payment in the
account specified by the Bank from time to time not later than 10:00 a.m. (Los
Angeles time) on the due date thereof. Any payments received after 10:00 a.m.
(Los Angeles time) on any Business Day shall be deemed received on the next
succeeding Business Day.
(b) Payments on Non-Business Days. Whenever any payment to be made
-----------------------------
hereunder shall be due on a day that is not a Business Day, such payment shall
instead be made on the next succeeding Business Day, together with interest
accrued during the period of such extension.
(c) Application of Payments. (i) Subject to the provisions of paragraph
-----------------------
(ii) below and except as otherwise provided herein, all payments in respect of
the Term Loan shall be applied to scheduled payments of interest on and
repayments of principal of the Term Loan on the due date thereof.
(ii) After the occurrence and during the continuance of an Event of
Default, the Bank may, and shall upon the acceleration of the Obligations, apply
all payments in respect of any Obligations and all proceeds of Collateral in the
following order:
(A) first, to pay Obligations in respect of any expense
-----
reimbursements, indemnities and other similar amounts then due to the Bank,
including without limitation, any amounts in respect of cash management
services provided to the Borrower and its Subsidiaries by the Bank in
connection with this Agreement;
(B) second, to pay Obligations in respect of any Fees then due to the
------
Bank;
(C) third, to pay interest due in respect of the Term Loan; and
-----
(D) fourth, to pay or prepay principal outstanding on the Term Loan.
------
The order of priority set forth above may at any time and from time to time
be changed by the Bank without necessity of notice to or consent of or approval
by the Borrower or any other Person.
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(d) Payments Set Aside. To the extent the Bank receives payment of any
------------------
amount under the Loan Documents, whether by way of payment by the Borrower,
setoff, as proceeds of Collateral or otherwise, which payment is subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, receiver or any other party under any bankruptcy law,
other law or equitable cause, in whole or in part, then, to the extent of such
payment received, the Obligations or part thereof intended to be satisfied
thereby shall be revived and continue in full force and effect, together with
all Collateral security therefor, as if such payment had not been received by
the Bank.
(e) The Borrower authorizes the Bank to collect all principal, interest and
fees due under this Agreement and any other Loan Document by charging Borrower's
demand deposit account number 4375-672300 with the Bank, or any other demand
deposit account maintained by the Borrower with the Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by the Borrower.
SECTION 2.8. REGULATORY CHANGES.
(a) Capital Costs. If a Regulatory Change regarding capital adequacy
-------------
(including the adoption or becoming effective of any treaty, law, rule,
regulation or guideline adopted pursuant to or arising out of the July 1988
report of the Basle Committee on Banking Regulations and Supervisory Practices
entitled "International Convergence of Capital Measurement and Capital
Standards") has or would have the effect of reducing the rate of return on the
capital of or maintained by the Bank or any company controlling the Bank as a
consequence of the Term Loan or other obligations hereunder and other
commitments of this type to a level below that which the Bank or company could
have achieved but for such Regulatory Change (taking into account the Bank's or
company's policies with respect to capital adequacy), then the Borrower shall
from time to time pay to the Bank, within 10 days after request by the Bank,
such additional amounts as the Bank determines to be sufficient to compensate
the Bank or company for such reduction in return, to the extent the Bank or such
company determines such reduction to be attributable to the existence, issuance
or maintenance of the Term Loan or other obligations for the account of the
Borrower. Such demand shall be accompanied by a statement as to the amount of
such compensation and include a summary of the basis for such demand (it being
agreed that such summary, showing in reasonable detail the basis for the
calculation of such compensation, shall, absent clearly demonstrable error, be
final and conclusive and binding upon the Borrower).
(b) Taxes. (i) If the Borrower is required by Applicable Law to make any
-----
deduction or withholding in respect of any Taxes (other than Excluded Taxes)
from any amount payable under any Loan Document to or for the account of the
Bank, the Borrower shall pay to or for the account of the Bank, on the date such
amount is payable, such additional amounts as the Bank reasonably determines may
be necessary so that the net amounts received by it or for its account, in the
aggregate, after all applicable deductions or withholdings, shall equal the
amount that the Bank would have been entitled to receive if no deductions or
withholdings were made. "Excluded Taxes" means, with respect to any payment to
the Bank, any taxes imposed on or measured by the overall net income (including
a franchise tax based on net income) of the Bank
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or its agent's office by the jurisdiction in which it is incorporated, maintains
its principal executive office or in which such agent's office is located. If
the Borrower shall deduct or withhold any Taxes from any payments under the Loan
Documents, it shall provide to the Bank (i) a statement setting forth the amount
and type of Taxes so deducted or withheld, the applicable rate and any other
information or documentation that the Bank may reasonably request and (ii) as
promptly as possible after payment is made to the relevant Governmental
Authority, a certified copy of any original official receipt received by the
Borrower showing payment.
(ii) If the Bank is required by law to make any payment on account of Taxes
(other than Excluded Taxes) on or in relation to any sum received or receivable
by it under any Loan Document, or any liability for Taxes (other than Excluded
Taxes) in respect of any such payment is imposed, levied or assessed against the
Bank, then the Borrower shall pay when due such additional amounts as the Bank
reasonably determines to be necessary so that the amount received by it, less
any such Taxes paid, imposed, levied or assessed, including any Taxes (other
than Excluded Taxes) imposed on such additional amounts, shall equal the amount
that the Bank would have been entitled to retain in the absence of the payment,
imposition, levy or assessment of such Taxes.
SECTION 2.9. COLLATERAL.
As security for all the Obligations, (a) the Borrower shall (i) grant to
the Bank a first priority Lien on the Mortgaged Property pursuant to the Deed of
Trust and (ii) grant to the Bank a first priority Lien on all the Capital Stock
of each of its Subsidiaries pursuant to the Borrower Pledge Agreement and (b)
Parent shall grant to the Bank a first priority Lien on all of the Capital Stock
of the Borrower pursuant to the Parent Pledge Agreement.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all out-of-pocket
costs and expenses incurred by Bank in connection with any of the foregoing
security, including without limitation, filing and recording fees and out-of-
pocket costs of appraisals, audits and title insurance.
SECTION 2.10. GUARANTIES.
The Obligations of the Borrower to the Bank shall be guaranteed in full by
LA Turf Club as evidenced by and subject to the terms of the Subsidiary
Guaranty.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower makes the following representations and warranties to the
Bank, which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of the Obligations:
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SECTION 3.1. ORGANIZATION, POWERS AND GOOD STANDING.
The Borrower and each of its Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, and has all requisite corporate power and authority and the legal
right to own and operate its properties, to carry on its business as heretofore
conducted and as proposed to be conducted, to enter into the Loan Documents to
which it is a party and to carry out the transactions contemplated thereby. The
Borrower and each of its Subsidiaries is duly qualified to do business and in
good standing in each jurisdiction in which it owns or operates any material
property or conducts any business or in which it otherwise is required by law to
be so qualified, except any jurisdictions where any failure to be so qualified,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
SECTION 3.2. AUTHORIZATION, BINDING EFFECT, NO CONFLICTS.
(a) Authorization. The execution, delivery and performance by the Borrower
-------------
and each of its Subsidiaries of each Loan Document to which they are a party
have been duly authorized by all necessary corporate or other action on the part
of such Person. Each such Loan Document has been duly executed and delivered by
the Borrower and each of its Subsidiaries party thereto and is the legal, valid
and binding obligation of such Person, enforceable against it in accordance with
its terms, except as enforcement may be limited by equitable principles and by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally.
(b) No Conflict. The execution, delivery and performance by any of the
-----------
Borrower or its Subsidiaries of each Loan Document to which they are a party,
and the consummation of the transactions contemplated thereby, do not (a)
violate any provision of the charter or other organizational documents of such
Person, (b) except for consents that have been obtained and are in full force
and effect, conflict with, result in a breach of, or constitute (or, with the
giving of notice or lapse of time or both, would constitute) a default under, or
require the approval or consent of any Person pursuant to, any Contractual
Obligation of the Borrower or any of its Subsidiaries, or violate any Applicable
Law binding on the Borrower or any of its Subsidiaries, except where such
violation, conflict, breach, or default could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect, or (c)
result in the creation or imposition of any Lien upon any asset of the Borrower
or any of its Subsidiaries, or any income or profits therefrom, except for Liens
in favor of the Bank under the Loan Documents.
(c) Governmental Approvals. Except for filings and recordings in
----------------------
connection with the perfection of Liens created by the Loan Documents, no
Governmental Approval is or will be required in connection with the execution,
delivery and performance by the Borrower or any of its Subsidiaries of any Loan
Document to which it is a party or the transactions contemplated thereby or to
ensure the legality, validity or enforceability thereof.
SECTION 3.3. SUBSIDIARIES; CAPITAL STOCK.
(a) Subsidiaries. Each Subsidiary of the Borrower, the authorized and
------------
issued Capital Stock of each such Subsidiary and the record and beneficial owner
of such Capital Stock are
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identified in Schedule 3.3, as amended from time to time. All of the outstanding
shares of Capital Stock of each of the Subsidiaries of the Borrower have been
duly authorized and validly issued, are fully paid and nonassessable and are
free and clear of any Liens. Except as disclosed in Schedule 3.3, as amended
from time to time, there are not outstanding any securities convertible into or
exchangeable for shares of Capital Stock of any of the Subsidiaries of the
Borrower, or any options, warrants or other rights to purchase any such Capital
Stock, or any commitments of any kind for the issuance of additional shares of
such Capital Stock or any such convertible or exchangeable securities or
options, warrants or rights to purchase such Capital Stock. Except as disclosed
in Schedule 3.3, neither the Borrower nor any of its Subsidiaries is a party to
any agreement with respect to the issuance, voting or sale of issued or unissued
shares of Capital Stock of any Subsidiary.
(b) Borrower Capital Stock. As of the Closing Date, (i) the authorized and
----------------------
outstanding Capital Stock of the Borrower is as set forth in Schedule 3.3 and
(ii) all outstanding shares of such Capital Stock are duly authorized and
validly issued, are fully paid and nonassessable and are owned beneficially and
of record as set forth in Schedule 3.3, free and clear of all Liens.
SECTION 3.4. LITIGATION.
Except as disclosed in Schedule 3.4, there are no actions, suits or
proceedings pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower, any of its Subsidiaries or any of their properties that
(a) if adversely determined, individually or in the aggregate, could have a
Material Adverse Effect, or (b) draws into question the validity, legality or
enforceability of any Loan Document or any transaction contemplated thereby.
SECTION 3.5. CORRECTNESS OF FINANCIAL STATEMENT.
The consolidated financial statement of the Borrower and its Subsidiaries
dated December 31, 1998, a true copy of which has been delivered by the Borrower
to the Bank prior to the date hereof, (a) is complete and correct and presents
fairly the financial condition of the Borrower and its Subsidiaries on a
consolidated basis and (b) has been prepared in accordance with GAAP
consistently applied. Since the date of such financial statement there has been
no Material Adverse Change in the financial condition of the Borrower, nor has
Borrower mortgaged, pledged, granted a security interest in or otherwise
encumbered any of its assets or properties except (i) in favor of the Bank, (ii)
Permitted Liens or (iii) as otherwise permitted by the Bank in writing.
SECTION 3.6. AGREEMENTS; APPLICABLE LAW.
(a) Neither the Borrower nor any of its Subsidiaries is in violation of or
in default under its charter or bylaws or any of its Contractual Obligations,
except where such violation or default could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(b) Except as disclosed in Schedule 3.6, the Borrower and its Subsidiaries
are in material compliance with all Applicable Laws and the use of the Track and
operation of the
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Racetrack Business are in material compliance with all Applicable Laws relating
thereto including, without limitation, the regulations and requirements of the
California Horse Racing Board, and, to the Borrower's knowledge, it has not
received any notice of non-compliance with Applicable Laws.
SECTION 3.7. INCOME TAX RETURNS.
All United States federal income tax returns and all other material tax
returns required to be filed by the Borrower or any of its Subsidiaries have
been filed and all Taxes due pursuant to such returns have been paid, except
such Taxes, if any, as are being contested in good faith and as to which
adequate reserves have been established in accordance with GAAP. To the
knowledge of the Borrower, there have not been asserted or proposed to be
asserted any Tax deficiency against the Borrower or any of its Subsidiaries
(except deficiencies that, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect) that is not reserved
against on the financial books of the Borrower or such Subsidiary, as the case
may be.
SECTION 3.8. GOVERNMENTAL REGULATIONS.
Neither the Borrower nor any of its Subsidiaries is (a) an "investment
company" registered or required to be registered under the Investment Company
Act of 1940, as amended, or a company controlled by or principal underwriter of
such a company, or (b) subject to regulation under the Public Utility Holding
Company Act of 1935 or to any federal or state, statute or regulation limiting
its ability to incur Debt for money borrowed (other than the Margin
Regulations).
SECTION 3.9. MARGIN REGULATIONS.
Neither the Borrower nor any of its Subsidiaries is engaged principally, or
as one of its important activities, in the business of extending credit for the
purposes of purchasing or carrying Margin Stock. The value of all Margin Stock
held by the Borrower or any of its Subsidiaries constitutes less than 25% of the
value, as determined in accordance with the Margin Regulations, of all assets of
the Borrower and its Subsidiaries.
SECTION 3.10. TITLE TO PROPERTY.
Except as disclosed on Schedule 3.10, each of the Borrower and its
Subsidiaries has good title to or valid and subsisting leasehold interests in
all of its property reflected in its books and records as being owned or leased
by it. No such property is subject to any Lien, other than Permitted Liens.
SECTION 3.11. ENVIRONMENTAL CONDITION.
Except as disclosed in Schedule 3.11:
(a) The Mortgaged Property and any other real property owned by the
Borrower or any of its Subsidiaries and, to the Borrower's knowledge, each
property adjacent
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thereto, is free from contamination from any Hazardous Materials, except
contamination that, individually or in the aggregate, could not reasonably be
expected to result in the payment of a Material Environmental Amount. Neither
the Borrower nor any of its Subsidiaries or, to the knowledge of the Borrower,
any prior owner or other user of the Mortgaged Property or any other real
property owned by the Borrower or any of its Subsidiaries or any such adjacent
property has caused or suffered any Environmental Damages in connection with
such real property, such adjacent property or the business or operations of the
Borrower or its Subsidiaries, except for Environmental Damages that have not had
and could not reasonably be expected to, individually or in the aggregate,
result in the payment of a Material Environmental Amount.
(b) Neither the Borrower nor any of its Subsidiaries or, to the
knowledge of the Borrower, any prior owner or other user of the Mortgaged
Property or any other real property owned by the Borrower or any of its
Subsidiaries or any adjacent property has received notice of any actual or
alleged violation of Environmental Requirements, or notice of any actual or
alleged liability for Environmental Damages in connection with such real
property or such adjacent property or the business or operations of the
Borrower, except for violations and liabilities that could not reasonably be
expected, individually or in the aggregate, to result in the payment of a
Material Environmental Amount. There exists no order, judgment or decree, and
there is not pending or, to the knowledge of the Borrower, threatened, any
action, suit, proceeding or investigation relating to any actual or alleged
liability arising out of the presence or suspected presence of Hazardous
Material, any actual or alleged violation of Environmental Requirements or any
actual or alleged liability for Environmental Damages in connection with the
Mortgaged Property or any other real property owned by the Borrower or any of
its Subsidiaries or the business or operations of the Borrower or its
Subsidiaries (except for Environmental Damages that have not had and could not
reasonably be expected to, individually or in the aggregate, result in the
payment of a Material Environmental Amount).
SECTION 3.12. ABSENCE OF CERTAIN RESTRICTIONS.
Except as disclosed in Schedule 3.12, neither the Borrower nor any of its
Subsidiaries is subject to any Contractual Obligation that restricts or limits
the ability of any Subsidiary to (a) make Restricted Payments to the Borrower,
(b) pay Indebtedness owed the Borrower or any Subsidiary thereof, (c) make any
loans or advances to the Borrower or (d) except as provided in Contractual
Obligations respecting the specific assets subject to Permitted Liens, transfer
any of its property to the Borrower.
SECTION 3.13. LABOR MATTERS.
There are no material strikes or other labor disputes pending or, to the
knowledge of the Borrower, threatened against the Borrower or any of its
Subsidiaries. Except as set forth in Schedule 3.13, there are no collective
bargaining agreements to which the Borrower or any of its Subsidiaries is a
party.
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SECTION 3.14. YEAR 2000 MATTERS.
Except as set forth in Schedule 3.14, all of the material computer
software, computer hardware (whether general or special purpose), and other
similar or related items of automated, computerized or software systems that are
used or relied on by the Borrower or any of its Subsidiaries in the conduct of
its business will not malfunction, will not cease to function, will not generate
incorrect data, and will not produce incorrect results when processing,
providing or receiving (a) date-related data into and between the twentieth and
twenty-first centuries and (b) date-related data in connection with any valid
date in the twentieth and twenty-first centuries.
SECTION 3.15. TRANSACTIONS WITH AFFILIATES.
As of the Closing Date, except as disclosed in Schedule 3.15 and except for
transactions on arm's length terms pursuant to which the Borrower or any
Subsidiary makes payments in the ordinary course of business upon terms no less
favorable than the Borrower or such Subsidiary could obtain from third parties,
none of the officers, directors or employees of the Borrower or any of its
Subsidiaries is presently a party to any transaction with the Borrower or any
Subsidiary (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Borrower, any corporation,
partnership, trust or other entity in which any officer, director or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
SECTION 3.16. DISCLOSURE.
The information in each document, certificate or written statement
furnished to the Bank by or on behalf of the Borrower or any of its Subsidiaries
with respect to the business, assets, prospects, results of operation or
financial condition of the Borrower of such Subsidiary or use in connection with
the transactions contemplated by this Agreement at the time of delivery thereof,
was true and correct in all material respects and did not omit, when considered
as a whole, any material fact necessary in order to make the statements made not
misleading, in light of the circumstances under which they were made. There is
no fact known to the Borrower (other than matters of a general economic nature)
that has had or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect and that has not been disclosed herein or
in such other documents, certificates or statements.
SECTION 3.17. NO SUBORDINATION.
There is no agreement, indenture, contract or instrument to which Borrower
or any of its Subsidiaries is a party or by which Borrower or any of its
Subsidiaries may be bound that requires the subordination in right of payment of
any of Obligations to which the Borrower or such Subsidiary is obligated to make
payment with respect to under this Agreement or any other Loan Document.
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SECTION 3.18. LICENSES, PERMITS, FRANCHISES.
The Borrower and each of its Subsidiaries possesses all Governmental
Approvals (other than Governmental Approvals which the failure to obtain could
not, either individually or in the aggregate, have a Material Adverse Effect)
that are necessary for the ownership, maintenance and operation of its
properties and conduct of its business as now conducted and proposed to be
conducted, and is not in material violation thereof. Without limitation, the
Borrower and its Subsidiaries possess, and will hereafter possess (i) all
governmental permits, consents, approvals, franchises, licenses and approvals
relating to the use or occupancy of the Track and operation of the Racetrack
Business, including a Racing License that permits, together with a Racing
License obtained by Oak Tree for calendar year 1999, no less than 100 Racing
Days at the Track for calendar year 1999, and all gaming, permits and licenses,
racing licenses, certificates of occupancy, certificates of compliance, food
handlers permits, liquor licenses, and any certificates of unofficial bodies
that may be required or customary for the conduct of the Racetrack Business and
(ii) rights to all trademarks, trade names, patents, and fictitious names, if
any, in each case, necessary to enable the Borrower and its Subsidiaries it to
conduct the Racetrack Business or any other business in which the Borrower or
any of its Subsidiaries is currently engaged in compliance with applicable law.
SECTION 3.19. ERISA.
The Borrower is, and all ERISA Affiliates are, in compliance in all
material respects with all applicable provisions of the ERISA; neither the
Borrower nor any ERISA Affiliate has violated any provision of any Plan; no
Reportable Event has occurred and is continuing with respect to any Plan
initiated by the Borrower or any ERISA Affiliate; the Borrower and all ERISA
Affiliates have met their minimum funding requirements under ERISA with respect
to each Plan; and each Plan will be able to fulfill its benefit obligations as
they come due in accordance with the Plan documents and under generally accepted
accounting principles.
SECTION 3.20. MORTGAGED PROPERTY.
Except as disclosed by the Borrower to the Bank in writing prior to the
date hereof, with respect to the Mortgaged Property:
(a) All taxes, governmental assessments, insurance premiums, and water,
sewer and municipal charges, and rents (if any) which previously became due and
owing in respect thereof have been paid as of the date hereof.
(b) None of the improvements which were included for purpose of determining
the appraised value of any such real property lies outside of the boundaries
and/or building restriction lines thereof, and no improvements on adjoining
properties materially encroach upon any such real property.
(c) There is no pending, or to the best of the Borrower's knowledge
threatened, proceeding for the total or partial condemnation of all or any
portion of any such real property, and all such real property is in good repair
and free and clear of any damage that would materially and adversely affect the
value thereof as security and/or the intended use thereof.
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SECTION 3.21. LEASES.
Schedule 3.21 lists all material leases or subleases to which the Borrower
or any Subsidiary, as of the Closing Date, is a lessor or sublessor and
affecting any portion of the Mortgaged Property, the operation of the Racetrack
Business or any other business of the Borrower and its Subsidiaries as presently
conducted (collectively, the "Leases").
ARTICLE IV
CONDITIONS
SECTION 4.1. CONDITIONS OF MAKING THE TERM LOAN.
The obligation of Bank to make the Term Loan is subject to the fulfillment
to Bank's satisfaction of all of the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the
------------------------
extension of credit by the Bank shall be satisfactory to the Bank's counsel.
(b) Certain Documents. The Bank shall have received the documents
-----------------
listed in Schedule 4.1 all of which shall be in form and substance satisfactory
to the Bank.
(c) Fees and Expenses Paid. The Borrower shall have paid (i) all Fees
----------------------
due on or before the Closing Date and (ii) all expenses of the Bank which the
Borrower has agreed herein to pay and for which the Borrower shall have been
billed on or before the Funding Date.
(d) Absence of Litigation Events. There has not been issued any
----------------------------
injunction, order or decree that prohibits or limits any of the transactions
contemplated by the Loan Documents and there shall not be any action, suit,
proceeding or investigation pending or, to the knowledge of the Borrower,
currently threatened against the Borrower or any of its Subsidiaries that (i)
draws into question the validity, legality or enforceability of any Loan
Document or the ability of any such Person to consummate the transactions
contemplated thereby or (ii) might result, either individually or in the
aggregate, in any Material Adverse Change.
(e) Approvals. All governmental and third party approvals (including
---------
landlords' and other consents) necessary or, in the discretion of the Bank,
advisable in connection with the continuing operations of the Borrower and its
Subsidiaries and the transactions contemplated hereby and under the other Loan
Documents shall have been obtained and be in full force and effect.
(f) Lien Searches. The Bank shall have received the results of a
-------------
recent lien search in each of the jurisdictions where assets of the Borrower
and/or its Subsidiaries are located, and such search shall reveal no Liens on
any of the assets of the Borrower or its Subsidiaries except for Permitted Liens
and Liens discharged on or prior to the Funding Date pursuant to documentation
satisfactory to the Bank.
(g) Environmental Matters. (i) The Bank shall have received and
---------------------
reviewed the "Phase I Environmental Site Assessment Update" prepared by Dames &
Moore dated
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December 1998 (the "D&M Environmental Report"), and the Bank shall
be reasonably satisfied with the nature of any environmental hazards or
liabilities, and the anticipated costs of any remedial actions, noted therein
and with the Borrower's remediation plans with respect thereto.
(ii) The Bank shall have received from Dames & Moore an original
executed copy of the D&M Environmental Report and a letter executed by Dames &
Moore authorizing the Bank to rely on the assessments and other determinations
set forth therein.
(iii) The Bank shall have received from the Borrower or Dames & Moore
a report or other documentation satisfactory to the Bank describing the presence
of asbestos containing materials on the Mortgaged Property and what remedial or
other actions, if any, are to be taken with respect to such materials.
(iv) The Bank shall have received from the Borrower, in form and
substance reasonably satisfactory to the Bank, evidence of the Borrower's
completion in all material respects of the remediation plan outlined in the D&M
Environmental Report with respect to the underground storage tanks existing on
the Mortgaged Property and that such remediation is in compliance with all
regulatory requirements.
(v) The Bank shall have received from the Borrower, in form and
substance reasonably satisfactory to the Bank, (A) a report of the status of the
Borrower's negotiations with the Regional Water Quality Control Board regarding
the Borrower's wastewater/stormwater management system for wastewater produced
on the Mortgaged Property and (B) documentation regarding the Borrower's plan
for implementing a new wastewater/stormwater management system on the Mortgaged
Property including the estimated date of completion of such new system and a
copy of the capital budget of the Borrower accounting for the costs associated
with such new system.
(vi) The Bank shall have received from the Borrower, in form and
substance reasonably satisfactory to the Bank, evidence that the Borrower has
initiated the risk assessment procedures outlined in the D&M Environmental
Report with respect to the existence of pesticide contaminated soil on the
Mortgaged Property.
(h) Appraisals. The Bank shall have obtained an appraisal of the
----------
Mortgaged Property, and all improvements thereon, issued by an appraiser
acceptable to the Bank and in form, substance reasonably satisfactory to Bank.
(i) Title Insurance. The Bank shall have received an ALTA Policy of
---------------
Title Insurance, with such endorsements as the Bank may reasonably require,
issued by a company and in form and substance satisfactory to Bank, in an amount
equal to the principal amount of the Term Loan, insuring the Bank's Lien on the
Mortgaged Property to be of first priority, subject only to such exceptions as
the Bank shall approve in its discretion (the "Loan Policy"), with all costs
thereof to be paid by Borrower.
(j) Filings, Registrations and Recordings. Each document (including
-------------------------------------
the Deed of Trust and any Uniform Commercial Code financing statement) required
by the Loan Documents or under law or reasonably requested by the Bank to be
filed, registered or recorded
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in order to create in favor of the Bank a perfected Lien on the Collateral
described therein, prior and superior in right to any other Person (other than
Permitted Liens), shall be in proper form for filing, registration or
recordation.
(k) Environmental Permits. The Bank shall have received an officer's
---------------------
certificate in form and substance satisfactory to the Bank certifying that the
Borrower and its Subsidiaries possess all material environmental permits
necessary for the conduct of their businesses and that copies of all such
permits have been provided to the Bank.
(l) Licenses. The Bank shall have received an officer's certificate
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in form and substance satisfactory to the Bank certifying that the Borrower and
its Subsidiaries possess (i) a Racing License for calendar year 1999 and (ii)
all permits or licenses (except for permits or licenses which the failure to
obtain would not have a Material Adverse Effect) specified in Section 3.18.
(m) Leases. With respect to the Leases to be assigned under the Deed
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of Trust or any other Loan Document, the Borrower or the applicable Subsidiary
has obtained all consents from third parties required in order to make valid and
enforceable assignments of such Leases.
(n) Balance Sheet of Magna International. The Bank shall have
------------------------------------
received from the Borrower a copy of the annual report to shareholders of Magna
International, which shall include a consolidated balance sheet of Magna
International and its Subsidiaries as of June 30, 1999.
(o) Business Plan. The Bank shall have received a report from the
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Borrower, which shall include (i) a historical review of the Borrower's business
and operations and (ii) a three year business plan for the Borrower and its
Subsidiaries (including projected financial results for such period), in form
and substance satisfactory to the Bank.
(p) Insurance. The Bank shall have received insurance certificates
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satisfying the requirements of this Agreement and the Loan Documents.
(q) Notice of Borrowing. The Borrower shall have delivered to the
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Bank a Notice of Borrowing (or telephonic notice in lieu thereof).
(r) Representations and Warranties. All of the representations and
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warranties of the Borrower and its Subsidiaries contained in the Loan Documents
shall be true and correct in all material respects on and as of the Closing Date
as though made on and as of that date (except to the extent that such
representations and warranties expressly were made only as of a specific date).
(s) No Default. No Default or Event of Default shall exist or result
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from the making of the Term Loan or any other action contemplated by this
Agreement or any other Loan Document.
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(t) No Material Adverse Change. No Material Adverse Change shall have
--------------------------
occurred since the date of the financial statements referred to in Section 3.5
and no material adverse change shall have occurred in the Applicable Laws
affecting the Bank or the Borrower.
(u) Documentation. The Bank shall have received all additional
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documents which it reasonably may request in connection with such the making of
the Term Loan or any other transaction contemplated by this Agreement or any
other Loan Document.
ARTICLE V
AFFIRMATIVE COVENANTS
The Borrower covenants that so long as the Term Loan is outstanding, the
Borrower shall, and shall cause each of its Subsidiaries to:
SECTION 5.1. Financial Statements and Other Reports.
