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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NO. 000-30578
MAGNA ENTERTAINMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE
(State or Other Jurisdiction 98-0208374
of Incorporation or Organization) (I.R.S. Employer Identification Number)
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285 WEST HUNTINGTON DRIVE
ARCADIA, CALIFORNIA 91007
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (626) 574-7233
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Subordinate Voting Stock
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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As of March 28, 2000, the aggregate Market Value of the Class A Subordinate
Voting Stock held by non-affiliates of the registrant was approximately
$24,220,319.63. As of March 28, 2000, the aggregate Market Value of the
Exchangeable Shares
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of MEC Holdings (Canada) Inc., each of which is exchangeable into one share
of Class A Subordinate Voting Stock of the registrant, held by non-affiliates
of the registrant was approximately $35,985,354.96.
The number of shares of Class A Subordinate Voting Stock of the registrant
outstanding as of March 28, 2000 was 7,176,391.
The number of shares of Class B Stock of the registrant outstanding as of
March 28, 2000 was 58,466,056.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Registration Statement on Form S-1 originally filed on
January 14, 2000 (File number 333-94791) and documents previously filed by
the registrant with The Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, are incorporated by reference in
Part III of this Form 10-K to the extent stated herein. Except with respect
to information specifically incorporated by reference in this Form 10-K, the
documents incorporated by reference are not deemed to be filed as a part
hereof.
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ITEM 1. BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included herein constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on
assumptions and analyses made by us in light of our experience and our
perception of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate in the
circumstances. However, whether actual results and developments will conform
with our expectations and predictions is subject to a number of risks and
uncertainties, including but not limited to those described below under "Risk
Factors". Consequently, all the forward-looking statements made in this
report are fully qualified by this special note, and there can be no
assurance that the actual results or developments anticipated by us will be
realized, or even if realized, that they will have the expected consequences
to, or effects on, us. See "Risk Factors" below for a description of the most
significant risks and uncertainties of our business.
INCORPORATION AND CORPORATE STRUCTURE
We were incorporated on March 4, 1999 under the laws of the State of
Delaware as MI Venture Inc. Our certificate of incorporation was amended by
certificate of amendment on August 30, 1999 to reclassify our Common Stock
into Class A Common Stock and to add a new class of stock designated as Class
C Common Stock. Our certificate of incorporation was further amended on
November 4, 1999 to change our name to MI Entertainment Corp., add share
provisions for our Class A Subordinate Voting Stock and Class B Stock and
reclassify and further subdivide our outstanding stock into shares of Class B
Stock. Our certificate of incorporation was further amended on January 26,
2000 to change our name to Magna Entertainment Corp. Our certificate of
incorporation was further amended on February 29, 2000 to broaden our
corporate purpose, clarify the attributes of our Class A Subordinate Voting
Stock and Class B Stock and implement our Corporate Constitution.
Subsequently, our certificate of incorporation was restated on March 1, 2000
to consolidate all prior amendments.
Our registered office is located at 1209 Orange Street, Wilmington,
Delaware, 19801 and our principal executive office is located at 285 West
Huntington Drive, Arcadia, California 91007.
The following chart shows our organizational structure and that of
our material subsidiaries, each of which is directly or indirectly
wholly-owned, together with the jurisdiction of incorporation of each of the
entities shown thereon as of March 29, 2000.
[CHART]
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OUR BUSINESS
We acquire, develop and operate horse racetracks and related
pari-mutuel wagering operations. As a complement to our horse racing
business, we are exploring the development of media sports wagering
operations, including telephone account, interactive television and
Internet-based wagering, as well as leisure and real estate projects on the
land surrounding some of our racetracks, possibly in conjunction with
business partners and subject to regulatory requirements. In addition, we own
a real estate portfolio which includes a gated residential project under
development, a golf course and related recreational facilities, another golf
course under development and other real estate. We are currently considering
a variety of options with respect to the golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions (which would require that Magna International Inc. ("Magna") not
exercise its right of first refusal) or outright sale. We intend gradually to
sell the balance of our real estate portfolio in order to provide capital to
be used in our business. Accordingly, we will take steps including servicing
our land and obtaining zoning and other approvals to enhance the value of the
properties and increase the revenues from resale. A brief description of our
horse racing business and real estate portfolio follows.
Pari-mutuel wagering on horse racing is pooled betting in which
individuals bet against each other on the outcome of a horse race. The
racetrack operator has no interest in the order of finish in any given race
and therefore has no risk in the outcome. A percentage of the pooled wagers
is retained by the operator of the wagering facility, a portion is paid to
the regulatory or taxing authorities and a portion is paid to the racetrack's
horsemen in the form of purses which encourage owners and trainers to enter
their horses in that track's live races. The balance of the pooled wagers is
paid to bettors as winnings. A racetrack's share of pari-mutuel revenues is
based on pre-determined percentages of various categories of the pooled
wagers at that racetrack and its in-state "off-track" wagering network. The
pre-determined percentages are set by state regulators. Pari-mutuel wagering
on horse racing occurs on the live races being conducted at racetracks as
well as on televised racing signals or simulcasts received or imported by the
simulcast wagering facilities located at such racetracks. This type of
wagering is known as on-track wagering. Pari-mutuel wagering on horse racing
also occurs at wagering establishments on horse races being conducted at
racetracks elsewhere. This type of wagering is known as off-track wagering.