Deliver, or cause to be delivered, to the Bank:
(a) Annual Financial Reports. As soon as practicable and in any event
------------------------
within 120 days after the end of each Fiscal Year, the consolidated (and
consolidating) balance sheet of the Borrower and its Subsidiaries as of the end
of such Fiscal Year and the related consolidated (and, except as to statements
of stockholders' equity, consolidating) statements of income, stockholders'
equity and cash flow of the Borrower and its Subsidiaries for such Fiscal Year,
setting forth in each case in comparative form the consolidated (and
consolidating) figures for the previous Fiscal Year, all in reasonable detail
and (i) in the case of such consolidated financial statements, accompanied by an
unqualified report thereon of Ernst & Young LLP or other independent certified
public accountants of recognized national standing selected by the Borrower and
reasonably satisfactory to the Bank and (ii) in the case of such consolidating
financial statements, certified by the chief financial officer of the Borrower
as being fairly stated in all material respects when considered in relation to
the audited consolidated financial statements of the Borrower and its
Subsidiaries;
(b) Quarterly Financials. As soon as practicable and in any event within
--------------------
60 days after the end of each fiscal quarter (other than the last fiscal quarter
of any Fiscal Year), an unaudited consolidated (and consolidating) balance sheet
of the Borrower and its Subsidiaries as of the end of such quarter and the
related unaudited consolidated statements of income, stockholders' equity and
cash flow for such quarter and the portion of the Fiscal Year ended at the end
of such quarter, setting forth in each case in comparative form the consolidated
figures for the corresponding periods of the prior Fiscal Year, all in
reasonable detail and certified by the Borrower's chief financial officer as
fairly presenting the consolidated financial condition of the Borrower and its
Subsidiaries as of the dates indicated, and their consolidated results of
operations and cash flows for the periods indicated, in conformity with GAAP,
subject to normal year-end adjustments and the absence of footnotes;
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(c) SEC Filings of the Parent. Promptly after the filing thereof with the
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SEC, all annual reports on Form 10-K and quarterly reports on Form 10-Q filed by
the Parent with the SEC;
(d) Evidence of Compliance with Financial Covenants. Together with each
-----------------------------------------------
delivery of financial statements pursuant to clauses (a) and (b) above, a
certificate of the chief financial officer of the Borrower in substantially the
form of Exhibit H hereto, duly completed and setting forth the calculations
required to establish compliance with Sections 6.17 and 6.18 on the date of such
financial statements;
(e) Event of Default. Within three Business Days after the Borrower
----------------
becomes aware of the occurrence of any Default or Event of Default, a
certificate of a Senior Officer of the Borrower setting forth the details
thereof and the action that the Borrower is taking or proposes to take with
respect thereto;
(f) Notice of Litigation. Within three Business Days after the Borrower
--------------------
obtains knowledge of the threat or commencement of litigation or proceedings
affecting the Borrower or any of its Subsidiaries, or of any material
development in any pending or future litigation, (i) that alleges liability in
excess of $1,000,000, (ii) in which injunctive or similar relief is sought that,
if obtained could have a Material Adverse Effect or (iii) that questions the
validity or enforceability of any Loan Document, notice providing reasonable
details about the threat or commencement of such litigation or about such
material development;
(g) Audit Reports. Within three Business Days after receipt thereof,
-------------
copies of all final reports or letters submitted to the Borrower by its
independent certified public accountants in connection with each audit of the
financial statements of the Borrower or its Subsidiaries made by such
accountants, including any management report, which reports the Borrower agrees
to obtain in connection with each of its annual audits;
(h) Business Plan. Within 90 days after the end of each Fiscal Year of the
-------------
Borrower, a forecast for each of the next succeeding two Fiscal Years of the
consolidated balance sheet and the consolidated results of operations and cash
flow of the Borrower and its Subsidiaries, together with (i) an outline of the
major assumptions upon which the forecast is based and (ii) a calculation in
reasonable detail evidencing compliance with all covenants set forth herein on
the basis of, and after giving effect to, such forecast;
(i) Environmental Notices. Within three Business Days after the receipt
---------------------
thereof by the Borrower, a copy of any notice, summons, citation or written
communication concerning any actual, alleged, suspected or threatened violation
of Environmental Requirements, or liability of the Borrower or any of its
Subsidiaries for Environmental Damages;
(j) Corporate Changes. Within three Business Days after the occurrence of
-----------------
any change in the name or the organizational structure of Borrower, including
amendments or other modifications to the Borrower's articles of incorporation or
bylaws;
(k) Cancellation of Insurance. Within three Business Days after the
-------------------------
occurrence of any termination or cancellation of any insurance policy which
Borrower or any of its
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Subsidiaries is required to maintain pursuant to this
Agreement or any other Loan Document, or any uninsured or partially uninsured
loss through liability or property damage, or through fire, theft or any other
cause affecting Borrower's property in excess of an aggregate of $1,000,000; and
(l) Other Information. From time to time such additional information
-----------------
regarding the Borrower or any of its Subsidiaries or any of their respective
businesses, assets, liabilities, prospects, results of operations or condition
(financial or otherwise) as the Bank may reasonably request.
SECTION 5.2. RECORDS AND INSPECTION, ETC.
Maintain adequate books, records and accounts as may be required or
necessary to permit the preparation of consolidated financial statements in
accordance with sound business practices and GAAP and permit such Persons as the
Bank may designate, at reasonable times and as often as may be reasonably
requested, under reasonable circumstances, to (a) visit and inspect any of its
properties, (b) inspect and copy its books and records, and (c) discuss with its
officers and its independent accountants (so long as no Default or Event of
Default has occurred and is continuing, with prior coordination through the
Borrower), its business, assets, liabilities, prospects, results of operations
or financial condition.
SECTION 5.3. CORPORATE EXISTENCE, ETC.
At all times preserve and keep in full force and effect its corporate
existence and all material rights, franchises and other Governmental Approvals,
provided, however, that (a) the corporate existence of any Subsidiary may be
terminated as contemplated and permitted by Section 6.6 and (b) the corporate
existence of any Subsidiary may be terminated, and any such Governmental
Approval may be terminated or not renewed, if such termination or nonrenewal, as
the case may be, is determined by the Board of Directors of the Borrower to be
in the best interest of the Borrower and is not disadvantageous in any material
respect to the Bank.
SECTION 5.4. PAYMENT OF TAXES.
Pay and discharge all material Taxes imposed upon it or any of its
properties or in respect of any of its franchises, business, income or property
before any penalty shall be incurred with respect to such Taxes, provided,
however, that, unless and until foreclosure, distraint, levy, sale or similar
proceedings shall have commenced, the Borrower and its Subsidiaries need not pay
or discharge any such Tax so long as the validity or amount thereof is being
contested in good faith and by appropriate proceedings and so long as any
reserves or other appropriate provisions as may be required by GAAP shall have
been made therefor.
SECTION 5.5. MAINTENANCE OF PROPERTIES.
Maintain or cause to be maintained in good repair, working order and
condition (ordinary wear and tear excepted and subject to alterations made in
connection with the renovations described in the business plan delivered to the
Bank pursuant to Section 5.1(h)) all properties and other assets necessary to
its business (including, without limitation, the Mortgaged Property and
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all improvements thereon), and from time to time the Borrower or the applicable
Subsidiary shall make or cause to be made all appropriate repairs, renewals and
replacements thereto, except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
SECTION 5.6. MAINTENANCE OF INSURANCE.
(a) Maintain with financially sound and reputable insurance companies
satisfactory to the Bank, insurance in at least such amounts, of such character
and against at least such risks as is maintained by the Borrower and each such
Subsidiary on the date of this Agreement and described in Schedule 5.6, or, if
such insurance is not available on a commercially reasonable basis, with the
Bank's prior written consent, such insurance, in at least such amounts, of such
character and against at least such risks as is usually maintained by companies
of established repute engaged in the same or a similar business in the same
general area. Such insurance shall include fire and extended coverage, public
liability, property damage, workers' compensation, business interruption, flood
(if the Bank determines that such insurance is required under Applicable Law)
and such other coverage as the Bank may reasonably request, provided, however,
that the Bank shall not require the Borrower to obtain earthquake loss
insurance.
(b) In addition to any requirements under the Loan Documents, (i) all
property loss or damage insurance policies with respect to any assets of the
Borrower or any of its Subsidiaries shall contain lenders loss payable
endorsements in favor of the Bank in form and substance satisfactory to it,
which shall provide that all insurance proceeds (A) in excess of $2,000,000 or
(B) payable after the insurer has received written notice from the Bank that an
Event of Default then exists (until a contrary notice is received), shall be
payable directly to the Bank, provided that any business interruption insurance
proceeds resulting from a business interruption of less than five (5) days shall
be released to the Borrower, (ii) all insurance policies shall (A) provide that
no cancellation, reduction in amount or material adverse change in coverage
thereof shall be effective until at least 30 days after receipt by the Bank of
written notice thereof, (B) insure the interests of the Bank regardless of any
breach of or violation by the Borrower or any of its Subsidiaries or any other
Person of any warranties, declarations or conditions contained therein, and (C)
provide that the Bank shall have no obligation or liability for premiums,
commissions, assessments or calls in connection with such insurance or in
connection with any representation or warranty made by the Borrower or any of
its Subsidiaries or any Subsidiary thereof in connection with obtaining of such
insurance, and (iii) all business interruption and extra expense insurance shall
name the Bank as a loss payee.
SECTION 5.7. CONDUCT OF BUSINESS; POSSESSION OF LICENSES.
(a) Engage only in the businesses in which the Borrower or such Subsidiary
is engaged on the date hereof except for other businesses that are ancillary or
incidental to its ongoing business as presently conducted or as contemplated in
the business plan delivered pursuant to Section 4.1. The Borrower shall, and
shall cause each of its Subsidiaries to, conduct its business in compliance in
all material respects with all Applicable Law, all its Governmental Approvals
and all its Contractual Obligations except to the extent any noncompliance could
not reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect.
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(b) (i) Maintain all licenses, permits and other consents and approvals
required with respect to the operation of the Racetrack Business; (ii) the LA
Turf Club shall (A) maintain any then current Racing License, (B) promptly apply
for a Racing License for each calendar year subsequent to 1999, (iii) use its
best efforts to obtain a valid Racing License for each such subsequent calendar
year in a timely fashion customary practice within the industry and (iv) obtain
a Racing License for each calendar year that permits, together with any Racing
License obtained by Oak Tree for such calendar year, at least 100 Racing Days at
the Track.
SECTION 5.8. ADDITIONAL GUARANTIES AND COLLATERAL.
Upon the creation or acquisition after the date hereof of any Subsidiary,
the Borrower shall, at the Bank's request, cause such Subsidiary to execute and
deliver a Subsidiary Guaranty and the Borrower shall grant, or cause to be
granted, a first priority Lien on all of the issued and outstanding Capital
Stock of such Subsidiary pursuant to the Borrower Pledge Agreement, in each case
in form and substance satisfactory to the Bank. The Borrower, at its own
expense, shall execute and deliver, or cause to be executed and delivered, and
thereafter cause to be registered, filed or recorded with the appropriate
Governmental Authority, any and all documents and instruments deemed by the Bank
to be necessary or desirable for the creation and perfection of the foregoing
Liens and shall pay all Taxes and fees related to such registration, filing or
recording.
SECTION 5.9. SUBORDINATION OF OTHER INDEBTEDNESS.
Cause all Intercompany Debt and Subordinated Debt to be subordinated to the
prior payment in full in cash of the Obligations or the obligations under the
Subsidiary Guaranty, as applicable, on terms of subordination satisfactory to
the Bank; provided, however, that as long as no Event of Default then exists,
(a) the Borrower and/or any of its Subsidiaries may pay such Intercompany Debt
in the ordinary course of business consistent with past practice and (b) the
Borrower may prepay Subordinated Debt owed from time to time by the Borrower to
the Parent in an aggregate principal amount not to exceed $63,000,000 minus the
aggregate amount of any distributions made after the Closing Date by the
Borrower to the Parent in respect of the Borrower's Capital Stock.
SECTION 5.10 ENVIRONMENTAL COMPLIANCE.
(a) Comply, in all material respects with all Environmental Requirements
and shall not cause or permit to exist on the Mortgaged Property and any other
real property owned by the Borrower or any of its Subsidiaries any Hazardous
Materials, unless the presence of such materials is necessary for the conduct of
the business of the Borrower or its Subsidiaries, all necessary Governmental
Approvals for such activity have been obtained and there is no material risk
that any Environmental Damages could result from such activity.
(b) The Borrower shall provide to the Bank, in each case, in form and
substance reasonably satisfactory to the Bank:
(i)(A) within 12 months of the Closing Date, evidence of the
Borrower's compliance with the recommendations of the D&M Environmental
Report concerning the
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preparation and implementation of an operation and management plan with
respect to the identification and maintenance of asbestos-containing
materials on the Borrower's real property and (B) in the event that any
renovation or removal of structures which contain asbestos containing
materials are to be conducted, prior to any such action, the results of a
comprehensive asbestos survey conducted to determine whether removal of any
asbestos containing materials are required or advisable and the costs
associated with any such removal;
(ii) within 12 months of the Closing Date, evidence of the Borrower's
compliance with the remediation plan, budget and schedule delivered to the
Bank pursuant to Section 4.1(g)(v) with respect to the implementation of a
new wastewater/stormwater management system on the Borrower's real
property; and
(iii)(A) within six (6) months after the Closing Date, evidence of the
Borrower's completion of the risk assessment procedures outlined in the D&M
Environmental Report with respect to the existence of pesticide
contaminated soil on the Borrower's real property and (B) within 12 months
of the Closing Date, evidence of compliance with all legal and regulatory
requirements with respect to such pesticide contaminated soil.
SECTION 5.11. ERISA.
Maintain and operate all Plans that are maintained and operated by the
Borrower or any of its Subsidiaries so as to comply with the provisions of
ERISA, the Code, all other applicable laws, and the regulations and
interpretations thereunder and the respective requirements of the governing
documents for such Plans to the extent that failure to comply with such
provisions, regulations, interpretations and requirements have a Material
Adverse Effect.
SECTION 5.12. YEAR 2000 COMPLIANCE.
Perform all acts reasonably necessary to ensure that (a) the Borrower and
any business in which the Borrower or any Subsidiary holds a substantial
interest, and (b) all customers, suppliers and vendors that are material to the
Borrower's business, become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all of the Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems.
As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. The Borrower shall, immediately upon request, provide to the Bank such
certifications or other evidence of Borrower's compliance with the terms hereof
as the Bank may from time to time require.
SECTION 5.13. AGREEMENTS REGARDING REAL PROPERTY.
(a) In the event that the Borrower acquires fee title to, or otherwise
acquires the exclusive right, via easement or otherwise, of access over and use
of, the Gate 1 Tract (as defined herein), or any portion thereof, the Borrower
shall (i) provide notice thereof to the Bank and
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shall, at its sole cost and expense and upon request of the Bank, execute in
recordable form and cause to be recorded, if applicable, such amendments to this
Agreement, the Deed of Trust, the Assignment of Leases and Rents and the other
Loan Documents as the Bank may reasonably request to reflect the new legal
description of the Mortgaged Property, and (ii) obtain, at its sole cost and
expense, such available endorsements to the Loan Policy as the Bank may
reasonably request insuring that the Gate 1 Tract and Parcels B1 and B2 are, or
continue to be, as applicable, portions of the Mortgaged Property.
(b) Whether or not such amendments are executed or delivered, immediately
upon the effectiveness of the vesting of interests in the Gate 1 Tract and/or
Parcel B1 or B2, or any portions thereof, in the Borrower as described above,
and without any further action on the part of any party, the Deed of Trust shall
be deemed to encumber any and all such real property.
(c) As used herein, the "Gate 1 Tract" means that certain tract of land
containing approximately 2.36 acres located adjacent to and southwesterly of the
Mortgaged Property (along Huntington Drive) on which Entrance Gate #1 to the
Racetrack currently is located and legally described as: Parcel 4 of Parcel Map
No. 4626, in the City of Arcadia, County of Los Angeles, State of California, as
per Map filed in Book 51, Page 50 of Parcel Maps, in the Office of the County
Recorder of said County. As used herein, "Parcels B1 and B2" mean those
easement parcels described as Parcels B1 and B2 in the Loan Policy.
ARTICLE VI
NEGATIVE COVENANTS
The Borrower covenants and agrees that so long as the Term Loan remains
outstanding, the Borrower will not, and will neither cause nor permit any of its
Subsidiaries to:
SECTION 6.1. INDEBTEDNESS.
Incur, create, assume or permit to exist any Indebtedness, except:
(a) the Obligations and the obligations of the Borrower or any Subsidiary
under the Revolving Credit Documents;
(b) Intercompany Debt;
(c) Subordinated Debt;
(d) Indebtedness existing on the date hereof and set forth in Schedule
6.1, and Indebtedness incurred to refinance such Indebtedness;
(e) Indebtedness under any Hedging Contract; and
(f) Indebtedness consisting of purchase money Indebtedness incurred in the
ordinary course of business after the Closing Date to finance Capital
Expenditures, provided that (i) the Indebtedness incurred shall not exceed 85%
of the purchase price of the assets financed thereby and (ii) the aggregate
principal amount of any Indebtedness incurred pursuant to this paragraph
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(f) during any Fiscal Year shall not exceed $2,000,000, and Indebtedness
incurred to refinance such Indebtedness.
SECTION 6.2. LIENS.
Create, incur, assume or permit to exist any Lien on or with respect to any
asset, or any income or profits therefrom, whether now owned or hereafter
acquired, except:
(a) Liens securing the Obligations and Liens created under the Revolving
Credit Documents;
(b) Liens existing on the date hereof and set forth on Schedule 6.2;
(c) Liens for taxes, assessments or charges of any Governmental Authority
for claims that are not material and are not yet due or being contested in good
faith by appropriate proceedings and with respect to which adequate reserves or
other appropriate provisions are being maintained in accordance with GAAP;
(d) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen, bankers and other Liens imposed by law and created in
the ordinary course of business;
(e) Liens incurred and deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security benefits or to secure the performance (including by way of
surety bonds or appeal bonds) of tenders, bids, leases, contracts, statutory
obligations or similar obligations or arising as a result of progress payments
under contracts, in each case in the ordinary course of business and not
relating to the repayment of Indebtedness;
(f) easements, rights-of-way, covenants, consents, reservations,
encroachments, variations and other restrictions, charges or encumbrances
(whether or not recorded) that do not materially interfere with the ordinary
conduct of business;
(g) building restrictions, zoning laws and other statutes, laws, rules,
regulations, ordinances and restrictions;
(h) leases or subleases granted in the ordinary course of business to
others not materially interfering with the business of, and consistent with past
practices of, the Borrower or any Subsidiary;
(i) any attachment or judgment Lien not constituting an Event of Default;
(j) Liens existing on assets of any Person at the time such Person becomes
a Subsidiary, provided that (i) such Lien was not created in contemplation of
such Person becoming a Subsidiary, and (ii) such Lien does not encumber any
assets other than the assets subject to such Lien at the time such Person
becomes a Subsidiary;
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(k) other Liens incidental to the conduct of the business or the ownership
of the assets of the Borrower or any Subsidiary that (i) were not incurred in
connection with borrowed money, (ii) do not in the aggregate materially detract
from the value of the assets subject thereto or materially impair the use
thereof in the operation of such business and (iii) do not secure obligations
aggregating in excess of $250,000;
(l) Liens on equipment or other personal property assets hereafter acquired
by the Borrower or any of its Subsidiaries, provided that (i) such Liens secure
Indebtedness permitted by Section 6.1(f), (ii) such Liens are incurred, and the
Indebtedness secured thereby is created, within 90 days after such acquisition
of such equipment or other acquired assets, (iii) the Indebtedness secured
thereby does not exceed 85% of the lesser of the cost of such equipment or other
acquired asset and (iv) such Liens do not attach to or otherwise encumber the
Mortgaged Property or any other property or assets of the Borrower or any of its
Subsidiaries other than the equipment or other asset so acquired.
SECTION 6.3. RESTRICTED PAYMENTS.
Pay or make, or agree to declare, pay or make, any Restricted Payment,
except (a) dividends, distributions or payments by any Subsidiary to the
Borrower and (b) distributions made by the Borrower in respect of the Borrower's
Capital Stock and/or payments by the Borrower of principal of Indebtedness owing
to the Parent as of the Funding Date, provided that, in the case of clause (b),
(i) no Event of Default then exists, (ii) the aggregate amount of such
distributions and payments made after the Closing Date shall not exceed
$63,000,000 and (iii) immediately after making any such distribution or payment,
and after giving effect thereto, the Borrower shall be in compliance, on a pro
forma basis, with Section 6.18.
SECTION 6.4. LOANS, ADVANCES, INVESTMENTS.
Make or permit to exist any loans or advances to or Investments in any
person or entity, except:
(a)(i) marketable direct obligations issued or unconditionally guaranteed
by the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States, in each case maturing within one
year from the date of acquisition thereof, (ii) marketable direct obligations
issued by any state of the United States or any political subdivision of any
such state or any public instrumentality thereof maturing within one year from
the date of acquisition thereof and having, at the time of acquisition, the
highest rating obtainable from either Standard & Poor's Rating Group or Moody's
Investors Service, Inc., (iii) commercial paper having, at the time of
acquisition, the highest rating obtainable from either Standard & Poor's Rating
Group or Moody's Investors Service, Inc., (iv) demand deposits, certificates of
deposit, other time deposits, and bankers' acceptances maturing within one year
from the date of acquisition thereof issued by any bank operating under the laws
of the United States or any state thereof or the District of Columbia that has
combined capital and surplus of not less than $500,000,000, or (v) institutional
money market funds organized under the laws of the United States of America or
any state thereof that are approved in writing by the Bank or, if not so
described or approved, substantially all of whose assets are securities of the
types described in the foregoing clauses (i), (ii), (iii), and (iv);
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(b)(i) trade credit extended on usual and customary terms in the ordinary
course of business, (ii) advances to employees for moving, relocation and travel
expenses, drawing accounts and similar expenditures in the ordinary course of
business and not to exceed $500,000 at any time outstanding, and (iii)
acquisitions of capital stock, debt, securities, or other property received in
connection with the bankruptcy, reorganization or similar proceeding of, or
settlement of delinquent accounts and disputes with, customers in the ordinary
course of business, and, in each case, extensions, modifications, and renewals
thereof;
(c) any Investment identified in Schedule 6.4, limited to the amount of
such Investment on the date hereof;
(d) Intercompany Debt;
(e) Investments by the Borrower in any Wholly-Owned Subsidiary so long as
such Subsidiary has executed a Subsidiary Guaranty in substantially the form of
Exhibit D; and
(f) Investments by the Borrower in connection with Permitted Acquisitions.
SECTION 6.5. LEASE EXPENDITURES.
Incur expenses with respect to Operating Leases (excluding LA Turf Club's
obligations under that certain Amended and Restated Lease dated November 9, 1994
between the Borrower and LA Turf Club) in any fiscal year in excess of an
aggregate of $100,000.
SECTION 6.6. FUNDAMENTAL CHANGES.
Enter into any merger or consolidation, or liquidate, wind-up or dissolve
(or suffer any liquidation or dissolution) or enter into any agreement providing
for any of the foregoing, except for a merger of a Wholly Owned Subsidiary of
the Borrower into the Borrower or (with the Borrower as the surviving
corporation) or another Wholly Owned Subsidiary, or convey, lease, sell,
transfer or otherwise dispose of, in one transaction or series of transactions,
all or substantially all of the Borrower's or any Subsidiary's business or
assets, whether now or hereafter acquired.
SECTION 6.7. ASSET DISPOSITIONS.
Make any Asset Disposition, except:
(a) the sale of inventory in the ordinary course of business;
(b) sales of assets outside of the ordinary course of business not in
excess of $250,000 in a single transaction or series of related transactions or
aggregating less than $1,000,000 in any Fiscal Year; and
(c) in addition to dispositions permitted under clauses (a) and (b) of this
Section 6.7, the disposition of equipment if such equipment is obsolete or no
longer useful in the ordinary course of the Borrower's or such Subsidiary's
business; provided that the aggregate Fair Market Value of all such equipment
disposed of in any Fiscal Year shall not exceed $1,000,000.
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SECTION 6.8. SALE-LEASEBACKS.
Enter into any arrangement, directly or indirectly, whereby the Borrower or
any of its Subsidiaries shall sell or transfer any property owned by it in order
then or thereafter to lease such property or lease other property which the
Borrower or such Subsidiary intends to use for substantially the same purpose as
the property being sold or transferred, without the prior written consent of the
Bank.
SECTION 6.9. TRANSACTIONS WITH AFFILIATES.
Enter into any transaction (including the transfer or lease of any property
or the rendering of any service) with any Affiliate of the Borrower, unless such
transaction is on fair and reasonable terms no less favorable to the Borrower or
its Subsidiary, as the case may be, than those terms that might be obtained at
the time in a comparable arm's length transaction with a Person who is not an
Affiliate of the Borrower or, if such transaction is not one that by its nature
could be obtained from such other Person, is on fair and reasonable terms and
was negotiated in good faith, provided that this Section shall not restrict (a)
dividends, distributions and other payments and transfers on account of the
Capital Stock of the Borrower or any Wholly-Owned Subsidiary or (b) the
transactions contemplated under this Agreement or any other Loan Document.
SECTION 6.10. AMENDMENTS OF CHARTER DOCUMENTS.
Amend its charter, bylaws or other charter documents in any respect that
affects the voting rights of Capital Stock included in the Collateral or holders
thereof, increases payment obligations of the Borrower, affects the validity or
enforceability of any Loan Document or Lien thereunder or that otherwise could
reasonably be expected to have a Material Adverse Effect, without in each case
obtaining the prior written consent of the Bank.
SECTION 6.11. RESTRICTIVE AGREEMENTS.
Enter into any Contractual Obligation that, directly or indirectly,
restricts or limits the ability of such Subsidiary to (a) pay dividends or make
distributions on its Capital Stock, (b) pay Indebtedness owed to the Borrower or
any Subsidiary or (c) make any loans or advances to the Borrower or any
Subsidiary (except as provided hereunder).
SECTION 6.12. NEGATIVE PLEDGES.
Enter into or otherwise become subject to, directly or indirectly, any
agreement prohibiting or restricting the Borrower or any Subsidiary in any
manner (including by way of covenant, representation or default), from
incurring, creating or assuming any Lien upon any of its assets.
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SECTION 6.13. AMENDMENTS OR WAIVERS OF SUBORDINATED DEBT DOCUMENTS.
Amend any loan or other documents pursuant to which any Subordinated Debt
(or any related Contingent Obligation) is outstanding, or waive or otherwise
relinquish any of its rights or causes of action under or arising out of such
documents, with respect to terms and provisions regarding interest rates,
principal or interest payment amounts, principal or interest payment dates,
subordination, representations by or covenants of the Borrower, any Subsidiary,
or events of default, or other material provisions, without in each case
obtaining the prior written consent of the Bank.
SECTION 6.14. ISSUANCE OF CAPITAL STOCK.
Issue any Capital Stock to any Person other than (a) in the case of the
Borrower, to the Parent and (b) in the case of any Subsidiary, to the Borrower,
in each case, subject to a Lien in favor of the Bank under the Loan Documents.
SECTION 6.15. ERISA.
(a) Engage, or permit any Subsidiary to engage, in any prohibited
transaction described in Sections 406 of ERISA or 4975 of the Code for which a
statutory or class exemption is not available or a private exemption has not
been previously obtained from the DOL;
(b) Terminate, or permit any Subsidiary to terminate, any Benefit Plan
which would result in any liability of the Borrower or any Subsidiary under
Title IV of ERISA in excess of $1,000,000;
(c) Fail to make any contribution or payment to any Multiemployer Plan
which the Borrower or any Subsidiary may be required to make under any agreement
relating to such Multiemployer Plan, or any law pertaining thereto;
(d) Fail, or permit any Subsidiary to fail, to timely pay contributions or
installments required under Section 412 of the Code or due with respect to any
waived funding deficiency with respect to any Benefit Plan; or
(e) Amend, or permit any Subsidiary to amend, a Benefit Plan resulting in
an increase in current liability for the plan year such that the Borrower or any
Subsidiary is required to provide security to such Benefit Plan under Section
401(a)(29) of the Code;
SECTION 6.16. USE OF PROCEEDS.
Use the proceeds of the Term Loan except for the purposes stated in Section
2.1 hereof.
SECTION 6.17. EBITDA COVERAGE RATIO.
Permit the EBITDA Coverage Ratio as of the end of any fiscal quarter to be
less than 1.15 to 1.00.
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SECTION 6.18. MINIMUM TANGIBLE NET WORTH.
Permit the Borrower's Tangible Net Worth on the last day of any fiscal
quarter to be less than $60,000,000.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1. EVENTS OF DEFAULT.
The occurrence of any of the following shall constitute an "Event of
Default" under this Agreement:
(a) The Borrower (i) shall fail to pay as and when due (whether at stated
maturity, upon acceleration, upon required prepayment or otherwise) all or any
portion of the principal of the Term Loan, or (ii) shall fail to pay any
interest, Fees or other amounts payable under the Loan Documents within three
Business Days of the date when due under the Loan Documents; or
(b) (i) the Borrower shall fail to perform, comply with or observe any
agreement, covenant or obligation under Sections 5.1(e), 5.1(g), Section 5.3 or
5.7, or any Section of Article VI; or (ii) there shall exist an Event of Default
under the Revolving Credit Agreement; or
(c) The Borrower shall fail to perform, comply with or observe any
agreement, covenant or obligation under any provision of any Loan Document
(other than those covenants set forth in clause (b) above) and such failure
shall not have been remedied within 30 days after the Borrower becomes aware of
such failure; or
(d) Any representation or warranty or certification made or furnished by
any the Borrower under any Loan Document shall prove to have been false or
incorrect in any material respect when made (or deemed made); or
(e) (i) The Borrower shall default in the payment (whether at stated
maturity, upon acceleration, upon required prepayment or otherwise), beyond any
period of grace provided therefor, of (A) any principal of or interest on any
Indebtedness for borrowed money in an aggregate principal amount in excess of
$250,000 or the deferred purchase price of any property or (B) any principal of
or interest on any Indebtedness (other than for borrowed money or the deferred
purchase price of any property), so long as the validity or amount thereof is
being contested in good faith and by appropriate proceedings and no action has
been commenced to enforce any Lien securing such Indebtedness or (ii) any other
breach or default (or other event or condition) shall occur under any agreement,
indenture or instrument relating to any such Indebtedness, if the effect of such
breach or default (or such other event or condition) is to cause, or to permit
the holder or holders of such Indebtedness (or a Person on behalf of such holder
or holders) to cause (upon the giving of notice, the lapse of time or both, or
otherwise), such Indebtedness to become or be declared due and payable, or
required to be prepaid, redeemed,
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purchased or defeased (or an offer of prepayment, redemption, purchase or
defeasance be made), prior to its stated maturity; or
(f) There shall be commenced against the Borrower or any of its
Subsidiaries an involuntary case seeking the liquidation or reorganization of
the Borrower or such Subsidiary under the Bankruptcy Code or any similar
proceeding under any other Applicable Law or an involuntary case or proceeding
seeking the appointment of a receiver, liquidator, sequestrator, custodian,
trustee or other officer having similar powers of the Borrower or such
Subsidiary or to take possession of all or a substantial portion of its property
or to operate all or a substantial portion of its business, and any of the
following events occur: (i) the Borrower or such Subsidiary consents to the
institution of such involuntary case or proceeding; (ii) the petition commencing
the involuntary case or proceeding is not timely controverted; (iii) the
petition commencing such involuntary case or proceeding remains undismissed and
unstayed for a period of 60 days; or (iv) an order for relief shall have been
issued or entered therein; or
(g) The Borrower or any of its Subsidiaries shall institute a voluntary
case seeking liquidation or reorganization under the Bankruptcy Code or any
similar proceeding under any other Applicable Law, or shall consent thereto; or
shall consent to the conversion of an involuntary case to a voluntary case; or
shall file a petition, answer a complaint or otherwise institute any proceeding
seeking, or shall consent to or acquiesce in the appointment of, a receiver,
liquidator, sequestrator, custodian, trustee or other officer with similar
powers of it or to take possession of all or a substantial portion of its
property or to operate all or a substantial portion of its business; or shall
make a general assignment for the benefit of creditors; or shall generally not
pay its debts as they become due; or the Board of Directors of the Borrower or
such Subsidiary (or any committee thereof) adopts any resolution or otherwise
authorizes action to approve any of the foregoing; or
(h) The Borrower or any of its Subsidiaries shall suffer (i) any money
judgments, fines, writs or warrants of attachment or similar processes that,
individually or in the aggregate, involve an amount or value in excess of
$500,000 (excluding therefrom money judgments to the extent covered by insurance
as to which the carrier has accepted liability), or (ii) any other material non-
monetary judgment or decree (including a judgment for injunctive relief), and,
in any such case, such judgments, writs, warrants or other orders shall continue
unsatisfied and unstayed for a period of 60 days or any action shall be taken by
a judgment creditor to levy upon the assets of the Borrower or any Subsidiary to
enforce any such judgment; or
(i) The Borrower, any Subsidiary or any ERISA Affiliate shall: (a) engage
in any prohibited transaction described in Sections 406 of ERISA or 4975 of the
Code for which a statutory or class exemption is not available or a private
exemption has not been previously obtained from the DOL; (b) terminate any
Benefit Plan which would result in any liability of the Borrower (including
joint and several liability with another Person) under Title IV of ERISA in
excess of $1,000,000; (c) fail to make any contribution or payment to any
Multiemployer Plan which the Borrower or any Subsidiary or any ERISA Affiliate
may be required to make under any agreement relating to such Multiemployer Plan,
or any law pertaining thereto that could result in liability of the Borrower
(including joint and several liability with another Person) in excess of
$1,000,000; (d) fail to timely pay contributions or installments required under
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Section 412 of the Code or due with respect to any waived funding deficiency
with respect to any Benefit Plan that could result in liability of the Borrower
(including joint and several liability with another Person) in excess of
$1,000,000; or (e) amend a Benefit Plan resulting in an increase in current
liability for the plan year such that the Borrower or any Subsidiary or any
ERISA Affiliate is required to provide security to such Benefit Plan under
Section 401(a)(29) of the Code; or
(j) Any Loan Document, or any material provision thereof, shall cease to be
in full force and effect for any reason, or any Lien in favor of the Bank
thereunder shall fail to have the priority required thereunder, except upon a
release or termination of such Loan Document or Lien pursuant to the terms
thereof; or the Borrower or any of its Subsidiaries shall contest or purport to
repudiate or disavow any of its obligations under or the validity of
enforceability of any Loan Document or any material provision thereof; or
(k) A Change of Control shall occur at any time.
SECTION 7.2. REMEDIES.
(a) Upon the occurrence of an Event of Default under Section 7.1(f) or (g),
then (i) all indebtedness of the Borrower under each of the Loan Documents, any
term thereof to the contrary notwithstanding, automatically shall become
immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are hereby expressly waived by the Borrower; (ii) the
obligation, if any, of the Bank to extend any further credit under any of the
Loan Documents shall immediately cease and terminate; and (iii) the Bank shall
have all rights, powers and remedies available under each of the Loan Documents,
or accorded by law, including without limitation the right to resort to any or
all security for any credit accommodation from the Bank subject hereto and to
exercise any or all of the rights of a beneficiary or secured party pursuant to
applicable law.
(b) Upon the occurrence of an Event of Default under 7.1 (other than under
Section 7.1(f) or (g)), then (i) all indebtedness of the Borrower under each of
the Loan Documents, any term thereof to the contrary notwithstanding, shall at
the Bank's option and without notice become immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are hereby
expressly waived by the Borrower; (ii) the obligation, if any, of the Bank to
extend any further credit under any of the Loan Documents shall immediately
cease and terminate; and (iii) the Bank shall have all rights, powers and
remedies available under each of the Loan Documents, or accorded by law,
including without limitation the right to resort to any or all security for any
credit accommodation from the Bank subject hereto and to exercise any or all of
the rights of a beneficiary or secured party pursuant to applicable law.
(c) All rights, powers and remedies of the Bank may be exercised at any
time by the Bank and from time to time after the occurrence of an Event of
Default, are cumulative and not exclusive, and shall be in addition to any other
rights, powers or remedies provided by law or equity.
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ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. NO WAIVER.
No delay, failure or discontinuance of Bank in exercising any right, power
or remedy under any of the Loan Documents shall affect or operate as a waiver of
such right, power or remedy; nor shall any single or partial exercise of any
such right, power or remedy preclude, waive or otherwise affect any other or
further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, permit, consent or approval of any kind by Bank of any breach of or
default under any of the Loan Documents must be in writing and shall be
effective only to the extent set forth in such writing.
SECTION 8.2. NOTICES.
All notices, requests and demands which any party is required or may desire
to give to any other party under any provision of this Agreement must be in
writing delivered to each party at the following address:
BORROWER: THE SANTA ANITA COMPANIES, INC.
285 West Huntington Drive
Arcadia, California 91066
Attention: President
Facsimile: (626) 446-9565
with a copy to:
MI Entertainment Corp.
337 Magna Drive
Aurora, Ontario, Canada L4G 7L1
Attention: James Nicol
Facsimile: (905) 726-7169
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
John Manning
Wells Fargo Bank
1000 Lakes Drive, Suite 250
West Covina, California 91790
Facsimile; 626-919-2909
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
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SECTION 8.3. COSTS, EXPENSES AND ATTORNEYS' FEES.
Borrower shall pay to Bank immediately upon demand (a) the Bank's out-of-
pocket costs and expenses, including reasonable attorneys' fees expended or
incurred by the Bank in connection with the negotiation and preparation of this
Agreement and the other Loan Documents, the Bank's continued administration
hereof and thereof, and the preparation of any amendments and waivers hereto and
thereto, and (b) the Bank's costs and expenses, including attorney's fees (to
include outside counsel fees but exclude costs of the Bank's in-house counsel)
expended or incurred by the Bank in connection with the enforcement of Bank's
rights and/or the collection of any amounts which become due to Bank under any
of the Loan Documents, or the prosecution or defense of any action in any way
related to any of the Loan Documents, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to the Borrower or any other person or entity.
SECTION 8.4. INDEMNITY.
The Borrower shall indemnify, defend and hold harmless the Bank and the
officers, directors, employees, agents, attorneys, affiliates, successors and
assigns of the Bank (collectively, the "Indemnitees") from and against (a) any
and all transfer taxes, documentary taxes, assessments or charges made by any
Governmental Authority by reason of the execution delivery, filing or recording
of the Loan Documents or the making of the Term Loan, and (b) any and all
liabilities, losses, damages, penalties, judgments, claims, costs and expenses
of any kind or nature whatsoever (including reasonable attorneys' fees (to
include outside counsel fees but exclude costs of the Bank's in-house counsel)),
and disbursements in connection with any actual or threatened investigative,
administrative or judicial proceeding, whether or not such Indemnitee shall be
designated a party thereto (and provided that such Indemnitee shall be entitled
to select its own counsel in all such proceedings) that may be imposed on,
incurred by or asserted against such Indemnitee, in any manner relating to or
arising out of the Loan Documents, the Term Loan, the use or intended use of the
proceeds of the Term Loan, or any Permitted Acquisition (the "Indemnified
Liabilities"); provided that (i) no Indemnitee shall have the right to be
indemnified or held harmless hereunder for its own gross negligence or willful
misconduct, as determined by a final judgment of a court of competent
jurisdiction, and (ii) the Borrower shall have no obligation hereunder in
respect of Indemnified Liabilities arising from a breach of any Loan Document by
the Indemnitee making a claim hereunder.
Without limiting the generality of the foregoing, the Borrower further
agrees to fully and promptly pay, perform, discharge, defend, indemnify and hold
harmless each Indemnitee from and against any Environmental Damages; provided
that the Borrower shall not have any obligation to any Indemnitee hereunder with
respect to any Environmental Damages to the extent such Environmental Damages
arise solely from the gross negligence or willful misconduct of that Indemnitee
as determined by a final judgment of a court of competent jurisdiction.
To the extent that the undertaking to indemnify and hold harmless set forth
herein may be unenforceable as violative of any Applicable Law or public policy,
the Borrower shall make the
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maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities that is permissible under Applicable Law. All Indemnified
Liabilities shall be payable on demand.
SECTION 8.5. SUCCESSORS, ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of the heirs,
executors, administrators, legal representatives, successors and assigns of the
parties; provided, however, that the Borrower may not assign or transfer its
interest hereunder without the Bank's prior written consent. The Bank reserves
the right to sell, assign, transfer, negotiate or grant participation in all or
any part of, or any interest in, Bank's rights and benefits under each of the
Loan Documents; provided, however, that the Bank agrees that, in the event that
it assigns less than the full amount of the Term Loan, the Bank shall act as
"Administrative Agent" for itself and any such assignees. In connection
therewith, the Bank may disclose all documents and information which the Bank
now has or may hereafter acquire relating to any credit extended by the Bank to
the Borrower, the Borrower or its business, any Subsidiary or the business of
such Subsidiary, or any Collateral.
SECTION 8.6. ENTIRE AGREEMENT; AMENDMENT.
This Agreement and the other Loan Documents constitute the entire agreement
between the Borrower and the Bank with respect to any extension of credit by the
Bank subject hereto and supersede all prior negotiations, communications,
discussions and correspondence concerning the subject matter hereof. This
Agreement may be amended or modified only in writing signed by each party
hereto.
SECTION 8.7. NO THIRD PARTY BENEFICIARIES.
This Agreement is made and entered into for the sole protection and benefit
of the parties hereto and their respective permitted successors and assigns, and
no other person or entity shall be a third party beneficiary of, or have any
direct or indirect cause of action or claim in connection with, this Agreement
or any other of the Loan Documents to which it is not a party.
SECTION 8.8. TIME.
Time is of the essence of each and every provision of this Agreement and
each other of the Loan Documents.
SECTION 8.9. SEVERABILITY OF PROVISIONS.
If any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or any remaining provisions of this Agreement.
SECTION 8.10. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
when executed and delivered shall be deemed to be an original, and all of which
when taken together shall constitute one and the same Agreement.
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SECTION 8.11. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California.
SECTION 8.12. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
-----------
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
---------------
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. (S) 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
----------------------------------------------------------
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
--------------------------------------------
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with
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the substantive law of the state of California, (ii) may grant any remedy or
relief that a court of the state of California could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award, and (iii) shall have the power to award recovery of all costs and fees,
to impose sanctions and to take such other actions as they deem necessary to the
same extent a judge could pursuant to the Federal Rules of Civil Procedure, the
California Rules of Civil Procedure or other applicable law. Any Dispute in
which the amount in controversy is $5,000,000 or less shall be decided by a
single arbitrator who shall not render an award of greater than $5,000,000
(including damages, costs, fees and expenses). By submission to a single
arbitrator, each party expressly waives any right or claim to recover more than
$5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000
shall be decided by majority vote of a panel of three arbitrators; provided
however, that all three arbitrators must actively participate in all hearings
and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary, in
---------------
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding anything
--------------------------------------------
herein to the contrary, no Dispute shall be submitted to arbitration if the
Dispute concerns Indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all Indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
Indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
-------------
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days
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of the filing of the Dispute with the AAA. No arbitrator or other party to an
arbitration proceeding may disclose the existence, content or results thereof,
except for disclosures of information by a party required in the ordinary course
of its business, by applicable law or regulation, or to the extent necessary to
exercise any judicial review rights set forth herein. If more than one agreement
for arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the subject
matter of the Dispute shall control. This arbitration provision shall survive
termination, amendment or expiration of any of the Loan Documents or any
relationship between the parties.
[Signatures on following page]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
THE SANTA ANITA COMPANIES, INC.
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
-------------------------------------
Name:
Title:
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EXHIBIT 10.8
Execution Copy
REVOLVING CREDIT AGREEMENT
THIS AGREEMENT is entered into as of November 15, 1999 (as amended from
time to time, this "Agreement"), by and between LOS ANGELES TURF CLUB,
INCORPORATED, a California corporation ("Borrower"), and WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank").
R E C I T A L
- - - - - - -
The Borrower has requested from the Bank the credit accommodation described
below, and the Bank has agreed to provide said credit accommodation to the
Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Bank and the Borrower hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS.
The following terms with initial capital letters have the following
meanings:
"Affiliate" means, with respect to any Person, any other Person that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such first Person. The term
"control" means the possession, directly or indirectly, of the power, whether or
not exercised, (i) to vote 20% or more of the securities having voting power for
the election of directors (or Persons performing similar functions) of such
Person or (ii) to direct or cause the direction of the management or policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise, and the terms "controlled" and "common control" have correlative
meanings. Unless otherwise indicated, "Affiliate" refers to an Affiliate of the
Borrower. Notwithstanding the foregoing, in no event shall the Bank or any
Affiliate of the Bank be deemed to be an Affiliate of the Borrower.
"Applicable Law" means all applicable provisions of all (i) constitutions,
treaties, statutes, laws, rules, regulations and ordinances of any Governmental
Authority, (ii) Governmental Approvals and (iii) orders, decisions, judgments,
awards and decrees of any Governmental Authority (including common law and
principles of public policy).
"Approved Subordination Terms" means the terms of subordination set forth
in Exhibit G.
"Asset Disposition" means any sale or other disposition, in any single
transaction or series of related transactions, by the Borrower or any Subsidiary
of the Borrower, of any of its
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assets (including (x) by way of a Sale-Leaseback Transaction and (y) in the case
of a Subsidiary of the Borrower, any issuance of any Capital Stock of such
Subsidiary to any Person other than the Borrower or a Wholly-Owned Subsidiary of
the Borrower (other than directors qualifying shares)) except that "Asset
Disposition" shall not include (A) any disposition of assets or issuance of
Capital Stock by any Subsidiary to the Borrower or a Wholly-Owned Subsidiary,
(B) a merger or consolidation permitted pursuant to Section 6.6 or (C) sales of
inventory held or purchased for sale to others or dispositions of other property
that has become obsolete or worn out, in each case in the ordinary course of
business.
"Bankruptcy Code" means Title 11 of the United States Code (11 U.S.C.
Section 101 et seq.), as amended from time to time.
"Base LIBOR" means the rate per annum for Dollar deposits quoted by the
Bank as the Inter-Bank Market Offered Rate, with the understanding that such
rate is quoted by the Bank for the purpose of calculating effective rates of
interest for loans making reference thereto, on the first day of an Interest
Period for delivery of funds on said date for a period of time approximately
equal to the number of days in such Interest Period and in an amount
approximately equal to the principal amount to which such Interest Period
applies. The Borrower understands and agrees that the Bank may base its
quotation of the Inter-Bank Market Offered Rate upon such offers or other market
indicators of the Inter-Bank Market as the Bank in its discretion deems
appropriate including, but not limited to, the rate offered for Dollar deposits
on the London Inter-Bank Market.
"Benefit Plan" means a defined benefit plan as defined in Section 3(35) of
ERISA (other than a Multiemployer Plan) in respect of which the Borrower or any
ERISA Affiliate is, or within the immediately preceding six (6) years was, an
"employer" as defined in Section 3(5) of ERISA.
"Borrowing" means a borrowing consisting of Loans of the same type made on
the same day.
"Business Day" means any day that is not a Saturday, Sunday or other day on
which banks in Los Angeles, California are authorized or obligated to close.
"Capital Expenditures" means, for any period, expenditures (whether paid in
cash or accrued as liabilities and including Capital Leases entered into during
the period) of the Borrower and its Subsidiaries during such period that are
required in accordance with GAAP to be capitalized on the consolidated balance
sheet of the Borrower.
"Capital Leases" means all leases of the Borrower and its Subsidiaries of
real or personal property that are required to be capitalized on the
consolidated balance sheet of the Borrower. The amount of any Capital Lease
shall be the capitalized amount thereof.
"Capital Stock" means, with respect to any Person, all (i) shares,
interests, participations or other equivalents (howsoever designated) of capital
stock and other equity interests of such
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Person and (ii) rights (other than Indebtedness securities convertible into
capital stock or other equity interests), warrants or options to acquire any
such capital stock or other equity interests.
"Change of Control" means the failure by Santa Anita to continue to hold
all of the outstanding shares of all classes of the Capital Stock of the
Borrower.
"Closing Date" means November 15, 1999.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral" means all property in which a Lien is created or conveyed in
or under the Loan Documents, or any of them, in favor of the Bank.
"Commitment" means the Bank's commitment to make Loans to the Borrower in
an aggregate principal amount not to exceed $10,000,000.
"Contingent Obligation" means, as to any Person, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) with respect to any
Indebtedness or other obligation of another Person, including any direct or
indirect guarantee of such Indebtedness (other than any endorsement for
collection in the ordinary course of business) or any other direct or indirect
obligation, by agreement or otherwise, to purchase or repurchase any such
Indebtedness or obligation or any security therefor, or to provide funds for the
payment or discharge of any such Indebtedness or obligation (whether in the form
of loans, advances, stock purchases, capital contributions or otherwise), (ii)
to provide funds to maintain the financial condition of any other Person if the
primary purpose of such obligations is to provide assurance that the
Indebtedness or other obligations of such other Person will be paid or
discharged or the holders of such Indebtedness or other obligations will be
protected against loss, or (iii) otherwise to assure or hold harmless the
holders of Indebtedness or other obligations of another Person against loss in
respect thereof, or (iv) under Hedging Contracts. The amount of any Contingent
Obligation under clause (i) or (ii) shall be the lesser of (a) an amount equal
to the stated or determinable amount of the primary obligation in respect of
which such Contingent Obligation is made and (b) the maximum amount for which
such Person may be liable pursuant to the terms of the instrument embodying such
Contingent Obligation, unless such primary obligation and the maximum amount for
which such Person may be liable are not stated or determinable, in which case
the amount of such Contingent Obligation shall be such Person's maximum
reasonably anticipated liability in respect thereof.
"Contractual Obligation" means, as applied to any Person, any provision of
any security issued by that Person or of any agreement or other instrument to
which that Person is a party or by which it or any of the properties owned or
leased by it is bound or otherwise subject.
"Deed of Trust" means the Deed of Trust and Assignment of Rents and Leases
executed by Santa Anita for the benefit of the Bank in order to secure the
obligations of Santa Anita under the Term Loan Credit Agreement.
"Default" means any condition or event that, with the giving of notice or
lapse of time or both, would, unless cured or waived, become an Event of
Default.
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"DOL" means the United States Department of Labor and any Person succeeding
to the functions thereof.
"Dollars" and "$" means lawful money of the United States of America.
"Environmental Damages" means all claims, judgments, damages, losses,
penalties, liabilities (including strict liability), costs and expenses,
including costs of investigation, remediation, defense, settlement and
reasonable attorneys' fees and consultants' fees, that are incurred at any time
as a result of the existence of Hazardous Material upon, about or beneath the
Mortgaged Property or any other real property owned by the Borrower or any of
its Subsidiaries or migrating or threatening to migrate to or from any such real
property, or arising from any investigation, proceeding or remediation of any
location at which the Borrower, any of its Subsidiaries or any predecessors are
alleged to have directly or indirectly disposed of Hazardous Materials or
arising in any manner whatsoever out of any violation of Environmental
Requirements.
"Environmental Lien" means a Lien in favor of any Governmental Authority
for Environmental Damages.
"Environmental Requirements" means all Applicable Laws relating to
Hazardous Materials or the protection of human health or the environment,
including all requirements pertaining to reporting, permitting, investigation
and remediation of releases or threatened releases of Hazardous Materials into
the environment, or relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, any
amendments thereto, any successor statutes, and any regulations promulgated
thereunder.
"ERISA Affiliate" means (i) any corporation which is a member of the same
controlled group of corporations (within the meaning of Section 414(b) of the
Code) as the Borrower; (ii) any trade or business (whether or not incorporated)
which is under common control (within the meaning of Section 414(c) of the Code)
with the Borrower; and (iii) a member of the same affiliated service group
(within the meaning of Section 414(m) of the Code) as the Borrower, any
corporation described in clause (i) above or any trade or business described in
clause (ii) above or (iv) any other Person which is required to be aggregated
with the Borrower pursuant to regulations promulgated under Section 414(o) of
the Code.
"Event of Default" is defined in Section 7.1.
"Fair Market Value" means, with respect to any asset or property, the sale
value that could be obtained in an arm's-length transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under pressure or
compulsion to complete the transaction.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System, or any successor thereto.
"Fees" means, collectively, the fees described or referenced in Section
2.5.
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"Fiscal Year" means the fiscal year of the Borrower, which shall be the 12
month-period ending on December 31 in each year or such other period as the
Borrower may designate and the Bank may approve in writing, which approval shall
not be unreasonably withheld or delayed. "Fiscal Quarter" or "fiscal quarter"
means any quarter of a Fiscal Year.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as in effect from time to time.
"Governmental Approval" means an authorization, consent, approval, permit
or license issued by, or a registration or filing with, any Governmental
Authority.
"Governmental Authority" means any nation and any state or political
subdivision thereof and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government and any
tribunal or arbitrator of competent jurisdiction.
"Hazardous Materials" means any substance (i) the presence of which
requires investigation or remediation under any Applicable Law; (ii) that is or
becomes defined as a "hazardous waste" or "hazardous substance" under any
Applicable Law, including the Comprehensive Environmental Response, Compensation
and Liability Act (42 U.S.C. Section 9601 et seq.) or the Resource Conservation
and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii) that is toxic,
explosive, corrosive, inflammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is or becomes regulated by any
Governmental Authority; (iv) the presence of which on the Mortgaged Property or
any other real property owned by the Borrower or any of its Subsidiaries causes
or threatens to cause a nuisance upon such real property or to adjacent
properties or poses or threatens to pose a hazard to any such real property or
to the health or safety of Persons on or about any such real property; or (v)
without limitation, that contains gasoline or other petroleum hydrocarbons,
polychlorinated biphenyls or asbestos.
"Hedging Contract" means, for any Person, any interest rate, commodity,
foreign exchange or other hedging agreement (including swaps, collars, caps and
forward contracts) between such Person and one or more financial institutions
providing for the transfer or mitigation of fluctuations of interest rates,
exchange rates or other prices either generally or under specific contingencies.
"Indebtedness", as applied to any Person, means, at any time, without
duplication, (a) all Indebtedness, obligations or other liabilities of such
Person (i) for borrowed money or evidenced by debt securities, debentures,
acceptances, notes or other similar instruments, and any past due interest, fees
and charges relating thereto, (ii) payable under profit payment agreements or in
respect of obligations to redeem, repurchase or exchange any securities of such
Person or to pay dividends in respect of any Capital Stock, (iii) with respect
to letters of credit issued for such Person's account, (iv) to pay the deferred
purchase price of property or services, except accounts payable and accrued
expenses arising in the ordinary course of business or (v) in respect of Capital
Leases; (b) all Contingent Obligations of such Person; (c) all Indebtedness,
obligations or other liabilities of such person or others secured by a Lien on
any property of such Person, whether or not such Indebtedness, obligations or
liabilities are assumed by such Person, all as of
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such time; and (d) all Indebtedness, obligations or other liabilities of such
Person in respect of Hedging Contracts, net of liabilities owed to such Person
by the counterparties thereon.
"Intercompany Debt" means any Indebtedness of any Subsidiary that is owed
to any Wholly-Owned Subsidiary or the Borrower.
"Interest Period" means, with respect to each LIBOR Loan, the period
commencing on the date specified in the related Notice of Borrowing or Notice of
Conversion/Continuation (or telephonic notice in lieu thereof) and ending on the
numerically corresponding day in the calendar month that is one, two or three
months thereafter, as the Borrower may elect pursuant to Section 2.1 or Section
2.4; provided that (i) in the case of immediately successive Interest Periods,
the succeeding Interest Period shall commence on the day on which the preceding
Interest Period expires; (ii) any Interest Period (A) that would otherwise end
on a day that is not a Business Day shall be extended to the next succeeding
Business Day, unless such succeeding Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day or (B) that begins on the last Business Day of a calendar month (or
on a day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last Business Day of
the calendar month at the end of such Interest Period; and (iii) no Interest
Period for any Loan shall end after the Termination Date.
"Investment" means, with respect to any Person, (i) any direct or indirect
purchase or other acquisition by that Person of Capital Stock or securities, or
any beneficial interest in Capital Stock or other securities, of any other
Person, any partnership (whether general or limited) or limited liability
company interest in any other Person, or all or any substantial part of the
business or assets of any other Person, and (ii) any direct or indirect loan,
advance or capital contribution by that Person to any other Person, including
all Indebtedness and accounts receivable from that other Person that are not
current assets or did not arise from sales to that other Person in the ordinary
course of business. The amount of any Investment shall be the original cost of
such Investment plus the cost of all additions thereto, without any adjustments
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment.
"LATC Guaranty" means the guaranty of obligations under the Term Loan
Credit Agreement by the Borrower, in substantially the form of Exhibit F, as
amended from time to time.
"Leases" is defined in Section 3.21.
"LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) equal to a fraction, the nominator of which shall equal
Base LIBOR and the denominator of which shall equal 100% minus the LIBOR Reserve
Percentage.
"LIBOR Loan" means a Loan which bears interest at a rate determined by
reference to a LIBOR as provided in Section 2.3.
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"LIBOR Reserve Percentage" means the reserve percentage prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
"Lien" means any lien, mortgage, pledge, security interest, charge, or
encumbrance of any kind (including any conditional sale or other title retention
agreement or any lease in the nature thereof) and any agreement to give or
refrain from giving any lien, mortgage, pledge, security interest, charge, or
other encumbrance of any kind.
"Loan" is defined in Section 2.1.
"Loan Account" is defined in Section 2.2.
"Loan Documents" means, collectively, this Agreement, the Note, the LATC
Guaranty, the Assignment of Leases and Rents and any other agreement, instrument
or other writing executed or delivered by the Borrower or any Subsidiary in
connection herewith or therewith, and all amendments, exhibits and schedules to
any of the foregoing.
"Magna International" means Magna International Inc., a corporation
incorporated under the law of the province of Ontario, Canada.
"Margin Regulations" means Regulations U and X of the Federal Reserve
Board, as amended from time to time.
"Margin Stock" means "margin stock" as defined in the Margin Regulations.
"Material Adverse Effect" or "Material Adverse Change" means the occurrence
of an event or events, or the existence of facts or circumstances, that has or
have a material adverse effect on, or result in a material adverse change in, as
the case may be, any one or more of the following:
(A) the ability of the Borrower or of any Subsidiary to conduct a
Racetrack Business at the Track; or
(B) the ability of the Borrower and its Subsidiaries to perform their
respective obligations under the Loan Documents; or
(C) the validity, legality or enforceability of any Loan Document, any
material provision therein, or the rights and remedies of the Bank
thereunder; or
(D) the validity, enforceability, perfection or priority of any of the
Liens in favor of the Bank arising or created under the Loan Documents or
any of them.
"Material Adverse Effect" or "Material Adverse Change" shall also include the
occurrence of an event or events or the existence of facts or circumstances that
could reasonably be expected to
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adversely affect the business, assets, results of operations, financial
condition or financial prospects of the Borrower and its Subsidiaries, taken as
a whole, and thereby:
(i) result in the incurrence by the Borrower or a Subsidiary of a
liability or liabilities, or require an expenditure or expenditures, in an
aggregate amount in excess of $2,000,000;
(ii) impair or diminish the value of any asset or assets of the
Borrower or a Subsidiary in an aggregate amount in excess of $2,000,000; or
(iii) reduce the actual or projected operating revenue or cash flow in
the Fiscal Year in which such event occurs, or in which such facts or
circumstances occur, or in the next succeeding Fiscal Year, by 10% or more
in relation to the respective amounts thereof (x) in the Fiscal Year
preceding the Fiscal Year in which such event occurs, or in which such
facts or circumstances occur, or (y) reflected in the forecast most
recently delivered in respect of such Fiscal Years pursuant to Section
5.1(h) hereof.
"Material Environmental Amount" means an amount payable by the Borrower or
any of its Subsidiaries in excess of $1,500,000 in respect of any Environmental
Damage or in connection with the violation or alleged violation of, or
compliance or attempted compliance with, any Environmental Requirement.
"Mortgaged Property" means Santa Anita's real property located at 285 West
Huntington Drive, Arcadia, California 91066 and known as the Santa Anita Race
Track (and the surrounding land) as described more fully in the Deed of Trust.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years
was, contributed to by the Borrower or any ERISA Affiliate.
"Net Income" means, for any period, net income (or loss) after taxes of the
Borrower and its Subsidiaries on a consolidated basis for such period determined
in accordance with GAAP.
"Note" means a Revolving Credit Promissory Note made by the Borrower
payable to the order of the Bank in substantially the form of Exhibit A, as
amended from time to time.
"Notice of Borrowing" is defined in Section 2.1.
"Oak Tree" means Oak Tree Racing Association, a California non-proft
corporation.
"Notice of Conversion/Continuation" is defined in Section 2.4.
"Obligations" means all present and future obligations and liabilities of
the Borrower or any of its Subsidiaries of every type and description arising
under or in connection with the Loan Documents due or to become due to the Bank
or any Person entitled to indemnification under the Loan Documents, or any of
their respective successors, transferees or assigns, whether for
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principal, interest, letter of credit or other reimbursement obligations, cash
collateral cover, Fees, expenses, indemnities or other amounts (including
attorneys' fees and expenses).
"Operating Lease" means, as applied to any Person, any lease of any
property (whether real, personal, or mixed) under which such Person is the
lessee and that is not capitalized on the balance sheet of such Person.
"Parent" means MI Entertainment Corp., a Delaware corporation, of which
Santa Anita is a Wholly-Owned Subsidiary.
"Parent Pledge Agreement" means the Pledge Agreement between Parent and the
Bank in substantially the form of Exhibit B, as amended from time to time.
"PBGC" means the Pension Benefit Guaranty Corporation and any Person
succeeding to the functions thereof.
"Permitted Liens" means, with respect to any asset, the Liens (if any)
permitted to exist on such asset under Section 6.2.
"Person" means an individual, a corporation, a partnership, a limited
liability company, a trust, an unincorporated organization or any other entity
or organization, including a government or any agency or political subdivision
thereof.
"Plan" means an employee benefit plan defined in Section 3(3) of ERISA in
respect of which the Borrower or any ERISA Affiliate is, or within the
immediately preceding six years was, an "employer" as defined in Section 3(5) of
ERISA.
"Prime Rate" means at any time the rate of interest most recently announced
within the Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of the Bank's Prime Rate and serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof in such
internal publication or publications as the Bank may designate. Each change in
the rate of interest shall become effective on the date each Prime Rate change
is announced within the Bank.
"Prime Rate Loan" means any Loan which bears interest at a rate determined
by reference to the Prime Rate as provided in Section 2.3.
"Racetrack Business" means the operation of the Track and all horseracing,
gaming, entertainment, and other activities associated therewith in a manner
consistent with past practices of the Track.
"Racing Day" means any day with respect to which horseracing and associated
gaming, entertainment and other activities have been authorized to be conducted
at the Track pursuant to a valid Racing License.
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"Racing License" means a license or permit issued by the California Horse
Racing Board, or such other relevant Governmental Authority, pursuant to which
the licensee or permitee is authorized to hold horseracing and related events on
a specified number of days during any calendar year at a specified location.
"Regulation D" means Regulation D of the Federal Reserve Board, as amended
from time to time.
"Regulatory Change" means (i) the adoption or becoming effective after the
date hereof of any treaty, law, rule or regulation, (ii) any change in any such
treaty, law, rule or regulation (including Regulation D), or any change in the
administration or enforcement thereof, by any Governmental Authority, central
bank or other monetary authority charged with the interpretation or
administration thereof, in each case after the date hereof, or (iii) compliance
by the Bank (or, in the case of capital adequacy requirements, any holding
company of the Bank) with, any interpretation, directive, request, order or
decree (whether or not having the force of law) of any such Governmental
Authority, central bank or other monetary authority issued or made after the
date hereof.
"Reportable Event" means any of the events described in Section 4043 of
ERISA.