HORSE RACING AND PARI-MUTUEL WAGERING
We currently operate six horse racetracks, each of which includes a
simulcast facility that accepts wagers on races conducted at other
racetracks. We also broadcast, or export, simulcasts of our horse races to a
number of locations across the United States, Canada, Mexico, the Caribbean
region and Australia. Our horse racing and related wagering operations
include: Santa Anita Park near Los Angeles, California; Gulfstream Park near
Miami, Florida; Golden Gate Fields, near San Francisco, California;
Thistledown near Cleveland, Ohio; Remington Park in Oklahoma City, Oklahoma;
and Great Lakes Downs in
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Muskegon Michigan. We also own San Luis Rey Downs, a horse training track
located outside of San Diego, California. We have acquired all these
racetracks since December 1998.
We own and operate some of the premier horse racing facilities in
North America and one of the horse racing industry's best simulcast products.
For example, Santa Anita Park has hosted the Breeders' Cup twice since the
inception of the Breeders' Cup in 1984 and Gulfstream Park has hosted it
three times, the most recent being on November 6, 1999. Furthermore, by many
standard industry measures including total handle or total amount wagered,
average daily attendance, average daily handle, average daily on-track handle
and average daily off-track handle, we believe that Santa Anita Park,
Gulfstream Park and Golden Gate Fields are three of the top racetracks in
North America.
SANTA ANITA PARK
Santa Anita Park is one of the premier horse racing and pari-mutuel
wagering facilities in North America. Santa Anita Park was the site of the
Breeders' Cup in both 1986 and 1993. Santa Anita Park is situated on
approximately 305 acres of land, located in the City of Arcadia, California,
approximately 14 miles northeast of Los Angeles. Over 10 million people are
located within a 30 mile radius of Santa Anita Park, providing us with one of
North America's largest target populations for live and simulcast horse
racing. Santa Anita Park was opened for thoroughbred horse racing in 1934 and
The Santa Anita Meet has been held at Santa Anita Park each year since its
founding, except for three years during World War II. The Santa Anita Meet
runs through the prime winter racing season, commencing December 26 and
running into late April each year. In addition, we lease Santa Anita Park to
Oak Tree Racing Association which hosts The Oak Tree Meet from the end of
September through early November of each year. As a result, Santa Anita Park
has one of the longest racing schedules of the top North American tracks,
totaling approximately 115 days each year. There are generally eight races
scheduled per live racing day during the week and nine or ten races per live
racing day on the weekends. Santa Anita Park's average daily attendance in
1999 was approximately 12,400 patrons per live racing day, representing one
of the highest average daily attendance figures of all North American
racetracks during that year.
Santa Anita Park had one of the highest total handles of all North
American racetracks in 1999, generating approximately $1.1 billion in wagers
in that year. In addition, Santa Anita Park's simulcast program generates
significant demand from other racetracks and off-track wagering
establishments, generating an average of approximately $9.2 million in
off-track handle during each racing day in 1999. Santa Anita Park exports its
simulcast signal to approximately 1,000 off-track wagering facilities in 23
countries, including the United States, Canada and Mexico. During periods in
which there is no live racing, Santa Anita Park operates as an off-track
wagering facility where customers can attend and wager on races via
television from other California racetracks as well as two racing programs
from other nationally recognized racing circuits.
Santa Anita Park's facilities currently include a large art deco
style grandstand structure with seating for approximately 19,000 patrons as
well as standing room for additional patrons, a one-mile oval dirt track
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as well as a natural turf course, stalls for approximately 2,000 horses and
parking facilities sufficient to accommodate approximately 20,000 cars. The
grandstand facilities include a clubhouse, a general admission area, and food
and beverage facilities, which range from fast food stands to restaurants,
both at outdoor terrace tables and indoor dining areas. The grounds
surrounding the grandstand are extensively landscaped and contain a
European-style paddock and infield accommodations, including picnic
facilities for special groups and the general public.
In December 1999, we completed an extensive capital renovation
program at Santa Anita Park in order to enhance our patrons' entertainment
experience. The improvements to Santa Anita Park include: the construction of
a fully enclosed 750 seat restaurant and bar that will be used for racing and
group functions throughout the year; the installation of a large format LED
screen in the infield track area for racing patrons and for use by the
restaurant and bar to promote non-racing events, such as the Super Bowl, the
World Cup and other similar events; improvements to the Winners' Circle and
trackside apron to provide patrons with better views of the track; upgrades
to the grandstand to current seismic code requirements; completion of fire
safety installations as required by the Fire Marshall; and the initiation of
improvements to the entrance way and parking lot of the racetrack. These
renovations cost approximately $45.0 million. We are also considering a
number of other upgrades to further strengthen Santa Anita Park's ability to
attract top horses, trainers and jockeys and to enable us to expand the
market for Santa Anita Park's simulcast signal.