"Restricted Payment" means (i) any dividend, distribution or payment,
direct or indirect, to or for the benefit of any holder of any Capital Stock of
the Borrower now or hereafter outstanding, except (a) a dividend or other
distribution payable solely in shares or equivalents of the same class of
Capital Stock of the Person paying such dividend or making such distribution,
(b) the issuance of Capital Stock upon the exercise of outstanding warrants,
options or other rights, or (ii) any redemption, retirement, sinking fund or
similar payment, purchase or other acquisition for value, direct or indirect, of
any Capital Stock of the Borrower now or hereafter outstanding, or (iii) any
payment of principal of or interest on, or any payment made to redeem,
repurchase, defease (by way either of in-substance or legal defeasance) or
otherwise acquire or retire for value, (a) any Subordinated Debt of the Borrower
or (b) any Contingent Obligation with respect to any such Subordinated Debt,
except, so long as no Default or Event of Default has occurred and is
continuing, any payment of accrued interest when due in accordance with the
terms of the documents or instruments governing or evidencing such Subordinated
Debt, or (iv) any payment of principal of or interest on any Indebtedness or
other obligation (other than Subordinated Debt and Intercompany Debt) owing by
the Borrower or any Subsidiary to Santa Anita or any other Affiliate of the
Borrower.
"Revolving Credit Obligations" means, at any particular time, the
outstanding principal amount of all Loans at such time.
"Sale-Leaseback Transaction" means any arrangement with any Person
providing for the leasing by the Borrower of any real or personal property that,
or of any property similar to and used for substantially the same purposes as
any other property that, has been or is to be sold or otherwise transferred by
the Borrower to such Person with the intention of entering into such a lease.
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"Santa Anita" means The Santa Anita Companies, Inc., a Delaware
corporation.
"Santa Anita Guaranty" means the guaranty of the Obligations by Santa Anita
for the benefit of the Bank in substantially form of Exhibit D, as amended from
time to time.
"Santa Anita Pledge Agreement" means the Pledge Agreement between Santa
Anita and the Bank in substantially the form of Exhibit C, as amended from time
to time.
"SEC" means the United States Securities and Exchange Commission, and any
successor.
"Senior Officer" means, with respect to the Borrower, the Chairman of the
Board of Directors, the President, the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer, the Treasurer or any Vice
President.
"Subordinated Debt" means any Indebtedness of the Borrower existing on the
date hereof or hereafter incurred that is subordinated to the Obligations on the
Approved Subordiantion Terms or on other terms approved in advance in writing by
the Bank and which (i) is unsecured, (ii) has an effective interest rate not
greater than the interest rate that is applicable to the Loans at the time such
Indebtedness is incurred (if such Indebtedness bears interest at a fixed rate)
or from time to time (if such Indebtedness bears interest at a floating rate),
(iii) has a stated maturity date no earlier than one year following the
Termination Date, (iv) contains no financial or operating covenants, (v) does
not require any payment of principal prior to the Termination Date, and (vi) (x)
is governed and evidenced only by a promissory note in substantially the form of
Exhibit I hereto or (y) has other terms and provisions that are reasonably
satisfactory to the Bank.
"Subsidiary" means, with respect to any Person, (i) any other Person of
which more than 50% of the total voting power of the Capital Stock entitled to
vote in the election of the board of directors (or other Persons performing
similar functions) is at the time directly or indirectly owned by such first
Person and (ii) any other Person the accounts of which would be consolidated
with those of such Person in a consolidated balance sheet of such Person
prepared in accordance with GAAP. Unless otherwise indicated, "Subsidiary"
refers to a Subsidiary of the Borrower.
"Taxes" means any present or future income, stamp and other taxes, charges,
fees, levies, duties, imposts, withholdings or other assessments, together with
any interest and penalties, additions to tax and additional amounts imposed by
any federal, state, local or foreign taxing authority upon any Person.
"Termination Date" means the earlier to occur of (i) the date of
termination of the Commitment pursuant to the terms hereof and (ii) May 1, 2000.
"Termination Event" means (i) a Reportable Event with respect to any
Benefit Plan; (ii) the withdrawal of the Borrower or any ERISA Affiliate from a
Benefit Plan during a plan year in which the Borrower or such ERISA Affiliate
was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or the
cessation of operations which results in the termination of employment of at
least 20% of Benefit Plan participants who are employees of the Borrower or any
ERISA Affiliate; (iii) the imposition of an obligation on the Borrower or any
ERISA
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Affiliate under Section 4041 of ERISA to provide affected parties written notice
of intent to terminate a Benefit Plan in a distress termination described in
Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to
terminate a Benefit Plan; (v) any event or condition which could reasonably
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan; or (vi) the partial or
complete withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer
Plan.
"Term Loan Credit Agreement" means the Credit Agreement dated as of the
date hereof between Santa Anita and the Bank.
"Term Loan Documents" means the "Loan Documents" as defined in the Term
Loan Credit Agreement.
"Track" means the race track located on the Mortgaged Property and commonly
known as the Santa Anita Race Track.
"Uniform Commercial Code" means the Uniform Commercial Code as enacted in
the State of California, as it may be amended from time to time.
"Wholly-Owned" means, with respect to any Subsidiary, that all the Capital
Stock (except for directors' qualifying shares) of such Subsidiary is directly
or indirectly owned by the Borrower.
SECTION 1.2. RELATED MATTERS.
(a) Construction. Unless the context of this Agreement clearly requires
------------
otherwise, references to the plural include the singular, the singular includes
the plural, the part includes the whole, "including" is not limiting, and "or"
has the inclusive meaning represented by the phrase "and/or." The words
"hereof," "herein," "hereby," "hereunder" and similar terms in this Agreement
refer to this Agreement as a whole (including the Preamble, the Recitals, the
Schedules and the Exhibits) and not to any particular provision of this
Agreement. Article, section, subsection, exhibit, schedule, recital and preamble
references in this Agreement are to this Agreement unless otherwise specified.
References in this Agreement to any agreement, other document or law "as
amended" or "as amended from time to time," or to amendments of any document or
law, shall include any amendments, supplements, replacements, renewals, waivers
or other modifications not prohibited by the Loan Documents. References in this
Agreement to any law (or any part thereof) include any rules and regulations
promulgated thereunder (or with respect to such part) by the relevant
Governmental Authority, as amended from time to time.
(b) Determinations. Any determination or calculation contemplated by this
--------------
Agreement that is made by the Bank shall be final and conclusive and binding
upon the Borrower in the absence of manifest error. References in this Agreement
to any "determination" by the Bank include good faith estimates by the Bank (in
the case of quantitative determinations), and good faith beliefs by the Bank (in
the case of qualitative determinations).
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(c) Accounting Terms and Determinations. Unless otherwise specified herein
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(and whether or not expressly stated), all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with GAAP as in effect from time to time provided, however, that if
there occurs after the date hereof any change in GAAP that affects in any
respect the calculation of any covenant contained in Article VI, the Bank and
the Borrower shall negotiate in good faith amendments to the provisions of this
Agreement that relate to the calculation of such covenant with the intent of
having the respective positions of the Bank and the Borrower after such change
in GAAP conform as nearly as possible to their respective positions as of the
date of this Agreement and, until any such amendments have been agreed upon, the
Borrower's compliance with the covenants in Article VI shall be determined as if
no such change in GAAP has occurred.
ARTICLE II
THE CREDIT
SECTION 2.1. LOANS.
(a) Loans. Subject to the terms and conditions set forth herein, the Bank
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hereby agrees to make revolving loans, in Dollars (each individually, a "Loan"
and, collectively, the "Loans") to the Borrower from time to time during the
period from December 1, 1999 to the Business Day next preceding the Termination
Date in an amount not to exceed at any time the Commitment, provided that the
Revolving Credit Obligations shall not exceed, at any time, the Commitment.
Subject to the provisions hereof, the Borrower may repay any outstanding Loan on
any day which is a Business Day and any amounts so repaid may be reborrowed, up
to the amount of available under this Section at the time of such Borrowing,
until the Business Day next preceding the Termination Date.
(b) Types of Loans and Minimum Amounts. Each Borrowing of Loans shall be
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in a minimum aggregate amount of $500,000 and integral multiples of $100,000.
(c) Notice of Borrowing. When the Borrower desires to borrow under this
-------------------
Section 2.1, it shall deliver to the Bank an irrevocable Notice of Borrowing (a
"Notice of Borrowing"), signed by it, no later than 1:00 p.m. (Los Angeles time)
(i) on the Business Day next preceding the proposed funding date, in the case of
a Borrowing of Prime Rate Loans and (ii) at least three (3) Business Days in
advance of the proposed funding date, in the case of a Borrowing of LIBOR Loans.
Such Notice of Borrowing shall specify (i) the proposed funding date (which
shall be a Business Day), (ii) the aggregate amount of the proposed Borrowing,
(iii) whether the proposed Borrowing will be of Prime Rate Loans or LIBOR Loans,
(iv) in the case of LIBOR Loans, the length of the Interest Period with respect
to such Borrowing and (v) instructions for the disbursement of the proceeds of
the proposed Borrowing. In lieu of delivering such a Notice of Borrowing, the
Borrower shall give the Bank irrevocable telephonic notice of any proposed
Borrowing by 1:00 p.m. on the day of the proposed Borrowing, and shall confirm
such notice by delivery of the Notice of Borrowing by telecopy to the Bank
promptly, but in no event later than 3:00 p.m. (Los Angeles time) on the same
day.
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(d) Making of Revolving Loans. (i) Promptly after receipt of a Notice of
-------------------------
Borrowing under Section 2.1(b) (or telephonic notice in lieu thereof), the Bank,
subject to the satisfaction of the conditions set forth in Section 4.2, shall
make the amount of such Borrowing available to the Borrower in immediately
available funds or shall disburse such proceeds in accordance with the
Borrower's disbursement instructions set forth in the applicable Notice of
Borrowing.
(e) Use of Proceeds of Revolving Loans. The proceeds of the Loans may be
----------------------------------
used solely to fund working capital in the ordinary course of the business of
the Borrower and its Subsidiaries.
(f) Termination Date. The Commitment shall terminate, and all outstanding
----------------
Revolving Credit Obligations shall be paid in full, on the Termination Date.
The Bank's obligation to make Loans shall terminate on the Business Day next
preceding the Termination Date.
SECTION 2.2. EVIDENCE OF INDEBTEDNESS.
(a) Note. The Borrower shall execute and deliver to the Bank on the
----
Closing Date the Note evidencing the Loans.
(b) Loan Account. The Bank shall maintain in accordance with its usual
------------
practice an account or accounts (a "Loan Account") evidencing the Indebtedness
of the Borrower to the Bank resulting from the Loans owing to the Bank from time
to time, including the amount of principal and interest payable and paid to the
Bank from time to time hereunder and under the Note.
SECTION 2.3. INTEREST; INTEREST PAYMENTS.
(a) Interest. Each Loan shall bear interest on the unpaid principal amount
--------
thereof, from and including the date of the making of such Loan to and excluding
the due date or the date of any repayment in full thereof, at the following
rates per annum: (i) for so long as and to the extent that such Loan is a Prime
Rate Loan, at the Prime Rate (as in effect from time to time) for each day on
which all or any portion of a Loan is a Prime Rate Loan; and (i) for so long as
and to the extent that such Loan is a LIBOR Loan, at the LIBOR for each day
during each Interest Period applicable thereto plus 2.20%. When interest is
determined in relation to the Prime Rate, each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is announced
within the Bank.
(b) Interest Payments. Accrued interest shall be payable in arrears (i) on
-----------------
the last day each calendar month; (ii) in the case of any interest accrued at
the rate specified in Section 2.3(c) below, on demand; and (iii) when the Loans
shall become due (whether at maturity, by reason of prepayment, acceleration or
otherwise).
(c) Default Interest. Notwithstanding the rates of interest specified in
----------------
Section 2.3(a) or elsewhere herein, if all or a portion of the principal of any
Loan or any interest thereon or any other amount that is due and payable
hereunder or under any other Loan Document is not paid when due (whether at
stated maturity, by acceleration or otherwise), the Borrower shall pay
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interest on such overdue amount of the principal of such Loan, interest or other
amount owing to the Bank hereunder or under any other Loan Document, on demand
from time to time, to the extent permitted by law, (i) in the case of overdue
principal, at the rate otherwise applicable to the Loans plus two percent (2%)
per annum and (ii) in the case of all other amounts owing to the Bank, at a rate
per annum equal to the Prime Rate plus two percent (2%), in each case, from and
including such date of non-payment to but excluding the date on which such
amount is paid in full (after as well as before judgment).
(d) Computation of Interest. Interest on all Obligations shall be computed
-----------------------
on the basis of the actual number of days elapsed in the period during which
interest accrues and a year of 360 days. In computing interest on any Loan, the
first day of any applicable Interest Period shall be included and the last day
of such Interest Period shall be excluded.
SECTION 2.4. CONVERSION/CONTINUATION; LIBOR PROVISIONS.
(a) Conversion or Continuation. (i) The Borrower shall have the option (A)
--------------------------
at any time, to convert all or any part of outstanding Prime Rate Loans to LIBOR
Loans; (B) on the last day of the Interest Period applicable thereto, (1) to
convert all or any part of outstanding LIBOR Loans to a Prime Rate Loans, or (2)
continue all or any part of outstanding LIBOR Loans as LIBOR Loans and the
succeeding Interest Period of such continued LIBOR Loans shall commence on last
day of the then current Interest Period; provided, however, no such outstanding
Loan may be continued as, or be converted into, a LIBOR Loan if (x) the
continuation of, or the conversion into, would violate any of the provisions of
this Section or (y) an Event of Default or Default would occur or has occurred
and is continuing.
(ii) To convert or continue the any Loan under Section 2.4(a)(i), the
Borrower shall deliver a Notice of Conversion/Continuation (a "Notice of
Conversion/Continuation") to the Bank no later than 11:00 a.m. (Los Angeles
time) at least (x) one Business Day in the case of the conversion of a Prime
Rate Loan or (y) three (3) Business Days in the case of conversion into or
continuation as a LIBOR Loan, advance of the proposed conversion/continuation
date. A Notice of Conversion/Continuation shall specify (A) the proposed
conversion/continuation date (which shall be a Business Day), (B) whether the
Loan shall be converted or continued, and (C) in the case of a conversion into,
or continuation of, a LIBOR Loan, the requested Interest Period. In lieu of
delivering a Notice of Conversion/Continuation, the Borrower may give the Bank
telephonic notice of any proposed conversion/continuation by the time required
under this Section, and such notice shall be confirmed in writing delivered to
the Bank promptly (but in no event later than 3:00 p.m. (Los Angeles time) on
the same day). Any Notice of Conversion/Continuation for conversion to, or
continuation of, any Loan (or telephonic notice in lieu thereof) shall be
irrevocable, and the Borrower shall be bound to convert or continue in
accordance therewith.
(b) Changes; Legal Restrictions. If after the date hereof the Bank
---------------------------
determines that the adoption or implementation of or any change in or in the
interpretation or administration of any law or regulation or any guideline or
request from any central bank or other Governmental Authority or quasi-
governmental authority exercising jurisdiction, power or control over the
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Bank or over banks or financial institutions generally (whether or not having
the force of law), compliance with which, in each case after the date hereof:
(i) subjects the Bank to charges (other than Taxes) in respect of the
Loans or in respect of the Bank's Commitment or changes the basis of taxation of
payments to the Bank of principal, fees, interest, or any other amount payable
hereunder with respect to LIBOR Loans; or
(ii) imposes, modifies, or holds applicable, any reserve (other than
reserves taken into account in calculating the LIBOR), special deposit,
compulsory loan, FDIC insurance or similar requirement against assets held by,
or deposits or other liabilities in or for the account of, advances or loans by,
commitments made, or other credit extended by, or any other acquisition of funds
by, the Bank;
and the result of any of the foregoing is to increase the cost to the Bank of
making, converting or continuing any Loan as a LIBOR Loan, or reduce any amount
receivable thereunder; then, in such case, the Borrower shall, within fourteen
(14) days after written demand by the Bank, pay to the Bank from time to time as
specified by the Bank, such amount or amounts as may be necessary to compensate
the Bank (in the form of an increased rate of, or different method of
calculating, interest or otherwise) for any such additional cost incurred or
reduced amount received. Such demand shall be accompanied by a statement as to
the amount of such compensation and include a summary of the basis for such
demand (it being agreed that such summary, showing in reasonable detail the
basis for the calculation of such compensation, shall, absent clearly
demonstrable error, be final and conclusive and binding on the Borrower).
(c) Confirmation of LIBOR. Upon the reasonable request of the Borrower
---------------------
from time to time, the Bank shall promptly provide to the Borrower such
information with respect to the applicable LIBOR as may be so requested.
(d) Interest Rate Unascertainable, Inadequate or Unfair. In the event that
---------------------------------------------------
at least one (1) Business Day before any Interest Period in which any Loan is to
be converted into, or made or continued as, a LIBOR Loan:
(i) the Bank determines that adequate and fair means do not exist for
ascertaining the applicable interest rates by reference to which the LIBOR then
being determined is to be fixed; or
(ii) the Bank determines that Dollar deposits in the outstanding
principal amount of any Loan at such time are not generally available in the
London interbank market for a period equal to such proposed Interest Period;
then the Bank shall forthwith give written notice thereof to the Borrower,
whereupon (until the Bank notifies the Borrower that the circumstances giving
rise to such suspension no longer exist) the right of the Borrower to elect to
have such Loan bear interest based upon the LIBOR shall be suspended and any
LIBOR Loan shall be converted into a Prime Rate Loan on the last day of the then
current Interest Period therefor.
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(e) Illegality. (i) If at any time the Bank determines (which
----------
determination shall, absent manifest error, be final and conclusive and binding
upon all parties) that the conversion into, or the making or continuation of, a
LIBOR Loan has become unlawful or impermissible by compliance by the Bank with
any law, governmental rule, regulation or order of any Governmental Authority
(whether or not having the force of law and whether or not failure to comply
therewith would be unlawful or would result in costs or penalties), then, and in
any such event, the Bank may give notice of that determination, in writing, to
the Borrower.
(ii) When notice is given by the Bank under this Section, the
Borrower's right to request from the Bank and the Bank's obligation, if any, to
make, convert or continue any Loan as a LIBOR Loan shall be immediately
suspended, and the Borrower shall immediately, or if permitted by applicable
law, no later than the date permitted thereby, upon at least one (1) Business
Day's prior written notice to the Bank, convert any LIBOR Loan into a Prime Rate
Loan.
(iii) If at any time after the Bank gives notice under this Section
the Bank determines that it may lawfully make LIBOR Loans, the Bank shall
promptly give notice of that determination, in writing, to the Borrower. The
Borrower's right to request, and the Bank's obligation, if any, to convert to or
make or continue a LIBOR Loan shall thereupon be restored.
(f) Compensation. In addition to all amounts required to be paid by the
------------
Borrower pursuant to this Agreement, the Borrower shall compensate the Bank,
within fourteen (14) days after written demand by the Bank, for all losses,
expenses and liabilities (including, without limitation, any loss or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by the Bank to fund or maintain the LIBOR Loans to the Borrower) which
the Bank may sustain (i) if for any reason a Borrowing, conversion into, or
continuation of LIBOR Loans does not occur on a date specified therefor in a
Notice of Borrowing or a Notice of Conversion/Continuation given by the Borrower
or in a telephonic request by it for borrowing or conversion/continuation or a
successive Interest Period does not commence after notice therefor is given
pursuant to this Section 2.4, including, without limitation, pursuant to Section
2.4(d), (ii) if for any reason a LIBOR Loan is prepaid (including, without
limitation, mandatorily pursuant to Section 2.6) on a date which is not the last
day of the applicable Interest Period, (iii) as a consequence of a required
conversion of a LIBOR Loan to a Prime Rate Loan as a result of any of the events
indicated in Section 2.4(d) or (e), or (iv) as a consequence of any failure by
the Borrower to repay the any LIBOR Loan when required by the terms hereof. The
Bank shall deliver to the Borrower concurrently with such demand a written
statement in reasonable detail as to such losses, expenses and liabilities, and
this statement shall be conclusive as to the amount of compensation due to the
Bank, absent manifest error.
SECTION 2.5. FEES.
(a) Upfront Fee. The Borrower shall pay to the Bank on the Closing Date an
-----------
upfront fee equal to $10,000 plus all out-of-pocket costs and expenses of the
Bank (including, without limitation, disbursements and reasonable fees of legal
counsel to the Bank) incurred in connection with this Agreement.
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(b) Calculation and Payment of Fees. The Fees shall be calculated on the
-------------------------------
basis of the actual number of days elapsed in a 360-day year. All Fees shall be
payable in addition to, and not in lieu of, interest, expense reimbursements,
indemnification and other Obligations. Fees shall be payable to the Bank's
Account in accordance with Section 2.7 except as otherwise provided by the Bank
in writing.
SECTION 2.6. REDUCTIONS OF THE COMMITMENT; PREPAYMENTS.
(a) Voluntary Reductions. The Borrower, upon at least three (3) Business
--------------------
Days' prior written notice to the Bank, shall have the right, from time to time,
to terminate in whole or permanently reduce in part the Commitment, provided
that the Borrower shall have made whatever payment may be required to reduce the
Revolving Credit Obligations to an amount less than or equal to the Commitment
as reduced or terminated. Any partial reduction of the Commitment shall be in
an aggregate minimum amount of $500,000 and integral multiples of $100,000 in
excess of that amount. Any notice of termination or reduction given to the Bank
under this Section shall specify the date (which shall be a Business Day) of
such termination or reduction and, with respect to a partial reduction, the
aggregate principal amount thereof. When notice of termination or reduction is
delivered as provided herein, the principal amount of the Loans specified in the
notice shall become due and payable on the date specified in such notice.
(b) Voluntary Prepayments. Subject to this Section, the Borrower may, at
---------------------
its option, at any time or from time to time, prepay the Loans in whole or in
part, without premium or penalty, provided that (a) any prepayment shall be in
an aggregate principal amount of at least $500,000 and in integral multiples of
$100,000 in excess thereof (or, alternatively, the whole amount of Loans then
outstanding) and (b) any prepayment of a LIBOR Loan shall be made only together
with amounts payable pursuant to Section 2.4(f).
(c) Mandatory Prepayments of Revolving Credit Obligations. In the event
-----------------------------------------------------
the Revolving Credit Obligations at any time are greater than the Commitment,
the Borrower shall immediately make a mandatory payment of the Revolving Credit
Obligations in an amount equal to the amount of such excess, which payment shall
be applied to the Revolving Credit Obligations in accordance with Section 2.7.
The prepayments in respect of reductions and terminations described shall be
subject to Section 2.4(f).
SECTION 2.7. MANNER OF PAYMENT.
(a) Except as otherwise expressly provided, the Borrower shall make each
payment under the Loan Documents to the Bank in Dollars and in immediately
available funds, without any deduction whatsoever, including any deduction for
any setoff, recoupment, counterclaim or Taxes, by depositing such payment in the
account specified by the Bank from time to time not later than 10:00 a.m. (Los
Angeles time) on the due date thereof. Any payments received after 10:00 a.m.
(Los Angeles time) on any Business Day shall be deemed received on the next
succeeding Business Day.
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(b) Payments on Non-Business Days. Whenever any payment to be made
-----------------------------
hereunder shall be due on a day that is not a Business Day, such payment shall
instead be made on the next succeeding Business Day, together with interest
accrued during the period of such extension.
(c) Application of Payments. (i) Subject to the provisions of paragraph
-----------------------
(ii) below and except as otherwise provided herein, all payments in respect of
the Loans shall be applied first to outstanding Prime Rate Loans and then to
-----
outstanding LIBOR Loans, in each case, in the inverse order of termination of
Interest Periods applicable thereto.
(ii) After the occurrence and during the continuance of an Event of
Default, the Bank may, and shall upon the acceleration of the Obligations, apply
all payments in respect of any Obligations and all proceeds of Collateral in the
following order:
(A) first, to pay Obligations in respect of any expense
-----
reimbursements, indemnities and other similar amounts then due to the Bank,
including without limitation, any amounts in respect of cash management
services provided to the Borrower and its Subsidiaries by the Bank in
connection with this Agreement;
(B) second, to pay Obligations in respect of any Fees then due to the
------
Bank;
(C) third, to pay interest due in respect of the Loans; and
-----
(D) fourth, to pay or prepay principal outstanding on Loans.
------
The order of priority set forth above may at any time and from time to time
be changed by the Bank without necessity of notice to or consent of or approval
by the Borrower or any other Person.
(d) Payments Set Aside. To the extent the Bank receives payment of any
------------------
amount under the Loan Documents, whether by way of payment by the Borrower,
setoff, as proceeds of Collateral or otherwise, which payment is subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, receiver or any other party under any bankruptcy law,
other law or equitable cause, in whole or in part, then, to the extent of such
payment received, the Obligations or part thereof intended to be satisfied
thereby shall be revived and continue in full force and effect, together with
all Collateral security therefor, as if such payment had not been received by
the Bank.
(e) The Borrower authorizes the Bank to collect all principal, interest and
fees due under this Agreement and any other Loan Document by charging Borrower's
demand deposit account number 4375-672318 with the Bank, or any other demand
deposit account maintained by the Borrower with the Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by the Borrower.
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SECTION 2.8. REGULATORY CHANGES.
(a) Capital Costs. If a Regulatory Change regarding capital adequacy
-------------
(including the adoption or becoming effective of any treaty, law, rule,
regulation or guideline adopted pursuant to or arising out of the July 1988
report of the Basle Committee on Banking Regulations and Supervisory Practices
entitled "International Convergence of Capital Measurement and Capital
Standards") has or would have the effect of reducing the rate of return on the
capital of or maintained by the Bank or any company controlling the Bank as a
consequence of any Loan or other obligations hereunder and other commitments of
this type to a level below that which the Bank or company could have achieved
but for such Regulatory Change (taking into account the Bank's or company's
policies with respect to capital adequacy), then the Borrower shall from time to
time pay to the Bank, within 10 days after request by the Bank, such additional
amounts as the Bank determines to be sufficient to compensate the Bank or
company for such reduction in return, to the extent the Bank or such company
determines such reduction to be attributable to the existence, issuance or
maintenance of any Loan or other obligations for the account of the Borrower.
Such demand shall be accompanied by a statement as to the amount of such
compensation and include a summary of the basis for such demand (it being agreed
that such summary, showing in reasonable detail the basis for the calculation of
such compensation, shall, absent clearly demonstrable error, be final and
conclusive and binding on the Borrower).
(b) Taxes. (i) If the Borrower is required by Applicable Law to make any
-----
deduction or withholding in respect of any Taxes (other than Excluded Taxes)
from any amount payable under any Loan Document to or for the account of the
Bank, the Borrower shall pay to or for the account of the Bank, on the date such
amount is payable, such additional amounts as the Bank reasonably determines may
be necessary so that the net amounts received by it or for its account, in the
aggregate, after all applicable deductions or withholdings, shall equal the
amount that the Bank would have been entitled to receive if no deductions or
withholdings were made. "Excluded Taxes" means, with respect to any payment to
the Bank, any taxes imposed on or measured by the overall net income (including
a franchise tax based on net income) of the Bank by the jurisdiction in which it
is incorporated, maintains its principal executive office or in which its
agent's office is located.
(ii) If the Bank is required by law to make any payment on account of
Taxes (other than Excluded Taxes) on or in relation to any sum received or
receivable by it under any Loan Document, or any liability for Taxes (other than
Excluded Taxes) in respect of any such payment is imposed, levied or assessed
against the Bank, then the Borrower shall pay when due such additional amounts
as the Bank reasonably determines to be necessary so that the amount received by
it, less any such Taxes paid, imposed, levied or assessed, including any Taxes
(other than Excluded Taxes) imposed on such additional amounts, shall equal the
amount that the Bank would have been entitled to retain in the absence of the
payment, imposition, levy or assessment of such Taxes.
SECTION 2.9. COLLATERAL.
As security for all the Obligations, Santa Anita shall grant to the Bank a
first priority Lien on all of the Capital Stock of the Borrower pursuant to
Santa Anita Pledge Agreement.
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All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all out-of-pocket
costs and expenses incurred by Bank in connection with any of the foregoing
security, including without limitation, filing and recording fees and out-of-
pocket costs of appraisals, audits and title insurance.
SECTION 2.10. GUARANTIES.
The Obligations of the Borrower to the Bank shall be guaranteed in full by
Santa Anita as evidenced by and subject to the terms of Santa Anita Guaranty.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower makes the following representations and warranties to the
Bank, which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of the Obligations:
SECTION 3.1. ORGANIZATION, POWERS AND GOOD STANDING.
The Borrower and each of its Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, and has all requisite corporate power and authority and the legal
right to own and operate its properties, to carry on its business as heretofore
conducted and as proposed to be conducted, to enter into the Loan Documents to
which it is a party and to carry out the transactions contemplated thereby. The
Borrower and each of its Subsidiaries is duly qualified to do business and in
good standing in each jurisdiction in which it owns or operates any material
property or conducts any business or in which it otherwise is required by law to
be so qualified, except any jurisdictions where any failure to be so qualified,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
SECTION 3.2. AUTHORIZATION, BINDING EFFECT, NO CONFLICTS.
(a) Authorization. The execution, delivery and performance by the Borrower
-------------
and each of its Subsidiaries of each Loan Document to which they are a party
have been duly authorized by all necessary corporate or other action on the part
of such Person. Each such Loan Document has been duly executed and delivered by
the Borrower and each of its Subsidiaries party thereto and is the legal, valid
and binding obligation of such Person, enforceable against it in accordance with
its terms, except as enforcement may be limited by equitable principles and by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally.
(b) No Conflict. The execution, delivery and performance by any of the
-----------
Borrower or its Subsidiaries of each Loan Document to which they are a party,
and the consummation of the
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transactions contemplated thereby, do not (a) violate any provision of the
charter or other organizational documents of such Person, (b) except for
consents that have been obtained and are in full force and effect, conflict
with, result in a breach of, or constitute (or, with the giving of notice or
lapse of time or both, would constitute) a default under, or require the
approval or consent of any Person pursuant to, any Contractual Obligation of the
Borrower or any of its Subsidiaries, or violate any Applicable Law binding on
the Borrower or any of its Subsidiaries, except where such violation, conflict,
breach, or default could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect or (c) result in the creation or
imposition of any Lien upon any asset of the Borrower or any of its
Subsidiaries, or any income or profits therefrom, except for Liens in favor of
the Bank under the Loan Documents.
(c) Governmental Approvals. Except for filings and recordings in
----------------------
connection with the perfection of Liens created by the Loan Documents, no
Governmental Approval is or will be required in connection with the execution,
delivery and performance by the Borrower or any of its Subsidiaries of any Loan
Document to which it is a party or the transactions contemplated thereby or to
ensure the legality, validity or enforceability thereof.
SECTION 3.3. SUBSIDIARIES; CAPITAL STOCK.
(a) Subsidiaries. Each Subsidiary of the Borrower, the authorized and
------------
issued Capital Stock of each such Subsidiary and the record and beneficial owner
of such Capital Stock are identified in Schedule 3.3, as amended from time to
time. All of the outstanding shares of Capital Stock of each of the Subsidiaries
of the Borrower have been duly authorized and validly issued, are fully paid and
nonassessable and are free and clear of any Liens. Except as disclosed in
Schedule 3.3, as amended from time to time, there are not outstanding any
securities convertible into or exchangeable for shares of Capital Stock of any
of the Subsidiaries of the Borrower, or any options, warrants or other rights to
purchase any such Capital Stock, or any commitments of any kind for the issuance
of additional shares of such Capital Stock or any such convertible or
exchangeable securities or options, warrants or rights to purchase such Capital
Stock. Except as disclosed in Schedule 3.3, neither the Borrower nor any of its
Subsidiaries is a party to any agreement with respect to the issuance, voting or
sale of issued or unissued shares of Capital Stock of any Subsidiary.
(b) Borrower Capital Stock. As of the Closing Date, (i) the authorized and
----------------------
outstanding Capital Stock of the Borrower is as set forth in Schedule 3.3 and
(ii) all outstanding shares of such Capital Stock are duly authorized and
validly issued, are fully paid and nonassessable and are owned beneficially and
of record as set forth in Schedule 3.3, in each case free and clear of all Liens
(other than Permitted Liens).
SECTION 3.4. LITIGATION.
Except as disclosed in Schedule 3.4, there are no actions, suits or
proceedings pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower, any of its Subsidiaries or any of their properties that
(a) if adversely determined, individually or in the aggregate, could have a
Material Adverse Effect, or (b) draws into question the validity, legality or
enforceability of any Loan Document or any transaction contemplated thereby.
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SECTION 3.5. CORRECTNESS OF FINANCIAL STATEMENT.
The consolidated financial statement of Santa Anita and its Subsidiaries
dated December 31, 1998, a true copy of which has been delivered by the Borrower
to the Bank prior to the date hereof, (a) is complete and correct and presents
fairly the financial condition of the Santa Anita and its Subsidiaries on a
consolidated basis and (b) has been prepared in accordance with GAAP
consistently applied. Since the date of such financial statement there has been
no Material Adverse Change in the financial condition of the Borrower, nor has
Borrower mortgaged, pledged, granted a security interest in or otherwise
encumbered any of its assets or properties except (i) in favor of the Bank, (ii)
Permitted Liens or (iii) as otherwise permitted by the Bank in writing.
SECTION 3.6. AGREEMENTS; APPLICABLE LAW.
(a) Neither the Borrower nor any of its Subsidiaries is in violation of or
in default under its charter or bylaws or any of its Contractual Obligations,
except where such violation or default could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(b) Except as disclosed in Schedule 3.6, the Borrower and its Subsidiaries
are in material compliance with all Applicable Laws and the use of the Track and
operation of the Racetrack Business are in material compliance with all
Applicable Laws relating thereto including, without limitation, the regulations
and requirements of the California Horse Racing Board, and, to the Borrower's
knowledge, it has not received any notice of non-compliance with Applicable
Laws.
SECTION 3.7. INCOME TAX RETURNS.
All United States federal income tax returns and all other material tax
returns required to be filed by the Borrower or any of its Subsidiaries have
been filed and all Taxes due pursuant to such returns have been paid, except
such Taxes, if any, as are being contested in good faith and as to which
adequate reserves have been established in accordance with GAAP. To the
knowledge of the Borrower, there have not been asserted or proposed to be
asserted any Tax deficiency against the Borrower or any of its Subsidiaries
(except deficiencies that, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect) that is not reserved
against on the financial books of the Borrower or such Subsidiary, as the case
may be.
SECTION 3.8. GOVERNMENTAL REGULATIONS.
Neither the Borrower nor any of its Subsidiaries is (a) an "investment
company" registered or required to be registered under the Investment Company
Act of 1940, as amended, or a company controlled by or principal underwriter of
such a company, or (b) subject to regulation under the Public Utility Holding
Company Act of 1935 or to any federal or state, statute or regulation limiting
its ability to incur Debt for money borrowed (other than the Margin
Regulations).
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SECTION 3.9. MARGIN REGULATIONS.
Neither the Borrower nor any of its Subsidiaries is engaged principally, or
as one of its important activities, in the business of extending credit for the
purposes of purchasing or carrying Margin Stock. The value of all Margin Stock
held by the Borrower or any of its Subsidiaries constitutes less than 25% of the
value, as determined in accordance with the Margin Regulations, of all assets of
the Borrower and its Subsidiaries.
SECTION 3.10. TITLE TO PROPERTY.
Except as disclosed on Schedule 3.10, each of the Borrower and its
Subsidiaries has good title to or valid and subsisting leasehold interests in
all of its property reflected in its books and records as being owned or leased
by it. No such property is subject to any Lien, other than Permitted Liens.
SECTION 3.11. ENVIRONMENTAL CONDITION.
Except as disclosed in Schedule 3.11:
(a) Any real property owned or leased by the Borrower or any of its
Subsidiaries and, to the Borrower's knowledge, each property adjacent thereto,
is free from contamination from any Hazardous Materials, except contamination
that, individually or in the aggregate, could not reasonably be expected to
result in the payment of a Material Environmental Amount. Neither the Borrower
nor any of its Subsidiaries or, to the knowledge of the Borrower, any prior
owner or other user of such real property owned by the Borrower or any of its
Subsidiaries or any such adjacent property has caused or suffered any
Environmental Damages in connection with such real property, such adjacent
property or the business or operations of the Borrower or its Subsidiaries,
except for Environmental Damages that have not had and could not reasonably be
expected to, individually or in the aggregate, result in the payment of a
Material Environmental Amount.
(b) Neither the Borrower nor any of its Subsidiaries or, to the
knowledge of the Borrower, any prior owner or other user of any real property
owned by the Borrower or any of its Subsidiaries or any adjacent property has
received notice of any actual or alleged violation of Environmental
Requirements, or notice of any actual or alleged liability for Environmental
Damages in connection with such real property or such adjacent property or the
business or operations of the Borrower, except for violations and liabilities
that could not reasonably be expected, individually or in the aggregate, to
result in the payment of a Material Environmental Amount. There exists no
order, judgment or decree, and there is not pending or, to the knowledge of the
Borrower, threatened, any action, suit, proceeding or investigation relating to
any actual or alleged liability arising out of the presence or suspected
presence of Hazardous Material, any actual or alleged violation of Environmental
Requirements or any actual or alleged liability for Environmental Damages in
connection with the real property owned by the Borrower or any of its
Subsidiaries or the business or operations of the Borrower or its Subsidiaries
(except for Environmental Damages that have not had and could not reasonably be
expected to, individually or in the aggregate, result in the payment of a
Material Environmental Amount).
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SECTION 3.12. ABSENCE OF CERTAIN RESTRICTIONS.
Except as disclosed in Schedule 3.12, neither the Borrower nor any of its
Subsidiaries is subject to any Contractual Obligation that restricts or limits
the ability of any Subsidiary to (a) make Restricted Payments to the Borrower,
(b) pay Indebtedness owed the Borrower or any Subsidiary thereof, (c) make any
loans or advances to the Borrower or (d) except as provided in Contractual
Obligations respecting the specific assets subject to Permitted Liens, transfer
any of its property to the Borrower.
SECTION 3.13. LABOR MATTERS.
There are no material strikes or other labor disputes pending or, to the
knowledge of the Borrower, threatened against the Borrower or any of its
Subsidiaries. Except as set forth in Schedule 3.13, there are no collective
bargaining agreements to which the Borrower or any of its Subsidiaries is a
party.
SECTION 3.14. YEAR 2000 MATTERS.
Except as set forth in Schedule 3.14, all of the material computer
software, computer hardware (whether general or special purpose), and other
similar or related items of automated, computerized or software systems that are
used or relied on by the Borrower or any of its Subsidiaries in the conduct of
its business will not malfunction, will not cease to function, will not generate
incorrect data, and will not produce incorrect results when processing,
providing or receiving (a) date-related data into and between the twentieth and
twenty-first centuries and (b) date-related data in connection with any valid
date in the twentieth and twenty-first centuries.
SECTION 3.15. TRANSACTIONS WITH AFFILIATES.
As of the Closing Date, except as disclosed in Schedule 3.15 and except for
transactions on arm's length terms pursuant to which the Borrower or any
Subsidiary makes payments in the ordinary course of business upon terms no less
favorable than the Borrower or such Subsidiary could obtain from third parties,
none of the officers, directors or employees of the Borrower or any of its
Subsidiaries is presently a party to any transaction with the Borrower or any
Subsidiary (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Borrower, any corporation,
partnership, trust or other entity in which any officer, director or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
SECTION 3.16. DISCLOSURE.
The information in each document, certificate or written statement
furnished to the Bank by or on behalf of the Borrower or any of its Subsidiaries
with respect to the business, assets, prospects, results of operation or
financial condition of the Borrower of such Subsidiary or use in connection with
the transactions contemplated by this Agreement at the time of delivery thereof,
was true and correct in all material respects and did not omit, when considered
as a whole, any
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material fact necessary in order to make the statements made not misleading, in
light of the circumstances under which they were made. There is no fact known to
the Borrower (other than matters of a general economic nature) that has had or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect and that has not been disclosed herein or in such other
documents, certificates or statements.
SECTION 3.17. NO SUBORDINATION.
There is no agreement, indenture, contract or instrument to which Borrower
or any of its Subsidiaries is a party or by which Borrower or any of its
Subsidiaries may be bound that requires the subordination in right of payment of
any of Obligations to which the Borrower or such Subsidiary is obligated to make
payment with respect to under this Agreement or any other Loan Document.
SECTION 3.18. LICENSES, PERMITS, FRANCHISES.
The Borrower and each of its Subsidiaries possesses all Governmental
Approvals (other than Governmental Approvals which the failure to obtain could
not, either individually or in the aggregate, have a Material Adverse Effect)
that are necessary for the ownership, maintenance and operation of its
properties and conduct of its business as now conducted and proposed to be
conducted, and is not in material violation thereof. Without limitation, the
Borrower and its Subsidiaries possess, and will hereafter possess (i) all
governmental permits, consents, approvals, franchises, licenses and approvals
relating to the use or occupancy of the Track and operation of the Racetrack
Business, including a Racing License that permits, together with a Racing
License obtained by Oak Tree for calendar year 1999, no less than 100 Racing
Days at the Track for calendar year 1999, and all gaming, permits and licenses,
racing licenses, certificates of occupancy, certificates of compliance, food
handlers permits, liquor licenses, and any certificates of unofficial bodies
that may be required or customary for the conduct of the Racetrack Business and
(ii) rights to all trademarks, trade names, patents, and fictitious names, if
any, in each case, necessary to enable the Borrower and its Subsidiaries it to
conduct the Racetrack Business or any other business in which the Borrower or
any of its Subsidiaries is currently engaged in compliance with applicable law.
SECTION 3.19. ERISA.
The Borrower is, and all ERISA Affiliates are, in compliance in all
material respects with all applicable provisions of the ERISA; neither the
Borrower nor any ERISA Affiliate has violated any provision of any Plan; no
Reportable Event has occurred and is continuing with respect to any Plan
initiated by the Borrower or any ERISA Affiliate; the Borrower and all ERISA
Affiliates have met their minimum funding requirements under ERISA with respect
to each Plan; and each Plan will be able to fulfill its benefit obligations as
they come due in accordance with the Plan documents and under generally accepted
accounting principles.
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SECTION 3.20. LEASES.
Schedule 3.20 lists all material leases or subleases to which the Borrower
or any Subsidiary, as of the Closing Date, is a lessee, sublessee, lessor or
sublessor and affecting any portion of the Mortgaged Property, the operation of
the Racetrack Business or any other business of the Borrower and its
Subsidiaries as presently conducted (collectively, the "Leases").
ARTICLE IV
CONDITIONS
SECTION 4.1. CLOSING CONDITIONS.
The occurrence of the Closing Date shall be subject to satisfaction of the
following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the
------------------------
extension of credit by the Bank shall be satisfactory to the Bank's counsel.
(b) Certain Documents. The Bank shall have received the documents
-----------------
listed in Schedule 4.1 all of which shall be in form and substance satisfactory
to the Bank.
(c) Fees and Expenses Paid. The Borrower shall have paid (i) all Fees
----------------------
due on or before the Closing Date and (ii) all expenses of the Bank which the
Borrower has agreed therein to pay and for which the Borrower shall have been
billed on or before the Closing Date.
(d) Absence of Litigation Events. There has not been issued any
----------------------------
injunction, order or decree that prohibits or limits any of the transactions
contemplated by the Loan Documents and there shall not be any action, suit,
proceeding or investigation pending or, to the knowledge of the Borrower,
currently threatened against the Borrower or any of its Subsidiaries that (i)
draws into question the validity, legality or enforceability of any Loan
Document or the ability of any such Person to consummate the transactions
contemplated thereby or (ii) might result, either individually or in the
aggregate, in any Material Adverse Change.
(e) Approvals. All governmental and third party approvals (including
---------
landlords' and other consents) necessary or, in the discretion of the Bank,
advisable in connection with the continuing operations of the Borrower and its
Subsidiaries and the transactions contemplated hereby and under the other Loan
Documents shall have been obtained and be in full force and effect.
(f) Lien Searches. The Bank shall have received the results of a
-------------
recent lien search in each of the jurisdictions where assets of the Borrower
and/or its Subsidiaries are located, and such search shall reveal no Liens on
any of the assets of the Borrower or its Subsidiaries except for Permitted Liens
and Liens discharged on or prior to the Closing Date pursuant to documentation
satisfactory to the Bank.
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(g) Filings, Registrations and Recordings. Each document (including
-------------------------------------
any Uniform Commercial Code financing statement) required by the Loan Documents
or under law or reasonably requested by the Bank to be filed, registered or
recorded in order to create in favor of the Bank a perfected Lien on the
Collateral described therein, prior and superior in right to any other Person
(other than Permitted Liens), shall be in proper form for filing, registration
or recordation.
(h) Environmental Permits. The Bank shall have received an officer's
---------------------
certificate in form and substance satisfactory to the Bank certifying that the
Borrower and its Subsidiaries possess all material environmental permits
necessary for the conduct of their businesses and that copies of all such
material permits have been provided to the Bank.
(i) Licenses. The Bank shall have received an officer's certificate
--------
in form and substance satisfactory to the Bank certifying that the Borrower and
its Subsidiaries possess (i) a Racing License for calendar year 1999 and (ii)
all permits or licenses (except for those permits or licenses which the failure
to obtain would not have a Material Adverse Effect) specified in Section 3.18.
(j) Balance Sheet of Magna International. The Bank shall have
------------------------------------
received from the Borrower a copy of the annual report to shareholders of Magna
International, which shall include a consolidated balance sheet of Magna
International and its Subsidiaries as of June 30, 1999.
(k) Business Plan. The Bank shall have received a report from the
-------------
Borrower, which shall include (i) a historical review of the Borrower's business
and operations and (ii) a three year business plan for the Borrower and its
Subsidiaries (including projected financial results for such period), in form
and substance satisfactory to the Bank.
(l) Insurance. The Bank shall have received insurance certificates
---------
satisfying the requirements of this Agreement and the Loan Documents.
(m Documentation. The Bank shall have received all additional
-------------
documents which it reasonably may request in connection with such the making of
the Loans or any other transaction contemplated by this Agreement or any other
Loan Document.
SECTION 4.2. CONDITIONS PRECEDENT TO LOANS.
The obligation of the Bank to make any Loan on any date shall be subject to
the following conditions precedent:
(a) Satisfaction of Closing Conditions. The conditions precedent set forth
----------------------------------
in Section 4.1 shall have been satisfied or waived in writing by the Bank.
(b) Notice of Borrowing. The Borrower shall have delivered to the Bank, in
-------------------
accordance with the applicable provisions of this Agreement, a Notice of
Borrowing (or telephonic notice in lieu thereof).
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(c) Representations and Warranties. All of the representations and
------------------------------
warranties of the Borrower and its Subsidiaries contained in the Loan Documents
shall be true and correct in all material respects on and as of the Closing Date
as though made on and as of that date (except to the extent that such
representations and warranties expressly were made only as of a specific date).
(d) No Default. No Default or Event of Default shall exist or result from
----------
the making of the Loans or any other action contemplated by this Agreement or
any other Loan Document.
(e) No Material Adverse Change. No Material Adverse Change shall have
--------------------------
occurred since the date of the financial statements referred to in Section 3.5
and no material adverse change shall have occurred in the Applicable Laws
affecting the Bank or the Borrower.
(f) Satisfaction of Conditions. Each Borrowing of a Loan shall constitute a
--------------------------
representation and warranty by the Borrower as of the date of such Borrowing
that the conditions contained in clauses (c) through (e) above have been
satisfied.
ARTICLE V
AFFIRMATIVE COVENANTS
The Borrower covenants that so long as any Loan is outstanding, the
Borrower shall, and shall cause each of its Subsidiaries to:
SECTION 5.1. Financial Statements and Other Reports.
Deliver, or cause to be delivered, to the Bank:
(a) Annual Financial Reports. As soon as practicable and in any event
------------------------
within 120 days after the end of each Fiscal Year, the consolidated (and
consolidating) balance sheet of Santa Anita and its Subsidiaries as of the end
of such Fiscal Year and the related consolidated (and, except as to statements
of stockholders' equity, consolidating) statements of income, stockholders'
equity and cash flow of Santa Anita and its Subsidiaries for such Fiscal Year,
setting forth in each case in comparative form the consolidated (and
consolidating) figures for the previous Fiscal Year, all in reasonable detail
and (i) in the case of such consolidated financial statements, accompanied by an
unqualified report thereon of Ernst & Young LLP or other independent certified
public accountants of recognized national standing selected by Santa Anita and
reasonably satisfactory to the Bank and (ii) in the case of such consolidating
financial statements, certified by the chief financial officer of Santa Anita as
being fairly stated in all material respects when considered in relation to the
audited consolidated financial statements of Santa Anita and its Subsidiaries;
(b) Quarterly Financials. As soon as practicable and in any event within
--------------------
60 days after the end of each fiscal quarter (other than the last fiscal quarter
of any Fiscal Year), an unaudited consolidated (and consolidating) balance sheet
of Santa Anita and its Subsidiaries as of the end of such quarter and the
related unaudited consolidated statements of income, stockholders' equity and
cash flow for such quarter and the portion of the Fiscal Year ended at the end
of such
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quarter, setting forth in each case in comparative form the consolidated figures
for the corresponding periods of the prior Fiscal Year, all in reasonable detail
and certified by Santa Anita's chief financial officer as fairly presenting the
consolidated financial condition of Santa Anita and its Subsidiaries as of the
dates indicated, and their consolidated results of operations and cash flows for
the periods indicated, in conformity with GAAP, subject to normal year-end
adjustments and the absence of footnotes;
(c) SEC Filings of Parent. Promptly after the filing thereof with the SEC,
---------------------
all annual reports on Form 10-K and quarterly reports on Form 10-Q filed by
Parent with the SEC;
(d) Evidence of Compliance with Financial Covenants. Together with each
-----------------------------------------------
delivery of financial statements pursuant to clauses (a) and (b) above, a
certificate of the chief financial officer of the Borrower or Santa Anita in
substantially the form of Exhibit H hereto, duly completed and setting forth the
calculations required to establish compliance with Sections 6.17 and 6.18 of the
Term Loan Credit Agreement on the date of such financial statements;
(e) Event of Default. Within three Business Days after the Borrower
----------------
becomes aware of the occurrence of any Default or Event of Default, a
certificate of a Senior Officer of the Borrower setting forth the details
thereof and the action that the Borrower is taking or proposes to take with
respect thereto;
(f) Notice of Litigation. Within three Business Days after the Borrower
--------------------
obtains knowledge of the threat or commencement of litigation or proceedings
affecting the Borrower or any of its Subsidiaries, or of any material
development in any pending or future litigation, (i) that alleges liability in
excess of $1,000,000, (ii) in which injunctive or similar relief is sought that,
if obtained could have a Material Adverse Effect or (iii) that questions the
validity or enforceability of any Loan Document, notice providing reasonable
details about the threat or commencement of such litigation or about such
material development;
(g) Audit Reports. Within three Business Days after receipt thereof,
-------------
copies of all final reports or letters submitted to Santa Anita by its
independent certified public accountants in connection with each audit of the
financial statements of Santa Anita or its Subsidiaries made by such
accountants, including any management report, which reports Santa Anita agrees
to obtain in connection with each of its annual audits;
(h) Business Plan. Within 90 days after the end of each Fiscal Year of
-------------
Santa Anita, a forecast for each of the next succeeding two Fiscal Years of the
consolidated balance sheet and the consolidated results of operations and cash
flow of Santa Anita and its Subsidiaries, together with (i) an outline of the
major assumptions upon which the forecast is based and (ii) a calculation in
reasonable detail evidencing compliance with all covenants set forth herein on
the basis of, and after giving effect to, such forecast;
(i) Environmental Notices. Within three Business Days after the receipt
---------------------
thereof by the Borrower, a copy of any notice, summons, citation or written
communication concerning any actual, alleged, suspected or threatened violation
of Environmental Requirements, or liability of the Borrower or any of its
Subsidiaries for Environmental Damages;
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(j) Corporate Changes. Within three Business Days after the occurrence of
-----------------
any change in the name or the organizational structure of Borrower, including
amendments or other modifications to the Borrower's articles of incorporation or
bylaws;
(k) Cancellation of Insurance. Within three Business Days after the
-------------------------
occurrence of any termination or cancellation of any insurance policy which
Borrower or any of its Subsidiaries is required to maintain pursuant to this
Agreement or any other Loan Document, or any uninsured or partially uninsured
loss through liability or property damage, or through fire, theft or any other
cause affecting Borrower's property in excess of an aggregate of $1,000,000;
(l) Other Information. From time to time such additional information
-----------------
regarding the Borrower or any of its Subsidiaries or any of their respective
businesses, assets, liabilities, prospects, results of operations or condition
(financial or otherwise) as the Bank may reasonably request.
SECTION 5.2. RECORDS AND INSPECTION, ETC.
(a) Maintain adequate books, records and accounts as may be required or
necessary to permit the preparation of consolidated financial statements in
accordance with sound business practices and GAAP and (b) permit such Persons as
the Bank may designate, at reasonable times and as often as may be reasonably
requested, under reasonable circumstances, to (i) visit and inspect any of its
properties, (ii) inspect and copy its books and records, and (iii) discuss with
its officers and its independent accountants (so long as no Default or Event of
Default has occurred and is continuing, with prior coordination through the
Borrower), its business, assets, liabilities, prospects, results of operations
or financial condition.
SECTION 5.3. CORPORATE EXISTENCE, ETC.
At all times preserve and keep in full force and effect its corporate
existence and all material rights, franchises and other Governmental Approvals,
provided, however, that (a) the corporate existence of any Subsidiary may be
terminated as contemplated and permitted by Section 6.6 and (b) the corporate
existence of any Subsidiary may be terminated, and any such Governmental
Approval may be terminated or not renewed, if such termination or nonrenewal, as
the case may be, is determined by the Board of Directors of the Borrower to be
in the best interest of the Borrower and is not disadvantageous in any material
respect to the Bank.
SECTION 5.4. PAYMENT OF TAXES.
Pay and discharge all material Taxes imposed upon it or any of its
properties or in respect of any of its franchises, business, income or property
before any penalty shall be incurred with respect to such Taxes, provided,
however, that, unless and until foreclosure, distraint, levy, sale or similar
proceedings shall have commenced, the Borrower and its Subsidiaries need not pay
or discharge any such Tax so long as the validity or amount thereof is being
contested in good faith and by appropriate proceedings and so long as any
reserves or other appropriate provisions as may be required by GAAP shall have
been made therefor.
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SECTION 5.5. MAINTENANCE OF PROPERTIES.
Maintain or cause to be maintained in good repair, working order and
condition (ordinary wear and tear excepted ans subject to alterations made in
connection with the renovations described in the business plan delivered to the
Bank pursuant to Section 5.1(h)) all properties and other assets necessary to
its business, and from time to time the Borrower or the applicable Subsidiary
shall make or cause to be made all appropriate repairs, renewals and
replacements thereto, except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
SECTION 5.6. MAINTENANCE OF INSURANCE.
(a) Maintain with financially sound and reputable insurance companies
satisfactory to the Bank, insurance in at least such amounts, of such character
and against at least such risks as is maintained by the Borrower and each such
Subsidiary on the date of this Agreement and described in Schedule 5.6, or, if
such insurance is not available on a commercially reasonable basis, with the
Bank's prior written consent, such insurance, in at least such amounts, of such
character and against at least such risks as is usually maintained by companies
of established repute engaged in the same or a similar business in the same
general area. Such insurance shall include fire and extended coverage, public
liability, property damage, workers' compensation, business interruption, flood
(if the Bank determines that such insurance is required under Applicable Law)
and such other coverage as the Bank may reasonably request, provided, however,
that the Bank shall not require the Borrower to obtain earthquake loss
insurance.
(b) In addition to any requirements under the Loan Documents, (i) all
property loss or damage insurance policies with respect to any assets of the
Borrower or any of its Subsidiaries shall contain lenders loss payable
endorsements in favor of the Bank in form and substance satisfactory to it,
which shall provide that all insurance proceeds (A) in excess of $2,000,000 or
(B) payable after the insurer has received written notice from the Bank that an
Event of Default then exists (until a contrary notice is received), shall be
payable directly to the Bank, provided that any business interruption insurance
proceeds resulting from a business interruption of less than five (5) days shall
be released to the Borrower, (ii) all insurance policies shall (A) provide that
no cancellation, reduction in amount or material adverse change in coverage
thereof shall be effective until at least 30 days after receipt by the Bank of
written notice thereof, (B) insure the interests of the Bank regardless of any
breach of or violation by the Borrower or any of its Subsidiaries or any other
Person of any warranties, declarations or conditions contained therein, and (C)
provide that the Bank shall have no obligation or liability for premiums,
commissions, assessments or calls in connection with such insurance or in
connection with any representation or warranty made by the Borrower or any of
its Subsidiaries or any Subsidiary thereof in connection with obtaining of such
insurance, and (iii) all business interruption and extra expense insurance shall
name the Bank as a loss payee.
SECTION 5.7. CONDUCT OF BUSINESS; POSSESSION OF LICENSES.
(a) Engage only in the businesses in which the Borrower or such Subsidiary
is engaged on the date hereof except for other businesses that are ancillary or
incidental to its
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ongoing business as presently conducted or as contemplated in the business plan
delivered pursuant to Section 4.1. The Borrower shall, and shall cause each of
its Subsidiaries to, conduct its business in compliance in all material respects
with all Applicable Law, all its Governmental Approvals and all its Contractual
Obligations except to the extent any noncompliance could not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect.
(b) (i) Maintain all licenses, permits and other consents and approvals
required with respect to the operation of the Racetrack Business; (ii) (A)
maintain any then current Racing License, and (B) promptly apply for a Racing
License for each calendar year subsequent to 1999, (iii) use its best efforts to
obtain a valid Racing License for each such subsequent calendar year in a timely
fashion customary practice within the industry and (iv) obtain a Racing License
for each calendar year that permits, together with any Racing License obtained
by Oak Tree for such calendar year, at least 100 Racing Days at the Track.
SECTION 5.8. ADDITIONAL GUARANTIES AND COLLATERAL.
Upon the creation or acquisition after the date hereof of any Subsidiary,
the Borrower shall, at the Bank's request, cause such Subsidiary to execute and
deliver a guaranty in substantially the form of Exhibit D hereto and such other
Loan Documents as the Bank may request, and the Borrower shall grant, and cause
to be granted, a first priority Lien on all of the issued and outstanding
Capital Stock of such Subsidiary pursuant to the Borrower Pledge Agreement, in
each case in form and substance satisfactory to the Bank. The Borrower, at its
own expense, shall execute and deliver, or cause to be executed and delivered,
and thereafter cause to be registered, filed or recorded with the appropriate
Governmental Authority, any and all documents and instruments deemed by the Bank
to be necessary or desirable for the creation and perfection of the foregoing
Liens and shall pay all Taxes and fees related to such registration, filing or
recording.
SECTION 5.9. SUBORDINATION OF OTHER INDEBTEDNESS.
Cause all Intercompany Debt and Subordinated Debt to be subordinated to the
prior payment in full in cash of the Obligations or the obligations under the
LATC Guaranty, as applicable, on terms of subordination satisfactory to the
Bank; provided, however, that as long as no Event of Default then exists, the
Borrower and/or any of its Subsidiaries may pay such Intercompany Debt in the
ordinary course of business consistent with past practice.
SECTION 5.10 ENVIRONMENTAL COMPLIANCE.
Comply, in all material respects with all Environmental Requirements and
shall not cause or permit to exist on the Mortgaged Property and any other real
property owned by the Borrower or any of its Subsidiaries any Hazardous
Materials, unless the presence of such materials is necessary for the conduct of
the business of the Borrower or its Subsidiaries, all necessary Governmental
Approvals for such activity have been obtained and there is no material risk
that any Environmental Damages could result from such activity.
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SECTION 5.11. ERISA.
Maintain and operate all Plans that are maintained and operated by the
Borrower or any of its Subsidiaries so as to comply with the provisions of
ERISA, the Code, all other applicable laws, and the regulations and
interpretations thereunder and the respective requirements of the governing
documents for such Plans to the extent that failure to comply with such
provisions, regulations, interpretations and requirements have a Material
Adverse Effect.
SECTION 5.12. YEAR 2000 COMPLIANCE.
Perform all acts reasonably necessary to ensure that (a) the Borrower and
any business in which the Borrower or any Subsidiary holds a substantial
interest, and (b) all customers, suppliers and vendors that are material to the
Borrower's business, become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all of the Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems. As
used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. The Borrower shall, immediately upon request, provide to the Bank such
certifications or other evidence of Borrower's compliance with the terms hereof
as the Bank may from time to time require.
ARTICLE VI
NEGATIVE COVENANTS
The Borrower covenants and agrees that so long as any Loan remains
outstanding, the Borrower will not, and will neither cause nor permit any of its
Subsidiaries to:
SECTION 6.1. INDEBTEDNESS.
Incur, create, assume or permit to exist any Indebtedness, except:
(a) the Obligations and the obligations of the Borrower or any Subsidiary
under the Term Loan Documents;
(b) Intercompany Debt;
(c) Subordinated Debt;
(d) Indebtedness existing on the date hereof and set forth in Schedule 6.1,
and Indebtedness incurred to refinance such Indebtedness;
(e) Indebtedness under any Hedging Contract; and
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(f) Indebtedness consisting of purchase money Indebtedness incurred in the
ordinary course of business after the Closing Date to finance Capital
Expenditures, provided that (i) the Indebtedness incurred shall not exceed 85%
of the purchase price of the assets financed thereby and (ii) the aggregate
principal amount of any Indebtedness incurred pursuant to this paragraph (f)
during any Fiscal Year shall not exceed $2,000,000, and Indebtedness incurred to
refinance such Indebtedness.
SECTION 6.2. LIENS.
Create, incur, assume or permit to exist any Lien on or with respect to any
asset, or any income or profits therefrom, whether now owned or hereafter
acquired, except:
(a) Liens securing the Obligations and Liens created under the Term Loan
Documents;
(b) Liens existing on the date hereof and set forth on Schedule 6.2;
(c) Liens for taxes, assessments or charges of any Governmental Authority
for claims that are not material and are not yet due or being contested in good
faith by appropriate proceedings and with respect to which adequate reserves or
other appropriate provisions are being maintained in accordance with GAAP;
(d) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, materialmen, bankers and other Liens imposed by law and created in
the ordinary course of business;
(e) Liens incurred and deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security benefits or to secure the performance (including by way of
surety bonds or appeal bonds) of tenders, bids, leases, contracts, statutory
obligations or similar obligations or arising as a result of progress payments
under contracts, in each case in the ordinary course of business and not
relating to the repayment of Indebtedness;
(f) easements, rights-of-way, covenants, consents, reservations,
encroachments, variations and other restrictions, charges or encumbrances
(whether or not recorded) that do not materially interfere with the ordinary
conduct of business;
(g) building restrictions, zoning laws and other statutes, laws, rules,
regulations, ordinances and restrictions;
(h) leases or subleases granted in the ordinary course of business to
others not materially interfering with the business of, and consistent with past
practices of, the Borrower or any Subsidiary;
(i) any attachment or judgment Lien not constituting an Event of Default;
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(j) Liens existing on assets of any Person at the time such Person becomes
a Subsidiary, provided that (i) such Lien was not created in contemplation of
such Person becoming a Subsidiary, and (ii) such Lien does not encumber any
assets other than the assets subject to such Lien at the time such Person
becomes a Subsidiary;
(k) other Liens incidental to the conduct of the business or the ownership
of the assets of the Borrower or any Subsidiary that (i) were not incurred in
connection with borrowed money, (ii) do not in the aggregate materially detract
from the value of the assets subject thereto or materially impair the use
thereof in the operation of such business and (iii) do not secure obligations
aggregating in excess of $250,000; and
(l) Liens on equipment or other personal property assets hereafter acquired
by the Borrower or any of its Subsidiaries, provided that (i) such Liens secure
Indebtedness permitted by Section 6.1(f), (ii) such Liens are incurred, and the
Indebtedness secured thereby is created, within 90 days after such acquisition
of such equipment or other acquired assets, (iii) the Indebtedness secured
thereby does not exceed 85% of the lesser of the cost of such equipment or other
acquired asset and (iv) such Liens do not attach to or otherwise encumber the
Mortgaged Property or any other property or assets of the Borrower or any of its
Subsidiaries other than the equipment or other asset so acquired.
SECTION 6.3. RESTRICTED PAYMENTS.
Pay or make, or agree to declare, pay or make, any Restricted Payment,
except dividends, distributions or payments by any Subsidiary to the Borrower.
SECTION 6.4. LOANS, ADVANCES, INVESTMENTS.
Make or permit to exist any loans or advances to or Investments in any
person or entity, except:
(a)(i) marketable direct obligations issued or unconditionally guaranteed
by the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States, in each case maturing within one
year from the date of acquisition thereof, (ii) marketable direct obligations
issued by any state of the United States or any political subdivision of any
such state or any public instrumentality thereof maturing within one year from
the date of acquisition thereof and having, at the time of acquisition, the
highest rating obtainable from either Standard & Poor's Rating Group or Moody's
Investors Service, Inc., (iii) commercial paper having, at the time of
acquisition, the highest rating obtainable from either Standard & Poor's Rating
Group or Moody's Investors Service, Inc., (iv) demand deposits, certificates of
deposit, other time deposits, and bankers' acceptances maturing within one year
from the date of acquisition thereof issued by any bank operating under the laws
of the United States or any state thereof or the District of Columbia that has
combined capital and surplus of not less than $500,000,000, or (v) institutional
money market funds organized under the laws of the United States of America or
any state thereof that are approved in writing by the Bank or, if not so
described or approved, substantially all of whose assets are securities of the
types described in the foregoing clauses (i), (ii), (iii), and (iv);
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(b)(i) trade credit extended on usual and customary terms in the ordinary
course of business, (ii) advances to employees for moving, relocation and travel
expenses, drawing accounts and similar expenditures in the ordinary course of
business and not to exceed $500,000 at any time outstanding, and (iii)
acquisitions of capital stock, debt, securities, or other property received in
connection with the bankruptcy, reorganization or similar proceeding of, or
settlement of delinquent accounts and disputes with, customers in the ordinary
course of business, and, in each case, extensions, modifications, and renewals
thereof;
(c) any Investment identified in Schedule 6.4, limited to the amount of
such Investment on the date hereof; and
(d) Intercompany Debt.
SECTION 6.5. LEASE EXPENDITURES.
Incur expenses with respect to Operating Leases in any fiscal year in
excess of an aggregate of $100,000.
SECTION 6.6. FUNDAMENTAL CHANGES.
Enter into any merger or consolidation, or liquidate, wind-up or dissolve
(or suffer any liquidation or dissolution) or enter into any agreement providing
for any of the foregoing, except for a merger of a Wholly Owned Subsidiary of
the Borrower into the Borrower or (with the Borrower as the surviving
corporation) or another Wholly Owned Subsidiary, or convey, lease, sell,
transfer or otherwise dispose of, in one transaction or series of transactions,
all or substantially all of the Borrower's or any Subsidiary's business or
assets, whether now or hereafter acquired.
SECTION 6.7. ASSET DISPOSITIONS.
Make any Asset Disposition, except:
(a) the sale of inventory in the ordinary course of business;
(b) sales of assets outside of the ordinary course of business not in
excess of $250,000 in a single transaction or series of related transactions or
aggregating less than $1,000,000 in any Fiscal Year; and
(c) in addition to dispositions permitted under clauses (a) and (b) of this
Section 6.7, the disposition of equipment if such equipment is obsolete or no
longer useful in the ordinary course of the Borrower's or such Subsidiary's
business; provided that the aggregate Fair Market Value of all such equipment
disposed of in any Fiscal Year shall not exceed $1,000,000.
SECTION 6.8. SALE-LEASEBACKS.
Enter into any arrangement, directly or indirectly, whereby the Borrower or
any of its Subsidiaries shall sell or transfer any property owned by it in order
then or thereafter to lease
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such property or lease other property which the Borrower or such Subsidiary
intends to use for substantially the same purpose as the property being sold or
transferred, without the prior written consent of the Bank.
SECTION 6.9. TRANSACTIONS WITH AFFILIATES.
Enter into any transaction (including the transfer or lease of any property
or the rendering of any service) with any Affiliate of the Borrower, unless such
transaction is on fair and reasonable terms no less favorable to the Borrower or
its Subsidiary, as the case may be, than those terms that might be obtained at
the time in a comparable arm's length transaction with a Person who is not an
Affiliate of the Borrower or, if such transaction is not one that by its nature
could be obtained from such other Person, is on fair and reasonable terms and
was negotiated in good faith, provided that this Section shall not restrict (a)
dividends, distributions and other payments and transfers on account of the
Capital Stock of the Borrower or any Wholly-Owned Subsidiary or (b) the
transactions contemplated under this Agreement or any other Loan Document.
SECTION 6.10. AMENDMENTS OF CHARTER DOCUMENTS.
Amend its charter, bylaws or other charter documents in any respect that
affects the voting rights of Capital Stock included in the Collateral or holders
thereof, increases payment obligations of the Borrower, affects the validity or
enforceability of any Loan Document or Lien thereunder or that otherwise could
reasonably be expected to have a Material Adverse Effect, without in each case
obtaining the prior written consent of the Bank.
SECTION 6.11. RESTRICTIVE AGREEMENTS.
Enter into any Contractual Obligation that, directly or indirectly,
restricts or limits the ability of such Subsidiary to (a) pay dividends or make
distributions on its Capital Stock, (b) pay Indebtedness owed to the Borrower or
any Subsidiary or (c) make any loans or advances to the Borrower or any
Subsidiary (except as provided hereunder).
SECTION 6.12. NEGATIVE PLEDGES.
Enter into or otherwise become subject to, directly or indirectly, any
agreement prohibiting or restricting the Borrower or any Subsidiary in any
manner (including by way of covenant, representation or default), from
incurring, creating or assuming any Lien upon any of its assets.
SECTION 6.13. AMENDMENTS OR WAIVERS OF SUBORDINATED DEBT DOCUMENTS.
Amend any loan or other documents pursuant to which any Subordinated Debt
(or any related Contingent Obligation) is outstanding, or waive or otherwise
relinquish any of its rights or causes of action under or arising out of such
documents, with respect to terms and provisions regarding interest rates,
principal or interest payment amounts, principal or interest payment dates,
subordination, representations by or covenants of the Borrower, any Subsidiary,
or events
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of default, or other material provisions, without in each case obtaining the
prior written consent of the Bank.
SECTION 6.14. ISSUANCE OF CAPITAL STOCK.
Issue any Capital Stock to any Person other than (a) in the case of the
Borrower, to Santa Anita and (b) in the case of any Subsidiary, to the Borrower,
in each case, subject to a Lien in favor of the Bank under the Loan Documents.
SECTION 6.15. ERISA.
(a) Engage, or permit any Subsidiary to engage, in any prohibited
transaction described in Sections 406 of ERISA or 4975 of the Code for which a
statutory or class exemption is not available or a private exemption has not
been previously obtained from the DOL;
(b) Terminate, or permit any Subsidiary to terminate, any Benefit Plan
which would result in any liability of the Borrower or any Subsidiary under
Title IV of ERISA in excess of $1,000,000;
(c) Fail to make any contribution or payment to any Multiemployer Plan
which the Borrower or any Subsidiary or any Subsidiary may be required to make
under any agreement relating to such Multiemployer Plan, or any law pertaining
thereto;
(d) Fail, or permit any Subsidiary to fail, to timely pay contributions or
installments required under Section 412 of the Code or due with respect to any
waived funding deficiency with respect to any Benefit Plan; or
(e) Amend, or permit any Subsidiary to amend, a Benefit Plan resulting in
an increase in current liability for the plan year such that the Borrower or any
Subsidiary is required to provide security to such Benefit Plan under Section
401(a)(29) of the Code;
SECTION 6.16. USE OF PROCEEDS.
Use the proceeds of any Loan except for the purposes stated in Section 2.1
hereof.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1. EVENTS OF DEFAULT.
The occurrence of any of the following shall constitute an "Event of
Default" under this Agreement:
(a) The Borrower (i) shall fail to pay as and when due (whether at stated
maturity, upon acceleration, upon required prepayment or otherwise) any
principal of any Loan, or (ii)
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shall fail to pay any interest, Fees or other amounts payable under the Loan
Documents within three Business Days of the date when due under the Loan
Documents; or
(b) (i) The Borrower shall fail to perform, comply with or observe any
agreement, covenant or obligation under Sections 5.1(e), 5.1(g), Section 5.3 or
5.7, or any Section of Article VI; or (ii) there shall exist an Event of Default
under the Term Loan Credit Agreement; or
(c) The Borrower shall fail to perform, comply with or observe any
agreement, covenant or obligation under any provision of any Loan Document
(other than those covenants set forth in clause (b) above) and such failure
shall not have been remedied within 30 days after the Borrower becomes aware of
such failure; or
(d) Any representation or warranty or certification made or furnished by
any the Borrower under any Loan Document shall prove to have been false or
incorrect in any material respect when made (or deemed made); or
(e) (i) The Borrower shall default in the payment (whether at stated
maturity, upon acceleration, upon required prepayment or otherwise), beyond any
period of grace provided therefor, of (A) any principal of or interest on any
other Indebtedness for borrowed money in an aggregate principal amount in excess
of $250,000 or the deferred purchase price of any property or (B) any principal
of or interest on any Indebtedness (other than for borrowed money or the
deferred purchase price of any property), so long as the validity or amount
thereof is being contested in good faith and by appropriate proceedings and no
action has been commenced to enforce and Lien securing such Indebtedness, or
(ii) any other breach or default (or other event or condition) shall occur under
any agreement, indenture or instrument relating to any such Indebtedness, if the
effect of such breach or default (or such other event or condition) is to cause,
or to permit the holder or holders of such Indebtedness (or a Person on behalf
of such holder or holders) to cause (upon the giving of notice, the lapse of
time or both, or otherwise), such Indebtedness to become or be declared due and
payable, or required to be prepaid, redeemed, purchased or defeased (or an offer
of prepayment, redemption, purchase or defeasance be made), prior to its stated
maturity; or
(f) There shall be commenced against the Borrower or any of its
Subsidiaries an involuntary case seeking the liquidation or reorganization of
the Borrower or such Subsidiary under the Bankruptcy Code or any similar
proceeding under any other Applicable Law or an involuntary case or proceeding
seeking the appointment of a receiver, liquidator, sequestrator, custodian,
trustee or other officer having similar powers of the Borrower or such
Subsidiary or to take possession of all or a substantial portion of its property
or to operate all or a substantial portion of its business, and any of the
following events occur: (i) the Borrower or such Subsidiary consents to the
institution of such involuntary case or proceeding; (ii) the petition commencing
the involuntary case or proceeding is not timely controverted; (iii) the
petition commencing such involuntary case or proceeding remains undismissed and
unstayed for a period of 60 days; or (iv) an order for relief shall have been
issued or entered therein; or
(g) The Borrower or any of its Subsidiaries shall institute a voluntary
case seeking liquidation or reorganization under the Bankruptcy Code or any
similar proceeding under any
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other Applicable Law, or shall consent thereto; or shall consent to the
conversion of an involuntary case to a voluntary case; or shall file a petition,
answer a complaint or otherwise institute any proceeding seeking, or shall
consent to or acquiesce in the appointment of, a receiver, liquidator,
sequestrator, custodian, trustee or other officer with similar powers of it or
to take possession of all or a substantial portion of its property or to operate
all or a substantial portion of its business; or shall make a general assignment
for the benefit of creditors; or shall generally not pay its debts as they
become due; or the Board of Directors of the Borrower or such Subsidiary (or any
committee thereof) adopts any resolution or otherwise authorizes action to
approve any of the foregoing; or
(h) The Borrower or any of its Subsidiaries shall suffer (i) any money
judgments, fines, writs or warrants of attachment or similar processes that,
individually or in the aggregate, involve an amount or value in excess of
$500,000 (excluding therefrom money judgments to the extent covered by insurance
as to which the carrier has accepted liability), or (ii) any other material non-
monetary judgment or decree (including a judgment for injunctive relief), and,
in any such case, such judgments, writs, warrants or other orders shall continue
unsatisfied and unstayed for a period of 60 days or any action shall be taken by
a judgment creditor to levy upon the assets of the Borrower or any Subsidiary to
enforce any such judgment; or
(i) The Borrower, any Subsidiary or any ERISA Affiliate shall: (a) engage
in any prohibited transaction described in Sections 406 of ERISA or 4975 of the
Code for which a statutory or class exemption is not available or a private
exemption has not been previously obtained from the DOL; (b) terminate any
Benefit Plan which would result in any liability of the Borrower (including
joint and several liability with another Person) under Title IV of ERISA in
excess of $1,000,000; (c) fail to make any contribution or payment to any
Multiemployer Plan which the Borrower or any Subsidiary or any ERISA Affiliate
may be required to make under any agreement relating to such Multiemployer Plan,
or any law pertaining thereto that could result in liability of the Borrower
(including joint and several liability with another Person) in excess of
$1,000,000; (d) fail to timely pay contributions or installments required under
Section 412 of the Code or due with respect to any waived funding deficiency
with respect to any Benefit Plan that could result in liability of the Borrower
(including joint and several liability with another Person) in excess of
$1,000,000; or (e) amend a Benefit Plan resulting in an increase in current
liability for the plan year such that the Borrower or any Subsidiary or any
ERISA Affiliate is required to provide security to such Benefit Plan under
Section 401(a)(29) of the Code; or
(j) Any Loan Document, or any material provision thereof, shall cease to be
in full force and effect for any reason, or any Lien in favor of the Bank
thereunder shall fail to have the priority required thereunder, except upon a
release or termination of such Loan Document or Lien pursuant to the terms
thereof; or the Borrower or any of its Subsidiaries shall contest or purport to
repudiate or disavow any of its obligations under or the validity of
enforceability of any Loan Document or any material provision thereof; or
(k) A Change of Control shall occur at any time.
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SECTION 7.2. REMEDIES.
(a) Upon the occurrence of an Event of Default under Section 7.1(f) or (g),
then (i) all indebtedness of the Borrower under each of the Loan Documents, any
term thereof to the contrary notwithstanding, automatically shall become
immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are hereby expressly waived by the Borrower; (ii) the
obligation, if any, of the Bank to extend any further credit under any of the
Loan Documents shall immediately cease and terminate; and (iii) the Bank shall
have all rights, powers and remedies available under each of the Loan Documents,
or accorded by law, including without limitation the right to resort to any or
all security for any credit accommodation from the Bank subject hereto and to
exercise any or all of the rights of a beneficiary or secured party pursuant to
applicable law.
(b) Upon the occurrence of an Event of Default under 7.1 (other than under
Section 7.1(f) or (g)), then (i) all indebtedness of the Borrower under each of
the Loan Documents, any term thereof to the contrary notwithstanding, shall at
the Bank's option and without notice become immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are hereby
expressly waived by the Borrower; (ii) the obligation, if any, of the Bank to
extend any further credit under any of the Loan Documents shall immediately
cease and terminate; and (iii) the Bank shall have all rights, powers and
remedies available under each of the Loan Documents, or accorded by law,
including without limitation the right to resort to any or all security for any
credit accommodation from the Bank subject hereto and to exercise any or all of
the rights of a beneficiary or secured party pursuant to applicable law.
(c) All rights, powers and remedies of the Bank may be exercised at any
time by the Bank and from time to time after the occurrence of an Event of
Default, are cumulative and not exclusive, and shall be in addition to any other
rights, powers or remedies provided by law or equity.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. NO WAIVER.
No delay, failure or discontinuance of Bank in exercising any right, power
or remedy under any of the Loan Documents shall affect or operate as a waiver of
such right, power or remedy; nor shall any single or partial exercise of any
such right, power or remedy preclude, waive or otherwise affect any other or
further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, permit, consent or approval of any kind by Bank of any breach of or
default under any of the Loan Documents must be in writing and shall be
effective only to the extent set forth in such writing.
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SECTION 8.2. NOTICES.
All notices, requests and demands which any party is required or may desire
to give to any other party under any provision of this Agreement must be in
writing delivered to each party at the following address:
BORROWER: LOS ANGELES TURF CLUB, INCORPORATED
285 West Huntington Drive
Arcadia, California 91066
Attention: President
Facsimile: (626) 446-9565
with a copy to:
MI Entertainment Corp.
337 Magna Drive
Aurora, Ontario, Canada L4G 7L1
Attention: James Nicol
Facsimile: (905) 726-7169
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
John Manning
Wells Fargo Bank
1000 Lakes Drive, Suite 250
West Covina, California 91790
Facsimile; 626-919-2909
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 8.3. COSTS, EXPENSES AND ATTORNEYS' FEES.
Borrower shall pay to Bank immediately upon demand (a) the Bank's out-of-
pocket costs and expenses, including reasonable attorneys' fees expended or
incurred by the Bank in connection with the negotiation and preparation of this
Agreement and the other Loan Documents, the Bank's continued administration
hereof and thereof, and the preparation of any amendments and waivers hereto and
thereto, and (b) the Bank's costs and expenses, including attorney's fees (to
include outside counsel fees but exclude costs of the Bank's in-house counsel)
expended or incurred by the Bank in connection with the enforcement of Bank's
rights and/or the collection of any amounts which become due to Bank under any
of the Loan Documents, or the prosecution or defense of any action in any way
related to any of the Loan Documents, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in
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connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to the Borrower or any other person or entity.
SECTION 8.4. INDEMNITY.
The Borrower shall indemnify, defend and hold harmless the Bank and the
officers, directors, employees, agents, attorneys, affiliates, successors and
assigns of the Bank (collectively, the "Indemnitees") from and against (a) any
and all transfer taxes, documentary taxes, assessments or charges made by any
Governmental Authority by reason of the execution delivery, filing or recording
of the Loan Documents or the making of the Loans, and (b) any and all
liabilities, losses, damages, penalties, judgments, claims, costs and expenses
of any kind or nature whatsoever (including reasonable attorneys' fees (to
include outside counsel fees but exclude costs of in-house counsel)), and
disbursements in connection with any actual or threatened investigative,
administrative or judicial proceeding, whether or not such Indemnitee shall be
designated a party thereto (and provided that such Indemnitee shall be entitled
to select its own counsel in all such proceedings) that may be imposed on,
incurred by or asserted against such Indemnitee, in any manner relating to or
arising out of the Loan Documents, the Loans, the use or intended use of the
proceeds of the Loans (the "Indemnified Liabilities"); provided that (i) no
Indemnitee shall have the right to be indemnified or held harmless hereunder for
its own gross negligence or willful misconduct, as determined by a final
judgment of a court of competent jurisdiction, and (ii) the Borrower shall have
no obligation hereunder in respect of Indemnified Liabilities arising from a
breach of any Loan Document by the Indemnitee making a claim hereunder.
Without limiting the generality of the foregoing, the Borrower further
agrees to fully and promptly pay, perform, discharge, defend, indemnify and hold
harmless each Indemnitee from and against any Environmental Damages; provided
that the Borrower shall not have any obligation to any Indemnitee hereunder with
respect to any Environmental Damages to the extent such Environmental Damages
arise solely from the gross negligence or willful misconduct of that Indemnitee
as determined by a final judgment of a court of competent jurisdiction.
To the extent that the undertaking to indemnify and hold harmless set forth
herein may be unenforceable as violative of any Applicable Law or public policy,
the Borrower shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities that is permissible under Applicable Law.
All Indemnified Liabilities shall be payable on demand.
SECTION 8.5. SUCCESSORS, ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of the heirs,
executors, administrators, legal representatives, successors and assigns of the
parties; provided however, that the Borrower may not assign or transfer its
interest hereunder without the Bank's prior written consent. The Bank reserves
the right to sell, assign, transfer, negotiate or grant participation in all or
any part of, or any interest in, Bank's rights and benefits under each of the
Loan Documents; provided, however, that the Bank agrees that, in the event that
it assigns less than the full amount of the Term Loan, the Bank shall act as
"Administrative Agent" for itself
44
<PAGE>
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and any such assignees. In connection therewith, the Bank may disclose all
documents and information which the Bank now has or may hereafter acquire
relating to any credit extended by the Bank to the Borrower, the Borrower or its
business, any Subsidiary or the business of such Subsidiary, or any Collateral.
SECTION 8.6. ENTIRE AGREEMENT; AMENDMENT.
This Agreement and the other Loan Documents constitute the entire agreement
between the Borrower and the Bank with respect to any extension of credit by the
Bank subject hereto and supersede all prior negotiations, communications,
discussions and correspondence concerning the subject matter hereof. This
Agreement may be amended or modified only in writing signed by each party
hereto.
SECTION 8.7. NO THIRD PARTY BENEFICIARIES.
This Agreement is made and entered into for the sole protection and benefit
of the parties hereto and their respective permitted successors and assigns, and
no other person or entity shall be a third party beneficiary of, or have any
direct or indirect cause of action or claim in connection with, this Agreement
or any other of the Loan Documents to which it is not a party.
SECTION 8.8. TIME.
Time is of the essence of each and every provision of this Agreement and
each other of the Loan Documents.
SECTION 8.9. SEVERABILITY OF PROVISIONS.
If any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or any remaining provisions of this Agreement.
SECTION 8.10. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
when executed and delivered shall be deemed to be an original, and all of which
when taken together shall constitute one and the same Agreement.
SECTION 8.11. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California.
SECTION 8.12. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
-----------
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind,
45
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whether in contract or tort, statutory or common law, legal or equitable, now
existing or hereafter arising under or in connection with, or in any way
pertaining to, any of the Loan Documents, or any past, present or future
extensions of credit and other activities, transactions or obligations of any
kind related directly or indirectly to any of the Loan Documents, including
without limitation, any of the foregoing arising in connection with the exercise
of any self-help, ancillary or other remedies pursuant to any of the Loan
Documents. Any party may by summary proceedings bring an action in court to
compel arbitration of a Dispute. Any party who fails or refuses to submit to
arbitration following a lawful demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
---------------
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute
shall apply to any arbitration proceeding. All discovery activities shall be
expressly limited to matters directly relevant to the Dispute being arbitrated.
Judgment upon any award rendered in an arbitration may be entered in any court
having jurisdiction; provided however, that nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections afforded to
it under 12 U.S.C. (S) 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
----------------------------------------------------------
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
--------------------------------------------
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000.
46
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Any Dispute in which the amount in controversy exceeds $5,000,000 shall be
decided by majority vote of a panel of three arbitrators; provided however, that
all three arbitrators must actively participate in all hearings and
deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary, in
---------------
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding anything
--------------------------------------------
herein to the contrary, no Dispute shall be submitted to arbitration if the
Dispute concerns Indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all Indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
Indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
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(g) Miscellaneous. To the maximum extent practicable, the AAA, the
-------------
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
[Signatures on following page]
48
<PAGE>
Execution Copy
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
LOS ANGELES TURF CLUB, INCORPORATED
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
--------------------------------
Name:
Title:
49
<PAGE>
FORBEARANCE AGREEMENT
FORBEARANCE AGREEMENT dated as of the ___ day of February, 2000,
between MAGNA INTERNATIONAL INC., a corporation organized under the laws of the
Province of Ontario, Canada (including any successor thereto, "Magna"), and
MAGNA ENTERTAINMENT CORP., a corporation organized under the laws of the State
of Delaware (including any successor thereto, the "Company").
WITNESSETH:
----------
WHEREAS Magna has invested approximately $550,000,000 in the Company
and its subsidiaries pursuant to the transfer of certain assets, the
cancellation of certain intercompany indebtedness and the subscription for
shares of the Company;
WHEREAS Magna intends to distribute by means of a special stock
dividend approximately 15.7 million shares of the Class A Subordinate Voting
Stock of the company or exchangeable shares of MEC Holdings (Canada), Inc. a
subsidiary of the Company to Magna's shareholders, thereby causing the Company
to become a separate publicly held company;
WHEREAS Magna owns, and immediately after such distribution will
continue to own, outstanding shares of the Company that carry a majority of the
aggregate voting power of all the Company's outstanding voting shares; and
WHEREAS Magna intends, for the express benefit of the holders from
time to time of its outstanding Class A Subordinate Voting Shares, to set forth
in a manner enforceable by such holders against Magna the restrictions on
Magna's conduct as specified herein.
NOW, THEREFORE, for good and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. For the purposes of this Agreement, the following
-----------
terms shall have the definitions assigned to them below:
(a) "Affiliate" shall have the meaning specified in Rule 12b-2 under
---------
the Exchange Act.
(b) "Control" and "Controlled" shall have the meaning specified in
------- ----------
Rule 12b-2 under the Exchange Act.
<PAGE>
(c) "Controlled Affiliate" means any Affiliate of Magna that is
--------------------
Controlled by or under common Control with Magna; provided, however, that
-------- -------
"Controlled Affiliate" shall not include a Stronach Affiliate.
(d) "Exchange Act" means the U.S. Securities Exchange Act of 1934, as
------------
amended, and any successor statute.
(e) "Person" shall mean any individual, corporation,
------
partnership, trust, association or other entity of any kind.
(f) "Shareholder Consent" shall mean the consent or approval given by
-------------------
holders of at least a majority of the votes cast at a meeting of the holders of
Magna's Class A Subordinate Voting Shares, excluding the votes attaching to
Magna's Class A Subordinate Voting Shares beneficially owned, directly or
indirectly, by Affiliates of Magna.
(g) "Stronach Affiliate" shall mean Frank Stronach or any member of
------------------
his family or any trust established by or for the benefit of any of them, or any
Person Controlled by any of them, includng without limitation the Stronach
Trust, but not Controlled by Magna or its Board of Directors.
2. Magna hereby covenants and agrees with the Company that, for the
period commencing from the date hereof and ending on May 31, 2006, neither Magna
nor any of its Controlled Affiliates shall, without obtaining prior Shareholder
Consent thereto, (i) make any further debt or equity investment in, or otherwise
give financial assistance to, the Company or any of its subsidiaries (which
term shall include any Person in which 50% or more of the outstanding equity or
voting securities is owned by the Company and/or any of its subsidiaries); or
(ii) invest in any business or assets determined in good faith by the
independent directors of Magna to be non-automotive-related and not ancillary or
incidental to Magna's automotive-related business.
3. Waiver. Magna hereby waives any failure or delay on the part of
------
the Company or any third party beneficiary hereof in asserting or enforcing any
of its rights or in making any claims or demands hereunder.
4. Amendment and Termination. Prior to May 31, 2006 (the
-------------------------
"Termination Date"), this Agreement may be amended or terminated by the parties
hereto only upon the receipt by Magna of Shareholder Consent thereto. This
Agreement shall automatically terminate on the Termination Date.
5. Rights of Magna Shareholders. All holders of Magna's Class A
----------------------------
Subordinate Voting Shares, whether such shares were acquired prior to, on or
after the date hereof, shall be intended third-party beneficiaries of this
Agreement; provided that the third-party beneficiary rights of any such holder
--------
shall be limited to (i) the right to demand that Magna abide by its covenants
under this Agreement and (ii) the right to proceed against Magna to enforce
Magna's covenants under this Agreement.
-2-
<PAGE>
6. Successors or Assigns. This Agreement shall be binding upon and
---------------------
inure to the benefit of the parties hereto and their respective successors and
permitted assigns; provided, however, that neither party hereto shall be
-------- --------
entitled to assign their rights hereunder without obtaining prior Shareholder
Consent.
7. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York without regard to the
conflict of laws principles thereof.
[Signature page follows.]
-3-
<PAGE>
IN WITNESS WHEREOF, Magna and the Company have each caused this
Agreement to be executed and delivered as of the day and year first above
written by their respective officers thereunto duly authorized.
MAGNA INTERNATIONAL INC.
By: _______________________________________
Name:
Title:
By: _______________________________________
Name:
Title:
MAGNA ENTERTAINMENT CORP.
By: _______________________________________
Name:
Title:
By: _______________________________________
Name:
Title:
<PAGE>
EXHIBIT 23.7
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Jerry D. Campbell
-----------------------------------
Name: Jerry D. Campbell
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.8
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ William G. Davis
-----------------------------------
Name: William G. Davis
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.9
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Peter M. George
-----------------------------------
Name: Peter M. George
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.10
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Joseph W. Harper
-----------------------------------
Name: Joseph W. Harper
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.11
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ J. Terrence Lanni
-----------------------------------
Name: J. Terrence Lanni
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.12
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Edward C. Lumley
-----------------------------------
Name: Edward C. Lumley
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.13
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Earle I. Mack
-----------------------------------
Name: Earle I. Mack
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.14
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Gino Roncelli
-----------------------------------
Name: Gino Roncelli
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.15
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Andrew Stronach
-----------------------------------
Name: Andrew Stronach
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.16
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ Ronald J. Volkman
-----------------------------------
Name: Ronald J. Volkman
Dated as of January 14, 2000
<PAGE>
EXHIBIT 23.17
CONSENT OF FUTURE DIRECTOR
I consent to being named as a person about to become a director of MI
Entertainment Corp. in the Registration Statement on Form S-1 of MI
Entertainment Corp. for the registration of its Class A Subordinate Voting
Stock.
/s/ John C. York II
-----------------------------------
Name: John C. York II
Dated as of January 14, 2000
<PAGE>
PROVISIONS ATTACHING TO THE
EXCHANGEABLE SHARES OF
MI Venture (Canada) Inc. (the "Corporation")
The Exchangeable Shares shall have the following rights, privileges,
restrictions and conditions:
ARTICLE 1
INTERPRETATION
1.1 Definitions.
For the purposes of these share provisions:
"Board of Directors" means the board of directors of the Corporation.
"Business Day" means any day on which commercial banks are open for business in
New York, New York and Toronto, Ontario other than a Saturday, a Sunday or a day
observed as a holiday in Toronto, Ontario under the laws of the Province of
Ontario or the federal laws of Canada or in New York, New York under the laws of
the State of New York or the federal laws of the United States of America.
"Canadian Dollar Equivalent" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying:
(a) the Foreign Currency Amount by,
(b) the noon spot exchange rate on such date for such foreign currency
expressed in Canadian dollars as reported by the Bank of Canada or, in the
event such spot exchange rate is not available, such spot exchange rate on
such date for such foreign currency expressed in Canadian dollars as may be
deemed by the Board of Directors to be appropriate for such purpose.
"Common Shares" means the common shares in the capital of the Corporation.
"Corporation" means MI Venture (Canada) Inc., a corporation incorporated under
and governed by the OBCA.
"Current Market Price" means, in respect of an MIEC Class A Share on any date,
the Canadian Dollar Equivalent of the average of the closing bid and ask prices
of MIEC Class A Shares during a period of 20 consecutive trading days ending not
more than three trading days before such date on NASDAQ, or, if the MIEC Class A
Shares are not then quoted on NASDAQ, on such other stock exchange or automated
quotation system on which the MIEC Class A Shares are listed or quoted, as the
case may be, as may be selected by the Board of Directors for such
<PAGE>
- 2 -
purpose; provided, however, that if in the opinion of the Board of Directors the
public distribution or trading activity of MIEC Class A Shares during such
period does not create a market which reflects the fair market value of an MIEC
Class A Share, then the Current Market Price of an MIEC Class A Share shall be
determined by the Board of Directors, in good faith and in its sole discretion,
and provided further that any such selection, opinion or determination by the
Board of Directors shall be conclusive and binding.
"Dividend Amount" has the meaning ascribed thereto in section 6.3 of these share
provisions.
"Exchangeable Shares" mean the non-voting exchangeable shares in the capital of
the Corporation having the rights, privileges, restrictions and conditions set
forth herein.
"Exchangeable Share Support Agreement" means the Exchangeable Share Support
Agreement between MIEC and the Corporation dated as of December 30, 1999.
"Exchangeable Share Voting Event" means any matter in respect of which holders
of Exchangeable Shares are entitled to vote as shareholders of the Corporation,
other than an Exempt Exchangeable Share Voting Event, and, for greater
certainty, excluding any matter in respect of which holders of Exchangeable
Shares are entitled to vote (or instruct Magna to vote) under the Voting and
Exchange Agreement.
"Exempt Exchangeable Share Voting Event" means any matter in respect of which
holders of Exchangeable Shares are entitled to vote as shareholders of the
Corporation in order to approve or disapprove, as applicable, any change to, or
in the rights of the holders of, the Exchangeable Shares, where the approval or
disapproval, as applicable, of such change would be required to maintain the
equivalence of the Exchangeable Shares and the MIEC Class A Shares.
"Expiry Date" means October 1, 2001, or such other date after October 1, 2001
but prior to April 1, 2003 that the Board of Directors may determine, provided
that written notice of the determination of such other date is provided to
holders of the Exchangeable Shares at least 60 days' prior to October 1, 2001.
"Liquidation Amount" has the meaning ascribed thereto in section 5.1 of these
share provisions.
"Liquidation Call Right" has the meaning ascribed thereto in section 14.1 of
these share provisions.
"Liquidation Date" has the meaning ascribed thereto in section 5.1 of these
share provisions.
"Magna" means Magna International Inc., a corporation incorporated under and
governed by the OBCA.
"MIEC Call Notice" has the meaning ascribed thereto in section 6.3 of these
share provisions.
"MIEC" means MI Entertainment Corp., a corporation existing under the laws of
the State of Delaware, and any successor corporation thereto.
<PAGE>
- 3 -
"MIEC Class A Shares" mean the shares of Class A Subordinate Voting Stock, par
value U.S. $0.01, in the capital of MIEC, and any other securities into which
such shares may be changed, including shares into which MIEC Class A Shares may
be changed consequent upon an amalgamation, merger, reorganization or other
transaction affecting the MIEC Class A Shares.
"MIEC Control Transaction" means any merger or amalgamation involving MIEC, any
tender offer for MIEC, and any material sale of shares or rights or interests
therein or thereto by MIEC or similar transactions, or any proposal to do so.
"MIEC Dividend Declaration Date" means the date on which the Board of Directors
declares any dividend on the MIEC Class A Shares.
"NASDAQ" means the Nasdaq National Market.
"OBCA" means the Business Corporations Act (Ontario) as it may be amended from
time to time.
"Person" includes any individual, firm, partnership, joint venture, venture
capital fund, association, trust, trustee, executor, administrator, legal
personal representative, estate, group, body corporate, corporation,
unincorporated association or organization, government body, syndicate or other
entity, whether or not having legal status.
"Purchase Price" has the meaning ascribed thereto in section 6.3 of these share
provisions.
"Redemption Call Purchase Price" has the meaning ascribed thereto in section
15.1 of these share provisions.
"Redemption Call Right" has the meaning ascribed thereto in section 15.1 of
these share provisions.
"Redemption Date" means the date, if any, established by the Board of Directors
for the redemption by the Corporation of all but not less than all of the
outstanding Exchangeable Shares pursuant to Article 7 of these share provisions,
which date shall be no earlier than the Expiry Date, unless:
(a) the number of Exchangeable Shares then outstanding, other than
Exchangeable Shares held by MIEC and its subsidiaries, constitutes less
than 5% of the aggregate of the number of MIEC Class A Shares then
outstanding and the total number of Exchangeable Shares then outstanding
(including all Exchangeable Shares held by MIEC and its subsidiaries), in
which case the Board of Directors may accelerate such redemption date to
such date prior to the Expiry Date as they may determine, upon at least 60
days' prior written notice to the registered holders of the Exchangeable
Shares;
(b) an MIEC Control Transaction occurs, in which case, provided that the
Board of Directors determines, in good faith and in its sole discretion,
that it is not reasonably practicable to substantially replicate the terms
and conditions of the Exchangeable Shares
<PAGE>
- 4 -
in connection with such MIEC Control Transaction and that the redemption of
all but not less than all of the outstanding Exchangeable Shares is
necessary to enable the completion of such MIEC Control Transaction in
accordance with its terms, the Board of Directors may accelerate such
redemption date to such date prior to the Expiry Date as they may
determine, upon such number of days' prior written notice to the registered
holders of the Exchangeable Shares as the Board of Directors may determine
to be reasonably practicable in such circumstances;
(c) an Exchangeable Share Voting Event is proposed, in which case,
provided that the Board of Directors has determined, in good faith and in
its sole discretion, that it is not reasonably practicable to accomplish
the business purpose intended by the Exchangeable Share Voting Event, which
business purpose must be bona fide and not for the primary purpose of
causing the occurrence of a Redemption Date, in any other commercially
reasonable manner that does not result in an Exchangeable Share Voting
Event, the redemption date shall be the Business Day prior to the record
date for any meeting or vote of the holders of the Exchangeable Shares to
consider the Exchangeable Share Voting Event and the Board of Directors
shall give such number of days' prior written notice of such redemption to
the registered holders of the Exchangeable Shares as the Board of Directors
may determine to be reasonably practicable in such circumstances; or
(d) an Exempt Exchangeable Share Voting Event is proposed and the holders
of the Exchangeable Shares fail to take the necessary action at a meeting
or other vote of holders of Exchangeable Shares, to approve or disapprove,
as applicable, the Exempt Exchangeable Share Voting Event, in which case
the redemption date shall be the Business Day following the day on which
the holders of the Exchangeable Shares failed to take such action and the
Board of Directors shall give such number of days' prior written notice of
such redemption to the registered holders of the Exchangeable Shares as the
Board of Directors may determine to be reasonably practicable in such
circumstances,
provided, however, that the accidental failure or omission to give any notice of
redemption under clauses (a), (b), (c) or (d) above to less than 10% of such
holders of Exchangeable Shares shall not affect the validity of any such
redemption.
"Redemption Price" has the meaning ascribed thereto in section 7.1 of these
share provisions.
"Retracted Shares" has the meaning ascribed thereto in section 6.1(a) of these
share provisions.
"Retraction Call Right" has the meaning ascribed thereto in section 6.1(c) of
these share provisions.
"Retraction Date" has the meaning ascribed thereto in section 6.1(b) of these
share provisions.
"Retraction Price" has the meaning ascribed thereto in section 6.1 of these
share provisions.
"Retraction Request" has the meaning ascribed thereto in section 6.1 of these
share provisions.
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"subsidiary" has the meaning ascribed thereto by the OBCA.
"Transfer Agent" means such Person as may from time to time be appointed by the
Board of Directors as the registrar and transfer agent for the Exchangeable
Shares.
"Voting and Exchange Agreement" means the Voting and Exchange Agreement among
Magna, MIEC and the Corporation dated as of December 30, 1999.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 Preference Entitlement.
The Exchangeable Shares shall be entitled to a preference over the Common Shares
and any other shares ranking junior to the Exchangeable Shares with respect to
the payment of dividends and the distribution of assets 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 shareholders for the purpose of winding up its affairs.
ARTICLE 3
DIVIDENDS
3.1 Entitlement.
Subject to section 3.2 below, a holder of an Exchangeable Share shall be
entitled to receive and the Board of Directors shall, subject to applicable law,
on each MIEC Dividend Declaration Date, declare a dividend on each Exchangeable
Share:
(a) in the case of a cash dividend declared on the MIEC Class A Shares, in
an amount in cash for each Exchangeable Share in U.S. dollars, or the
Canadian Dollar Equivalent thereof on the MIEC Dividend Declaration Date,
in each case, corresponding to the cash dividend declared on each MIEC
Class A Share;
(b) in the case of a stock dividend declared on the MIEC Class A Shares to
be paid in MIEC Class A Shares, in such number of Exchangeable Shares for
each Exchangeable Share as is equal to the number of MIEC Class A Shares to
be paid on each MIEC Class A Share; or
(c) in the case of a dividend declared on the MIEC Class A Shares in
property other than cash or MIEC Class A Shares, in such type and amount of
property for each Exchangeable Share as is the same as or economically
equivalent to (to be determined by the Board of Directors as contemplated
by section 3.5 hereof) the type and amount of property declared as a
dividend on each MIEC Class A Share.
Such dividends shall be paid out of money, assets or property of the Corporation
properly applicable to the payment of dividends, or out of authorized but
unissued shares of the Corporation, as applicable.
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3.2 Stock Dividends.
In the case of a stock dividend declared on the MIEC Class A Shares to be paid
in MIEC Class A Shares, in lieu of declaring the stock dividend contemplated by
section 3.1(b) on the Exchangeable Shares, the Board of Directors may, in its
discretion and subject to applicable law, subdivide, redivide or change (the
"subdivision") each Exchangeable Share on the basis that each Exchangeable Share
before the subdivision becomes a number of Exchangeable Shares as is equal to
the sum of (i) an MIEC Class A Share and (ii) the number of MIEC Class A Shares
to be paid as a stock dividend on each MIEC Class A Share. In such instance,
and notwithstanding any other provision hereof, such subdivision shall become
effective on the effective date specified in section 3.4 hereof without any
further act or formality on the part of the Board of Directors or of the holders
of Exchangeable Shares. For greater certainty, no approval of the holders of
Exchangeable Shares to an amendment to the articles of the Corporation shall be
required to give effect to such subdivision.
3.3 Payment of Cash Dividends.
Cheques of the Corporation payable at par at any branch of the bankers of the
Corporation shall be issued in respect of any cash dividends contemplated by
section 3.1(a) hereof and the sending of such a cheque to each holder of an
Exchangeable Share shall satisfy the cash dividend represented thereby unless
the cheque is not paid on presentation. Subject to applicable law, certificates
registered in the name of the registered holder of Exchangeable Shares shall be
issued or transferred in respect of any stock dividends contemplated by section
3.1(b) hereof or any subdivision of shares contemplated by section 3.2 hereof
and the sending of such a certificate to each holder of an Exchangeable Share
shall satisfy the stock dividend or share subdivision represented thereby. Such
other type and amount of property in respect of any dividends contemplated by
section 3.1(c) hereof shall be issued, distributed or transferred by the
Corporation in such manner as it shall determine and the issuance, distribution
or transfer thereof by the Corporation to each holder of an Exchangeable Share
shall satisfy the dividend represented thereby. No holder of an Exchangeable
Share shall be entitled to recover by action or other legal process against the
Corporation any dividend that is represented by a cheque that has not been duly
presented to the Corporation's bankers for payment or that otherwise remains
unclaimed for a period of six years from the date on which such dividend was
payable.
3.4 Record Date.
The record date for the determination of the holders of Exchangeable Shares
entitled to receive payment of, and the payment date for, any dividend declared
on the Exchangeable Shares under section 3.1 hereof shall be the same dates as
the record date and payment date, respectively, for the corresponding dividend
declared on the MIEC Class A Shares. The record date for the determination of
the holders of Exchangeable Shares entitled to receive Exchangeable Shares in
connection with any subdivision of Exchangeable Shares under section 3.2 hereof
and the effective date of such subdivision shall be the same dates as the record
date and payment date, respectively, for the corresponding stock dividend
declared on MIEC Class A Shares.
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3.5 Unpaid Dividends.
If on any payment date for any dividends declared on the Exchangeable Shares
under section 3.1 hereof the dividends are not paid in full on all of the
Exchangeable Shares then outstanding, any such dividends that remain unpaid
shall be paid on a subsequent date or dates determined by the Board of Directors
on which the Corporation shall have sufficient moneys, assets or property
properly applicable to the payment of such dividends.
3.6 Economic Equivalence.
The Board of Directors shall determine, in good faith and in its sole
discretion, economic equivalence for the purposes of sections 3.1 and 3.2
hereof, and each such determination shall be conclusive and binding on the
Corporation and its shareholders. In making each such determination, the
following factors shall, without excluding other factors determined by the Board
of Directors to be relevant, be considered by the Board of Directors:
(a) in the case of any stock dividend or other distribution payable in
MIEC Class A Shares, the number of such shares issued in proportion to the
number of MIEC Class A Shares previously outstanding;
(b) in the case of the issuance or distribution of any rights, options or
warrants to subscribe for or purchase MIEC Class A Shares (or securities
exchangeable for or convertible into or carrying rights to acquire MIEC
Class A Shares), the relationship between the exercise price of each such
right, option or warrant and the current market value (as determined by the
Board of Directors in the manner above contemplated) of an MIEC Class A
Share;
(c) in the case of the issuance or distribution of any other form of
property (including without limitation any shares or securities of MIEC of
any class other than MIEC Class A Shares, any rights, options or warrants
other than those referred to in section 3.6(b) above, any evidences of
indebtedness of MIEC or any assets of MIEC), the relationship between the
fair market value (as determined by the Board of Directors in the manner
above contemplated) of such property to be issued or distributed with
respect to each outstanding MIEC Class A Share and the current market value
(as determined by the Board of Directors in the manner above contemplated)
of an MIEC Class A Share; and
(d) in all such cases, the general taxation consequences of the relevant
event to holders of Exchangeable Shares to the extent that such
consequences may differ from the taxation consequences to holders of MIEC
Class A Shares as a result of differences between taxation laws of Canada
and the United States (except for any differing consequences arising as a
result of differing marginal taxation rates and without regard to the
individual circumstances of holders of Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of any
security listed and traded or quoted on a securities exchange shall be the
average of the closing bid and ask prices of such security during a period of
not less than 20 consecutive trading days ending not more than
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three trading days before the date of determination on the principal securities
exchange on which such securities are listed and traded or quoted; provided,
however, that if in the opinion of the Board of Directors the public
distribution or trading activity of such securities during such period does not
create a market which reflects the fair market value of such securities, then
the current market value thereof shall be determined by the Board of Directors,
in good faith and in its sole discretion, and provided further that any such
determination by the Board of Directors shall be conclusive and binding on the
Corporation and its shareholders.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 Restrictions on the Corporation.
So long as any of the Exchangeable Shares are outstanding, the Corporation shall
not at any time without, but, subject to section 3.2 hereof, may at any time
with, the approval of the holders of the Exchangeable Shares given as specified
in section 10.2 of these share provisions:
(a) pay any dividends on the Common Shares or any other shares ranking
junior to the Exchangeable Shares, other than stock dividends payable in
Common Shares or any such other shares ranking junior to the Exchangeable
Shares, as the case may be;
(b) redeem or purchase or make any capital distribution in respect of the
Common Shares or any other shares ranking junior to the Exchangeable
Shares;
(c) redeem or purchase any other shares of the Corporation ranking equally
with the Exchangeable Shares with respect to the payment of dividends or on
any liquidation distribution;
(d) issue any Exchangeable Shares other than (i) pursuant to any
shareholder rights plan adopted by the Corporation, (ii) by way of stock
dividend to the holders of such Exchangeable Shares contemplated by section
3.1 hereof, or (iii) by way of any subdivision of Exchangeable Shares
contemplated by section 3.2 hereof; or
(e) issue any shares of the Corporation ranking equally with, or superior
to, the Exchangeable Shares other than by way of stock dividends to the
holders of such Exchangeable Shares.
The restrictions in sections 4.1(a), 4.1(b), 4.1(c) and 4.1.(d) above shall not
apply if all dividends on the outstanding Exchangeable Shares corresponding to
dividends declared and paid to date on the MIEC Class A Shares shall have been
declared and paid on the Exchangeable Shares.
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ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 Entitlement of Holder.
In the event of the liquidation, dissolution or winding-up of the Corporation or
any other distribution of the assets of the Corporation among its shareholders
for the purpose of winding up its affairs, subject to the exercise by MIEC of
the Liquidation Call Right, a holder of Exchangeable Shares shall be entitled,
subject to applicable law, to receive from the assets of the Corporation in
respect of each Exchangeable Share held by such holder on the effective date
(the "Liquidation Date") of such liquidation, dissolution or winding-up, before
any distribution of any part of the assets of the Corporation among the holders
of the Common Shares or any other shares ranking junior to the Exchangeable
Shares, an amount per share equal to the Current Market Price of an MIEC Class A
Share on the last Business Day prior to the Liquidation Date (the "Liquidation
Amount"), which shall be satisfied in full by the Corporation causing to be
delivered to such holder one MIEC Class A Share, together with all declared and
unpaid dividends on each such Exchangeable Share held by such holder on any
dividend record date which occurred prior to the Liquidation Date.
5.2 Payment of Liquidation Amount.
On or promptly after the Liquidation Date, the Corporation shall cause to be
delivered to the holders of the Exchangeable Shares the Liquidation Amount for
each such Exchangeable Share upon presentation and surrender of the certificates
representing such Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares under
the OBCA and the by-laws of the Corporation and such additional documents and
instruments as the Transfer Agent, MIEC or the Corporation may reasonably
require, at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation by notice to the holders
of the Exchangeable Shares. Payment of the total Liquidation Amount for such
Exchangeable Shares shall be made by delivery to each holder, at the address of
the holder recorded in the securities register of the Corporation for the
Exchangeable Shares or by holding for pick-up by the holder at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation by notice to the holders of Exchangeable Shares, on
behalf of the Corporation of certificates representing MIEC Class A Shares
(which shares shall be duly issued as fully paid and non-assessable and shall be
free and clear of any lien, claim or encumbrance) and a cheque of the
Corporation payable at par at any branch of the bankers of the Corporation in
respect of the remaining portion, if any, of the total Liquidation Amount (in
each case less any amounts withheld on account of tax required to be deducted
and withheld therefrom) (without interest). On and after the Liquidation Date,
the holders of the Exchangeable Shares shall cease to be holders of such
Exchangeable Shares and shall not be entitled to exercise any of the rights of
holders in respect thereof, other than the right to receive their proportionate
part of the total Liquidation Amount, unless payment of the total Liquidation
Amount for such Exchangeable Shares shall not be made upon presentation and
surrender of share certificates in accordance with the foregoing provisions, in
which case the rights of the holders shall remain unaffected until the
<PAGE>
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total Liquidation Amount has been paid in the manner hereinbefore provided. The
Corporation shall have the right at any time after the Liquidation Date to
deposit or cause to be deposited the total Liquidation Amount in respect of the
Exchangeable Shares represented by certificates that have not at the Liquidation
Date been surrendered by the holders thereof in a custodial account with any
chartered bank or trust company in Canada. Upon such deposit being made, the
rights of the holders of Exchangeable Shares after such deposit shall be limited
to receiving their proportionate part of the total Liquidation Amount (in each
case less any amounts withheld on account of tax required to be deducted and
withheld therefrom) (without interest) for such Exchangeable Shares so
deposited, against presentation and surrender of the said certificates held by
them, respectively, in accordance with the foregoing provisions. Upon such
payment or deposit of the total Liquidation Amount, the holders of the
Exchangeable Shares shall thereafter be considered and deemed for all purposes
to be holders of the MIEC Class A Shares delivered to them or the custodian on
their behalf.
5.3 No Further Entitlement.
After the Corporation has satisfied its obligations to pay the holders of the
Exchangeable Shares the Liquidation Amount per Exchangeable Share pursuant to
section 5.1 of these share provisions, such holders shall not be entitled to
share in any further distribution of the assets of the Corporation.
ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 Retraction Entitlement.
A holder of Exchangeable Shares shall be entitled at any time, subject to the
exercise by MIEC of the Retraction Call Right and otherwise upon compliance with
the provisions of this Article 6, to require the Corporation to redeem any or
all of the Exchangeable Shares registered in the name of such holder for an
amount per share equal to the Current Market Price of an MIEC Class A Share on
the last Business Day prior to the Retraction Date (the "Retraction Price"),
which shall be satisfied in full by the Corporation causing to be delivered to
such holder one MIEC Class A Share for each Exchangeable Share presented and
surrendered by the holder, together with, on the payment date therefor, the full
amount of all declared and unpaid dividends on any such Exchangeable Share held
by such holder on any dividend record date which occurred prior to the
Retraction Date. To effect such redemption, the holder shall present and
surrender at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation by notice to the holders
of Exchangeable Shares the certificate or certificates representing the
Exchangeable Shares which the holder desires to have the Corporation redeem,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the OBCA and the by-laws of the
Corporation and such additional documents and instruments as the Transfer Agent,
MIEC or the Corporation may reasonably require, and together with a duly
executed statement (the "Retraction Request") in the form of Schedule A hereto
or in such other form as may be acceptable to the Corporation:
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(a) specifying that the holder desires to have all or any number specified
therein of the Exchangeable Shares represented by such certificate or
certificates (the "Retracted Shares") redeemed by the Corporation;
(b) stating the Business Day on which the holder desires to have the
Corporation redeem the Retracted Shares (the "Retraction Date"), provided
that the Retraction Date shall be not less than 10 Business Days nor more
than 15 Business Days after the date on which the Retraction Request is
received by the Corporation and further provided that, in the event that no
such Business Day is specified by the holder in the Retraction Request, the
Retraction Date shall be deemed to be the 15th Business Day after the date
on which the Retraction Request is received by the Corporation; and
(c) acknowledging the overriding right (the "Retraction Call Right") of
MIEC to purchase all but not less than all the Retracted Shares directly
from the holder and that the Retraction Request shall be deemed to be a
revocable offer by the holder to sell the Retracted Shares to MIEC in
accordance with the Retraction Call Right on the terms and conditions set
out in section 6.3 below.
6.2 Corporation To Redeem.
Subject to the exercise by MIEC of the Retraction Call Right, upon receipt by
the Corporation or the Transfer Agent in the manner specified in section 6.1
hereof of a certificate or certificates representing the number of Exchangeable
Shares which the holder desires to have the Corporation redeem, together with a
Retraction Request, and provided that the Retraction Request is not revoked by
the holder in the manner specified in section 6.7, the Corporation shall redeem
the Retracted Shares effective at the close of business on the Retraction Date
and shall cause to be delivered to such holder the total Retraction Price with
respect to such shares, provided that all declared and unpaid dividends for
which the record date has occurred prior to the Retraction Date shall be paid on
the payment date for such dividends. If only a part of the Exchangeable Shares
represented by any certificate is redeemed (or purchased by MIEC pursuant to the
Retraction Call Right), a new certificate for the balance of such Exchangeable
Shares shall be issued to the holder at the expense of the Corporation.
6.3 Notice of Retraction Request to MIEC.
Upon receipt by the Corporation of a Retraction Request, the Corporation shall
immediately notify MIEC thereof. In order to exercise the Retraction Call Right,
MIEC must notify the Corporation of its determination to do so (the "MIEC Call
Notice") within five Business Days of notification to MIEC by the Corporation of
the receipt by the Corporation of the Retraction Request. If MIEC does not so
notify the Corporation within such five Business Day period, the Corporation
will notify the holder as soon as possible thereafter that MIEC will not
exercise the Retraction Call Right. If MIEC delivers the MIEC Call Notice within
such five Business Day period, and provided that the Retraction Request is not
revoked by the holder in the manner specified in section 6.7, the Retraction
Request shall thereupon be considered only to be an offer by the holder to sell
the Retracted Shares to MIEC in accordance with the Retraction Call Right. In
such event, the Corporation shall not redeem the Retracted Shares and MIEC shall
purchase
<PAGE>
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from such holder and such holder shall sell to MIEC on the Retraction Date the
Retracted Shares for a purchase price (the "Purchase Price") per share equal to
the Retraction Price per share, plus, on the designated payment date therefor,
to the extent not paid by the Corporation on the designated payment date
therefor, an additional amount equivalent to the full amount of all declared and
unpaid dividends on those Retracted Shares held by such holder on any dividend
record date which occurred prior to the Retraction Date (the "Dividend Amount").
For the purposes of completing a purchase pursuant to the Retraction Call Right,
MIEC shall deposit with the Transfer Agent, on or before the Retraction Date,
certificates representing MIEC Class A Shares and a cheque or cheques of MIEC
payable at par at any branch of the bankers of MIEC representing the aggregate
Dividend Amount, less any amounts withheld on account of tax required to be
deducted and withheld therefrom (without interest). Provided that MIEC has
complied with the immediately preceding sentence, the closing of the purchase
and sale of the Retracted Shares pursuant to the Retraction Call Right shall be
deemed to have occurred as at the close of business on the Retraction Date and,
for greater certainty, no redemption by the Corporation of such Retracted Shares
shall take place on the Retraction Date. In the event that MIEC does not deliver
a MIEC Call Notice within such five Business Day period, and provided that the
Retraction Request is not revoked by the holder in the manner specified in
section 6.7, the Corporation shall redeem the Retracted Shares on the Retraction
Date and in the manner otherwise contemplated in this Article 6.
6.4 Delivery of MIEC Class A Shares.
The Corporation or MIEC, as the case may be, shall deliver or cause the Transfer
Agent to deliver to the relevant holder, at the address of the holder recorded
in the securities register of the Corporation for the Exchangeable Shares or at
the address specified in the holder's Retraction Request or by holding for pick-
up by the holder at the registered office of the Corporation or at any office of
the Transfer Agent as may be specified by the Corporation by notice to the
holders of Exchangeable Shares, certificates representing the MIEC Class A
Shares (which shares shall be duly issued as fully paid and non-assessable and
shall be free and clear of any lien, claim or encumbrance) registered in the
name of the holder or in such other name as the holder may request, and, if
applicable and on or before the payment date therefor, a cheque payable at par
at any branch of the bankers of the Corporation or MIEC, as applicable,
representing the aggregate Dividend Amount in payment of the total Retraction
Price or the total Purchase Price, as the case may be, in each case, less any
amounts withheld on account of tax required to be deducted and withheld
therefrom (without interest), and such delivery of such certificates and cheques
on behalf of the Corporation or by MIEC, as the case may be, or by the Transfer
Agent shall be deemed to be payment of and shall satisfy and discharge all
liability for the total Retraction Price or total Purchase Price, as the case
may be, to the extent that the same is represented by such share certificates
and cheques (plus any tax deducted and withheld therefrom and remitted to the
proper tax authority).
6.5 No Further Entitlement of Holder.
On and after the close of business on the Retraction Date, the holder of the
Retracted Shares shall cease to be a holder of such Retracted Shares and shall
not be entitled to exercise any of the
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rights of a holder in respect thereof, other than the right to receive his
proportionate part of the total Retraction Price or total Purchase Price, as the
case may be, unless upon presentation and surrender of certificates in
accordance with the foregoing provisions, payment of the total Retraction Price
or the total Purchase Price, as the case may be, shall not be made as provided
in section 6.4, in which case the rights of such holder shall remain unaffected
until the total Retraction Price or the total Purchase Price, as the case may
be, has been paid in the manner hereinbefore provided. On and after the close of
business on the Retraction Date, provided that presentation and surrender of
certificates and payment of the total Retraction Price or the total Purchase
Price, as the case may be, has been made in accordance with the foregoing
provisions, the holder of the Retracted Shares so redeemed by the Corporation or
purchased by MIEC shall thereafter be considered and deemed for all purposes to
be a holder of the MIEC Class A Shares delivered to it.
6.6 Limitation of Redemption Obligation.
Notwithstanding any other provision of this Article 6, the Corporation shall not
be obligated to redeem Retracted Shares specified by a holder in a Retraction
Request to the extent that such redemption of Retracted Shares would be contrary
to solvency requirements or other provisions of applicable law. If the
Corporation believes that on any Retraction Date it would not be permitted by
any of such provisions to redeem the Retracted Shares tendered for redemption on
such date, and provided that MIEC shall not have exercised the Retraction Call
Right with respect to the Retracted Shares, the Corporation shall only be
obligated to redeem Retracted Shares specified by a holder in a Retraction
Request to the extent of the maximum number that may be so redeemed (rounded
down to a whole number of shares) as would not be contrary to such provisions
and shall notify the holder at least two Business Days prior to the Retraction
Date as to the number of Retracted Shares which will not be redeemed by the
Corporation. In any case in which the redemption by the Corporation of Retracted
Shares would be contrary to solvency requirements or other provisions of
applicable law, the Corporation shall redeem the maximum number of Exchangeable
Shares which the Board of Directors determine the Corporation is, on the
Retraction Date, permitted to redeem, which shall be selected as nearly as may
be pro rata (disregarding fractions) in proportion to the total number of
Exchangeable Shares tendered for retraction by each holder thereof and the
Corporation shall issue to each holder of Retracted Shares a new certificate, at
the expense of the Corporation, representing the Retracted Shares not redeemed
by the Corporation pursuant to section 6.2 hereof. Provided that the Retraction
Request is not revoked by the holder in the manner specified in section 6.7 and
provided further that MIEC shall not have exercised the Retraction Call Right
with respect to the Retracted Shares, the holder of any such Retracted Shares
not redeemed by the Corporation pursuant to section 6.2 of these share
provisions as a result of solvency requirements or other provisions of
applicable law shall be deemed by giving the Retraction Request to have required
MIEC to purchase such Retracted Shares from such holder on the Retraction Date
or as soon as practicable thereafter on payment by MIEC to such holder of the
Purchase Price for each such Retracted Share.
<PAGE>
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6.7 Withdrawal of Retraction Request.
A holder of Retracted Shares may, by notice in writing given by the holder to
the Corporation before the close of business on the Business Day immediately
preceding the Retraction Date, withdraw its Retraction Request, in which event
such Retraction Request shall be null and void and, for greater certainty, the
revocable offer constituted by the Retraction Request to sell the Retracted
Shares to MIEC shall be deemed to have been revoked.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION
7.1 Redemption by Corporation.
Subject to applicable law, and provided MIEC has not exercised the Redemption
Call Right, the Corporation shall on the Redemption Date redeem all but not less
than all of the then outstanding Exchangeable Shares for an amount per share
equal to the Current Market Price of an MIEC Class A Share on the last Business
Day prior to the Redemption Date (the "Redemption Price"), which shall be
satisfied in full by the Corporation causing to be delivered to each holder of
Exchangeable Shares one MIEC Class A Share for each Exchangeable Share held by
such holder, together with the full amount of all declared and unpaid dividends
on each such Exchangeable Share held by such holder on any dividend record date
which occurred prior to the Redemption Date.
7.2 Notice to Holders.
In any case of a redemption of Exchangeable Shares under this Article 7, the
Corporation shall, at least 60 days before the Redemption Date (other than a
Redemption Date established in connection with a MIEC Control Transaction, an
Exchangeable Share Voting Event or an Exempt Exchangeable Share Voting Event),
send or cause to be sent to each holder of Exchangeable Shares a notice in
writing of the redemption by the Corporation or the purchase by MIEC under the
Redemption Call Right, as the case may be, of the Exchangeable Shares held by
such holder. In the case of a Redemption Date established in connection with a
MIEC Control Transaction, an Exchangeable Share Voting Event and an Exempt
Exchangeable Share Voting Event, the written notice of redemption by the
Corporation or the purchase by MIEC under the Redemption Call Right will be sent
on or before the Redemption Date, on as many days prior written notice as may be
determined by the Board of Directors of the Corporation to be reasonably
practicable in the circumstances. In any such case, such notice shall set out
the Redemption Price or the Redemption Call Purchase Price, as the case may be,
the Redemption Date and, if applicable, particulars of the Redemption Call
Right.
7.3 Payment of Redemption Price.
On or after the Redemption Date and subject to the exercise by MIEC of the
Redemption Call Right, the Corporation shall cause to be delivered to the
holders of the Exchangeable Shares to be redeemed the Redemption Price for each
such Exchangeable Share, together with the full amount of all declared and
unpaid dividends on each such Exchangeable Share held by such
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holder on any dividend record date which occurred prior to the Redemption Date,
upon presentation and surrender at the registered office of the Corporation or
at any office of the Transfer Agent as may be specified by the Corporation in
such notice of the certificates representing such Exchangeable Shares, together
with such other documents and instruments as may be required to effect a
transfer of Exchangeable Shares under the OBCA and the by-laws of the
Corporation and such additional documents and instruments as the Transfer Agent,
MIEC or the Corporation may reasonably require. Payment of the total Redemption
Price for such Exchangeable Shares, together with payment of such dividends,
shall be made by delivery to each holder, at the address of the holder recorded
in the securities register of the Corporation or by holding for pick-up by the
holder at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation in such notice, on behalf
of the Corporation of certificates representing MIEC Class A Shares (which
shares shall be duly issued as fully paid and non-assessable and shall be free
and clear of any lien, claim or encumbrance) and, if applicable, a cheque of the
Corporation payable at par at any branch of the bankers of the Corporation in
payment of any such dividends, in each case, less any amounts withheld on
account of tax required to be deducted and withheld therefrom (without
interest). On and after the Redemption Date, the holders of the Exchangeable
Shares called for redemption shall cease to be holders of such Exchangeable
Shares and shall not be entitled to exercise any of the rights of holders in
respect thereof, other than the right to receive their proportionate part of the
total Redemption Price and any such dividends, unless payment of the total
Redemption Price and any such dividends for such Exchangeable Shares shall not
be made upon presentation and surrender of certificates in accordance with the
foregoing provisions, in which case the rights of the holders shall remain
unaffected until the total Redemption Price and any such dividends have been
paid in the manner hereinbefore provided. The Corporation shall have the right
at any time after the sending of notice of its intention to redeem the
Exchangeable Shares as aforesaid to deposit or cause to be deposited the total
Redemption Price for and the full amount of such dividends on (except as
provided in the preceding sentence) the Exchangeable Shares so called for
redemption, or of such of the said Exchangeable Shares represented by
certificates that have not at the date of such deposit been surrendered by the
holders thereof in connection with such redemption, in a custodial account with
any chartered bank or trust company in Canada named in such notice, less any
amounts withheld on account of tax required to be deducted and withheld
therefrom (without interest). Upon the later of such deposit being made and the
Redemption Date, the Exchangeable Shares in respect whereof such deposit shall
have been made shall be redeemed and the rights of the holders thereof after
such deposit or Redemption Date, as the case may be, shall be limited to
receiving their proportionate part of the total Redemption Price and such
dividends for such Exchangeable Shares so deposited (without interest), against
presentation and surrender of the said certificates held by them, respectively,
in accordance with the foregoing provisions. Upon such payment or deposit of the
total Redemption Price and the full amount of such dividends, the holders of the
Exchangeable Shares shall thereafter be considered and deemed for all purposes
to be holders of the MIEC Class A Shares delivered to them or the custodian on
their behalf.
<PAGE>
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ARTICLE 8
PURCHASE FOR CANCELLATION
8.1 Corporation May Purchase For Cancellation.
Subject to applicable law and the articles of the Corporation, the Corporation
may at any time and from time to time purchase for cancellation all or any part
of the outstanding Exchangeable Shares at any price by tender to all the holders
of record of Exchangeable Shares then outstanding or through the facilities of
any stock exchange on which the Exchangeable Shares are listed or quoted at any
price per share together with an amount equal to all declared and unpaid
dividends thereon for which the record date has occurred prior to the date of
purchase. If in response to an invitation for tenders under the provisions of
this section 8.1, more Exchangeable Shares are tendered at a price or prices
acceptable to the Corporation than the Corporation is prepared to purchase, the
Exchangeable Shares to be purchased by the Corporation shall be purchased as
nearly as may be pro rata according to the number of shares tendered by each
holder who submits a tender to the Corporation, provided that when shares are
tendered at different prices, the pro rating shall be effected (disregarding
fractions) only with respect to the shares tendered at the price at which more
shares were tendered than the Corporation is prepared to purchase after the
Corporation has purchased all the shares tendered at lower prices. If part only
of the Exchangeable Shares represented by any certificate shall be purchased, a
new certificate for the balance of such shares shall be issued at the expense of
the Corporation.
ARTICLE 9
VOTING RIGHTS
9.1 Exchangeable Shares Non-Voting.
Except as required by applicable law and by Article 10, section 11.1 and section
12.2 hereof, the holders of the Exchangeable Shares shall not be entitled as
such to receive notice of or to attend any meeting of the shareholders of the
Corporation or to vote at any such meeting.
9.2 Rights Under Voting and Exchange Agreement.
The holders of the Exchangeable Shares shall be entitled to require Magna to
exercise the voting rights attaching to certain of the shares of MIEC held by it
in accordance with the terms of the Voting and Exchange Agreement.
ARTICLE 10
AMENDMENT AND APPROVAL
10.1 Requirement for Approval.
The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but only with the
approval of the holders of the Exchangeable Shares given as hereinafter
specified.
<PAGE>
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10.2 Manner of Approval.
Any approval given by the holders of the Exchangeable Shares to add to, change
or remove any right, privilege, restriction or condition attaching to the
Exchangeable Shares or any other matter requiring the approval or consent of the
holders of the Exchangeable Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than two-thirds of the votes cast on such resolution at a meeting of
holders of Exchangeable Shares duly called and held at which the holders of at
least 25% of the outstanding Exchangeable Shares at that time are present or
represented by proxy; provided that if at any such meeting the holders of at
least 25% of the outstanding Exchangeable Shares at that time are not present or
represented by proxy within one-half hour after the time appointed for such
meeting, then the meeting shall be adjourned to such date not less than five
days thereafter and to such time and place as may be designated by the Chairman
of such meeting. At such adjourned meeting the holders of Exchangeable Shares
present or represented by proxy thereat may transact the business for which the
meeting was originally called and a resolution passed thereat by the affirmative
vote of not less than two-thirds of the votes cast on such resolution at such
meeting shall constitute the approval or consent of the holders of the
Exchangeable Shares.
ARTICLE 11
RECIPROCAL CHANGES, ETC. IN RESPECT OF MIEC CLASS A SHARES
11.1 Acknowledgement of Holder.
Each holder of an Exchangeable Share acknowledges that the Exchangeable Share
Support Agreement provides, in part, that MIEC will not without the prior
approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with section 10.2 of these share
provisions:
(a) issue or distribute MIEC Class A Shares (or securities exchangeable
for or convertible into or carrying rights to acquire MIEC Class A Shares)
to the holders of all or substantially all of the then outstanding MIEC
Class A Shares by way of stock dividend or other distribution, other than
an issue of MIEC Class A Shares (or securities exchangeable for or
convertible into or carrying rights to acquire MIEC Class A Shares) to
holders of MIEC Class A Shares who exercise an option to receive dividends
in MIEC Class A Shares (or securities exchangeable for or convertible into
or carrying rights to acquire MIEC Class A Shares) in lieu of receiving
cash dividends;
(b) issue or distribute rights, options or warrants to the holders of all
or substantially all of the then outstanding MIEC Class A Shares entitling
them to subscribe for or to purchase MIEC Class A Shares (or securities
exchangeable for or convertible into or carrying rights to acquire MIEC
Class A Shares); or
(c) issue or distribute to the holders of all or substantially all of the
then outstanding MIEC Class A Shares:
<PAGE>
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(i) shares or securities of MIEC of any class other than MIEC Class
A Shares (other than shares convertible into or exchangeable for or
carrying rights to acquire MIEC Class A Shares);
(ii) rights, options or warrants other than those referred to in
section 11.1(b) above;
(iii) evidences of indebtedness of MIEC; or
(iv) assets of MIEC,
unless the economic equivalent on a per share basis of such rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to holders of the Exchangeable Shares.
11.2 Further Acknowledgement.
Each holder of an Exchangeable Share acknowledges that the Exchangeable Share
Support Agreement further provides, in part, that MIEC will not without the
prior approval of the Corporation and the prior approval of the holders of the
Exchangeable Shares given in accordance with section 10.2 of these share
provisions:
(a) subdivide, redivide or change the then outstanding MIEC Class A Shares
into a greater number of MIEC Class A Shares;
(b) reduce, combine, consolidate or change the then outstanding MIEC Class
A Shares into a lesser number of MIEC Class A Shares; or
(c) reclassify or otherwise change the MIEC Class A Shares or effect an
amalgamation, merger, reorganization or other transaction affecting the
MIEC Class A Shares,
unless the same or an economically equivalent change shall simultaneously be
made to, or in, the rights of the holders of the Exchangeable Shares. The
Exchangeable Share Support Agreement further provides, in part, that the
aforesaid provisions of the Exchangeable Share Support Agreement shall not be
changed without the approval of the holders of the Exchangeable Shares given in
accordance with section 10.2 of these share provisions.
ARTICLE 12
ACTIONS BY THE CORPORATION UNDER
EXCHANGEABLE SHARE SUPPORT AGREEMENT
12.1 Compliance with Agreement.
The Corporation will take all such actions and do all such things as shall be
necessary or advisable to perform and comply with and to ensure performance and
compliance MIEC and the Corporation with all provisions of the Exchangeable
Share Support Agreement applicable to each
<PAGE>
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of them respectively, in accordance with the terms thereof including, without
limitation, taking all such actions and doing all such things as shall be
necessary or advisable to enforce to the fullest extent possible for the direct
benefit of the Corporation all rights and benefits in favour of the Corporation
under or pursuant to such agreement.
12.2 No Amendment Without Shareholder Approval.
The Corporation shall not propose, agree to or otherwise give effect to any
amendment to, or waiver or forgiveness of its rights or obligations under, the
Exchangeable Share Support Agreement without the approval of the holders of the
Exchangeable Shares given in accordance with section 10.2 of these share
provisions other than such amendments, waivers and/or forgiveness as may be
necessary or advisable for the purposes of:
(a) adding to the covenants of the other parties to such agreement for the
protection of the Corporation or the holders of the Exchangeable Shares
thereunder;
(b) making such provisions or modifications not inconsistent with such
agreement as may be necessary or desirable with respect to matters or
questions arising thereunder which, in the good faith opinion of the Board
of Directors, it may be expedient to make, provided that the Board of
Directors shall be of the good faith opinion, after consultation with
counsel, that such provisions and modifications will not be prejudicial to
the interests of the holders of the Exchangeable Shares; or
(c) making such changes in or corrections to such agreement which, on the
advice of counsel to the Corporation, are required for the purpose of
curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error contained therein, provided
that the Board of Directors shall be of the good faith opinion, after
consultation with counsel, that such changes or corrections will not be
prejudicial to the interests of the holders of the Exchangeable Shares.
ARTICLE 13
LEGEND; CALL RIGHTS
13.1 Certificates to Bear Legend.
The certificates evidencing the Exchangeable Shares shall contain or have
affixed thereto a legend in form and on terms approved by the Board of
Directors, with respect to the Exchangeable Share Support Agreement, the
Liquidation Call Right, the Redemption Call Right, the Retraction Call Right and
the Voting and Exchange Agreement (including the provisions with respect to the
voting rights, exchange right and automatic exchange thereunder).
13.2 Acknowledgement of Rights in Favour of MIEC.
Each holder of an Exchangeable Share, whether of record or beneficial, by virtue
of becoming and being such a holder shall be deemed to acknowledge each of the
Liquidation Call Right, the Retraction Call Right and the Redemption Call Right,
in each case, in favour of MIEC, and the
<PAGE>
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overriding nature thereof in connection with the liquidation, dissolution or
winding-up of the Corporation or the retraction or redemption of Exchangeable
Shares, as the case may be, and to be bound thereby in favour of MIEC.
ARTICLE 14
LIQUIDATION CALL RIGHT
14.1 Rights of MIEC Upon Liquidation, Etc.
MIEC shall have the overriding right (the "Liquidation Call Right"), in the
event of and notwithstanding the proposed liquidation, dissolution or winding-up
of the Corporation pursuant to Article 5 hereof, to purchase from all but not
less than all of the holders of Exchangeable Shares (other than MIEC and any
holder of Exchangeable Shares which is a subsidiary of MIEC) on the Liquidation
Date all but not less than all of the Exchangeable Shares held by each such
holder on payment by MIEC of an amount per share (the "Liquidation Call Purchase
Price") equal to the Current Market Price of an MIEC Class A Share on the last
Business Day prior to the Liquidation Date, which shall be satisfied in full by
MIEC causing to be delivered to such holder one MIEC Class A Share, plus, to the
extent not paid by the Corporation, an additional amount equivalent to the full
amount of all declared and unpaid dividends on each such Exchangeable Share held
by such holder on any dividend record date which occurred prior to the date of
purchase by MIEC (the "Dividend Amount"). In the event of the exercise of the
Liquidation Call Right by MIEC, each holder of Exchangeable Shares (other than
MIEC and any holder of Exchangeable Shares which is a subsidiary of MIEC) shall
be obligated to sell all of the Exchangeable Shares held by such holder to MIEC
on the Liquidation Date on payment by MIEC to the holder of the Liquidation Call
Purchase Price for each such share, and the Corporation shall have no obligation
to pay the Liquidation Amount of such shares so purchased by MIEC.
14.2 Exercise of Liquidation Call Right.
To exercise the Liquidation Call Right, MIEC must notify the Transfer Agent, as
agent for the holders of Exchangeable Shares, and the Corporation of MIEC's
intention to exercise such right at least 45 days before the Liquidation Date in
the case of a voluntary liquidation, dissolution or winding-up of the
Corporation and at least five Business Days before the Liquidation Date in the
case of an involuntary liquidation, dissolution or winding-up of the
Corporation. The Transfer Agent will notify the holders of Exchangeable Shares
as to whether or not MIEC has exercised the Liquidation Call Right forthwith
after the expiry of the period during which the same may be exercised by MIEC.
If MIEC exercises the Liquidation Call Right, then on the Liquidation Date MIEC
will purchase and the holders will sell all of the Exchangeable Shares then
outstanding (other than any Exchangeable Shares held by MIEC or a subsidiary of
MIEC) for a price per share equal to the Liquidation Call Purchase Price.
14.3 Satisfaction of Purchase Under Liquidation Call Right.
For the purposes of completing the purchase of the Exchangeable Shares pursuant
to the Liquidation Call Right, MIEC shall deposit with the Transfer Agent, on or
before the Liquidation
<PAGE>
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Date, certificates representing the aggregate number of MIEC Class A Shares
deliverable by MIEC and a cheque or cheques of MIEC payable at par at any branch
of the bankers of MIEC representing the aggregate Dividend Amount in payment of
the total Liquidation Call Purchase Price, less any amounts withheld pursuant to
Article 16 hereof. Provided that MIEC has complied with the immediately
preceding sentence, on and after the Liquidation Date, the rights of each holder
of Exchangeable Shares (other than any Exchangeable Shares held by MIEC or by a
subsidiary of MIEC) will be limited to receiving such holder's proportionate
part of the total Liquidation Call Purchase Price payable by MIEC upon
presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall on and after the
Liquidation Date be considered and deemed for all purposes to be the holder of
the MIEC Class A Shares to which it is entitled. Upon surrender to the Transfer
Agent of a certificate or certificates representing Exchangeable Shares,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the OBCA and the by-laws of the
Corporation and such additional documents and instruments as the Transfer Agent
may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the Transfer
Agent on behalf of MIEC shall deliver to such holder, certificates representing
the MIEC Class A Shares to which the holder is entitled and a cheque or cheques
of MIEC payable at par at any branch of the bankers of MIEC in payment of the
remaining portion, if any, of the total Liquidation Call Purchase Price, less
any amounts withheld pursuant to Article 16 hereof. If MIEC does not exercise
the Liquidation Call Right in the manner described above, on the Liquidation
Date the holders of the Exchangeable Shares will be entitled to receive in
exchange therefor the liquidation price otherwise payable by the Corporation in
connection with the liquidation, dissolution or winding-up of the Corporation
pursuant to Article 5 hereof.
ARTICLE 15
REDEMPTION CALL RIGHT
15.1 Rights of MIEC Upon Redemption.
MIEC shall have the overriding right (the "Redemption Call Right"),
notwithstanding the proposed redemption of Exchangeable Shares by the
Corporation pursuant to Article 7 hereof, to purchase from all but not less than
all of the holders of Exchangeable Shares [(other than MIEC and any holder of
Exchangeable Shares which is a subsidiary of MIEC) on the Redemption Date all
but not less than all of the Exchangeable Shares held by each such holder on
payment by MIEC to each holder of an amount per Exchangeable Share (the
"Redemption Call Purchase Price") equal to the Current Market Price of an MIEC
Class A Share on the last Business Day prior to the Redemption Date, which shall
be satisfied in full by MIEC causing to be delivered to such holder one MIEC
Class A Share, plus the Dividend Amount. In the event of the exercise of the
Redemption Call Right by MIEC, each holder (other than MIEC and any holder of
Exchangeable Shares which is a subsidiary of MIEC) shall be obligated to sell
all of the Exchangeable Shares held by such holder to MIEC on the Redemption
Date on payment by MIEC to the holder of the Redemption Call Purchase Price for
each such share, and the Corporation shall have no obligation to redeem such
shares so purchased by MIEC.
<PAGE>
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15.2 Exercise of Redemption Call Right.
To exercise the Redemption Call Right, MIEC must notify the Transfer Agent, as
agent for the holders of Exchangeable Shares, and the Corporation of MIEC's
intention to exercise such right at least 60 days before the Redemption Date,
except in the case of a redemption occurring as a result of an MIEC Control
Transaction, an Exchangeable Share Voting Event or an Exempt Exchangeable Share
Voting Event, in which case MIEC shall so notify the Transfer Agent and the
Corporation on or before the Redemption Date. The Transfer Agent will notify
the holders of Exchangeable Shares as to whether or not MIEC has exercised the
Redemption Call Right forthwith after the expiry of the period during which the
same may be exercised by MIEC. If MIEC exercises the Redemption Call Right,
then on the Redemption Date, MIEC will purchase and the holders will sell all of
the Exchangeable Shares then outstanding (other than any Exchangeable Shares
held by MIEC or a subsidiary of MIEC) for a price per share equal to the
Redemption Call Purchase Price.
15.3 Satisfaction of Purchase Under Redemption Call Right.
For the purposes of completing the purchase of the Exchangeable Shares pursuant
to the Redemption Call Right, MIEC shall deposit with the Transfer Agent, on or
before the Redemption Date, certificates representing the aggregate number of
MIEC Class A Shares deliverable by MIEC and a cheque or cheques of MIEC payable
at par at any branch of the bankers of MIEC representing the aggregate Dividend
Amount in payment of the total Redemption Call Purchase Price, less any amounts
withheld pursuant Article 16 hereof. Provided that MIEC has complied with the
immediately preceding sentence, on and after the Redemption Date, the rights of
each holder of Exchangeable Shares (other than any Exchangeable Shares held by
MIEC or a subsidiary of MIEC) will be limited to receiving such holder's
proportionate part of the total Redemption Call Purchase Price payable by MIEC
upon presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall on and after the
Redemption Date be considered and deemed for all purposes to be the holder of
the MIEC Class A Shares to which it is entitled. Upon surrender to the Transfer
Agent of a certificate or certificates representing Exchangeable Shares,
together with such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the OBCA and the by-laws of the
Corporation and such additional documents and instruments as the Transfer Agent
may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor, and the Transfer
Agent on behalf of MIEC shall deliver to such holder, certificates representing
the MIEC Class A Shares to which the holder is entitled and a cheque or cheques
of MIEC payable at par at any branch of the bankers of MIEC in payment of the
remaining portion, if any, of the total Redemption Call Purchase Price, less any
amounts withheld pursuant to Article 16 hereof. If MIEC does not exercise the
Redemption Call Right in the manner described above, on the Redemption Date the
holders of the Exchangeable Shares will be entitled to receive in exchange
therefor the redemption price otherwise payable by the Corporation in connection
with the redemption of the Exchangeable Shares pursuant to Article 7 hereof.
<PAGE>
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ARTICLE 16
WITHHOLDING TAXES
16.1 Right to Deduct and Withhold.
The Corporation and MIEC shall be entitled to deduct and withhold from any
dividend or consideration otherwise payable to any holder of Exchangeable Shares
such amounts as it is required or permitted to deduct and withhold with respect
to such payment under the Income Tax Act (Canada), the United States Internal
Revenue Code of 1986 or any provision of provincial, state, local or foreign tax
law, in each case, as amended. To the extent that amounts are so withheld, such
withheld amounts shall be treated for all purposes hereof as having been paid to
the holder of the shares in respect of which such deduction and withholding was
made, provided that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount so required or
permitted to be deducted or withheld from any payment to a holder exceeds the
cash portion of the consideration otherwise payable to the holder, the
Corporation and MIEC are hereby authorized to sell or otherwise dispose of such
portion of the consideration as is necessary to provide sufficient funds to
enable it to comply with such deduction or withholding requirement and it shall
notify the holder thereof and remit to the holder any unapplied balance of the
net proceeds of such sale.
ARTICLE 17
NOTICES
17.1 Notices to the Corporation.
Any notice, request or other communication to be given to the Corporation by a
holder of Exchangeable Shares shall be in writing and shall be valid and
effective if given by mail (postage prepaid) or by telecopy or by delivery to
the registered office of the Corporation and addressed to the attention of the
President. Any such notice, request or other communication, if given by mail,
telecopy or delivery, shall only be deemed to have been given and received upon
actual receipt thereof by the Corporation.
17.2 Presentation and Surrender of Exchangeable Shares.
Any presentation and surrender by a holder of Exchangeable Shares to the
Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding-up of the
Corporation or the retraction or redemption of Exchangeable Shares shall be made
by ordinary mail (postage prepaid) or by delivery to the registered office of
the Corporation or to such office of the Transfer Agent as may be specified by
the Corporation, in each case, addressed to the attention of the President of
the Corporation. Any such presentation and surrender of certificates shall only
be deemed to have been made and to be effective upon actual receipt thereof by
the Corporation or the Transfer Agent, as the case may be. Any such presentation
and surrender of certificates made by ordinary mail shall be at the sole risk of
the holder mailing the same.
<PAGE>
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17.3 Notices to Holders of Exchangeable Shares.
Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the securities register of the
Corporation or, in the event of the address of any such holder not being so
recorded, then at the last known address of such holder. Any such notice,
request or other communication, if given by mail, shall be deemed to have been
given and received on the third Business Day following the date of mailing and,
if given by delivery, shall be deemed to have been given and received on the
date of delivery. Accidental failure or omission to give any notice, request or
other communication to one or more holders of Exchangeable Shares shall not
invalidate or otherwise alter or affect any action or proceeding to be taken by
the Corporation pursuant thereto.
17.4 Interruption of Mail Service.
If the Corporation determines that mail service is or is threatened to be
interrupted at the time when the Corporation is required or elects to give any
notice to the holders of Exchangeable Shares hereunder, the Corporation shall,
notwithstanding the provisions hereof, give such notice by means of publication
in The Globe and Mail, national edition, or any other English language daily
newspaper or newspapers of general circulation in Canada and in a French
language daily newspaper of general circulation in the Province of Quebec, once
in each of two successive weeks, and notice so published shall be deemed to have
been given on the latest date on which the first publication has taken place.
If, by reason of any actual or threatened interruption of mail service due to
strike, lock-out or otherwise, any notice to be given to the Corporation would
be unlikely to reach its destination in a timely manner, such notice shall be
valid and effective only if delivered personally to the Corporation in
accordance with section 17.1 or 17.2, as the case may be.
<PAGE>
SCHEDULE A
NOTICE OF RETRACTION
TO: MI Venture (Canada) Inc. (the "Corporation")
AND TO: MI Entertainment Corp. ("MIEC")
This notice is given pursuant to Article 6 of the provisions attaching to the
Exchangeable Shares of the Corporation represented by this certificate (the
"Share Provisions") and all capitalized words and expressions used in this
notice that are defined in the Share Provisions have the meanings ascribed to
such words and expressions in such Share Provisions.
The undersigned hereby notifies the Corporation that, subject to the Retraction
Call Right referred to below, the undersigned desires to have the Corporation
redeem in accordance with Article 6 of the Share Provisions:
[_] all share(s) represented by this certificate; or
[_] ________________ share(s) only.
The undersigned hereby notifies the Corporation that the Retraction Date shall
be ________________________________________________.
NOTE: The Retraction Date must be a Business Day and must not be less than 10
Business Days nor more than 15 Business Days after the date upon which this
notice is received by the Corporation. If no such Business Day is specified
above, the Retraction Date shall be deemed to be the 15th Business Day after the
date on which this notice is received by the Corporation.
The undersigned acknowledges the overriding Retraction Call Right of MIEC to
purchase all but not less than all the Retracted Shares from the undersigned and
that this notice is and shall be deemed to be a revocable offer by the
undersigned to sell the Retractable Shares to MIEC in accordance with the
Retraction Call Right on the Retraction Date for the Purchase Price and on the
other terms and conditions set out in section 6.3 of the Share Provisions. This
notice of retraction, and this offer to sell the Retracted Shares to MIEC, may
be revoked and withdrawn by the undersigned only by notice in writing given to
the Corporation at any time before the close of business on the Business Day
immediately preceding the Retraction Date.
The undersigned acknowledges that if, as a result of solvency provisions of
applicable law, the Corporation is unable to redeem all Retracted Shares, and
provided that MIEC shall not have exercised the Retraction Call Right with
respect to the Retracted Shares, the undersigned will be deemed to have
exercised the Exchange Right (as defined in the Voting and Exchange Agreement)
so as to require MIEC to purchase the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to MIEC and the Corporation that
the undersigned:
[_] is
(select one)
[_] is not
a non-resident of Canada for purposes of the Income Tax Act (Canada). The
undersigned acknowledges that in the absence of an indication that the
undersigned is not a non-resident of Canada, withholding on account of Canadian
tax may be made from amounts payable to the undersigned on the redemption or
purchase of the Retracted Shares.
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The undersigned hereby represents and warrants to MIEC and the Corporation that
the undersigned has good title to, and owns, the share(s) represented by this
certificate to be acquired by MIEC or the Corporation, as the case may be, free
and clear of all liens, claims and encumbrances.
_________ ______________________________ ________________________________
(Date) (Signature of Shareholder) (Guarantee of Signature)
[_] Please check box if the securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares are to be held for pick- up by
the shareholder from the Transfer Agent, failing which the securities and any
cheque(s) will be mailed to the last address of the shareholder as it appears on
the register.
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent may require, must be deposited with
the Transfer Agent. The securities and any cheque(s) resulting from the
retraction or purchase of the Retracted Shares will be issued and registered in,
and made payable to, respectively, the name of the shareholder as it appears on
the register of the Corporation and the securities and any cheque(s) resulting
from such retraction or purchase will be delivered to such shareholder as
indicated above, unless the form appearing immediately below is duly completed.
Date: ____________________
Name of Person in Whose Name Securities or Cheque(s)
Are to be Registered, Issued or Delivered (please print): ______________________
Street Address or P.O. Box: ____________________________________________________
Signature of Shareholder: ______________________________________________________
City, Province and Postal Code: ________________________________________________
Signature Guaranteed by: _______________________________________________________
NOTE: If this notice of retraction is for less than all of the shares
represented by this certificate, a certificate representing the remaining
share(s) of the Corporation represented by this certificate will be issued and
registered in the name of the shareholder as it appears on the register of the
Corporation, unless the Share Transfer Power on the share certificate is duly
completed in respect of such share(s).