We are also currently considering a variety of themed entertainment
and retail-based development proposals for approximately 85 acres of
available land at Santa Anita Park, some of which could be developed in
conjunction with business partners. This development would be intended to
further enhance the total entertainment experience at Santa Anita Park,
attract new patrons from diverse demographic backgrounds and strengthen the
loyalty of existing patrons. These proposals are only in their preliminary
stages, as any development of this nature would require the preparation of
detailed feasibility studies and business plans and extensive consideration
by our management of all relevant issues. If any proposal turns out to be
commercially viable after a detailed review, additional time would be
required to obtain the necessary regulatory approvals, negotiate with
potential business partners and obtain the necessary financing.
GULFSTREAM PARK
Gulfstream Park is also one of the premier horse racing and
pari-mutuel wagering facilities in North America. Gulfstream Park is located
on approximately 255 acres of land in the cities of Hallandale and Aventura,
between Miami and Ft. Lauderdale in Florida. The Miami/Ft. Lauderdale area is
home to approximately 3.3 million people, thus providing Gulfstream Park with
a sizeable target market for live racing and off-track wagering. Gulfstream
Park first opened in February 1939 and has operated each year since except
for the four years from 1940 to 1943. The annual meet at Gulfstream Park
lasts for approximately 63 days each year and is held between early January
and mid-March in each year. In addition, the Breeders' Cup has been held at
Gulfstream Park three times--in 1989 and 1992, and most
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recently on November 6, 1999. There are generally eleven races scheduled on
each racing day during the week and 11 or 12 races scheduled on each racing
day during the weekend. In 1999, Gulfstream Park's average daily attendance
was approximately 10,800 patrons per live racing day.
Gulfstream Park ranked as one of the five highest North American
racetracks in average daily off-track handle in 1999, generating an average
daily off-track handle of approximately $9.0 million on each live racing day
in that year. Gulfstream Park also had one of the highest total handles of
all North American racetracks in 1999, generating approximately $700 million
in wagers in that year. Gulfstream Park exports its simulcast program to
approximately 11 million people at approximately 800 off-track wagering
facilities in the United States, Canada, the Caribbean region and Mexico.
Total weekly viewership of Gulfstream Park's major racing events, including
through cable shows and satellite feeds, is estimated by us to be
approximately 55 million.
Gulfstream Park's facilities currently include a grandstand with
seating for approximately 14,500 patrons, a clubhouse with seating for an
additional 5,800 patrons, a one-mile main track, a seven-eighths mile turf
track, stalls for approximately 1,450 horses and parking for approximately
14,000 cars. The grandstand consists of three levels of seating, a rooftop
restaurant, casual restaurants, snack bars and liquor bars. There are also
three gourmet dining rooms in the clubhouse. Gulfstream Park includes
approximately 50 acres of land which we are considering developing.
The owners of Hialeah Park have entered into a three-month lease
agreement with us to conduct Hialeah's 2000 race meet at Gulfstream Park. Our
management and employees will be actively involved in operating the Spring
racing at Gulfstream Park conducted by Hialeah.
GOLDEN GATE FIELDS
Golden Gate Fields racetrack is one of the premier horse racing and
pari-mutuel wagering facilities in North America in terms of total handle.
Golden Gate Fields is located on approximately 181 acres of land in the
Cities of Albany and Berkeley, California, approximately 8 miles from Oakland
and approximately 11 miles from San Francisco. Over 2.5 million people are
located within a 30 mile radius of Golden Gate Fields, thus providing a large
target market for live and simulcast horse racing. Golden Gate Fields' racing
season consists of two meets, one of which runs for 60 days from late March
to mid-June each year and the other of which runs for approximately 45 days
from mid-November of each year to mid-January of the following year. This
racing schedule complements Santa Anita Park's racing schedule by adding
racing days between the end of The Oak Tree Meet and the beginning of The
Santa Anita Meet. Golden Gate Fields had one of the ten highest total handles
of all North American racetracks in 1999, generating approximately $525
million in wagers in that year. Golden Gate Fields' simulcast program also
generates strong demand from other racetracks and off-track wagering
facilities, generating approximately $160 million in off-track handle in
1999. Golden Gate Fields exports its simulcast program to approximately 560
sites in the United States, Canada, Mexico, Jamaica and Panama. In addition,
we
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recently commenced exporting Golden Gate Fields' simulcast program to
Australia and the Dominican Republic.
Golden Gate Fields' facilities currently consist of a one-mile main
track and a nine-tenths mile turf course, stalls for over 1,400 horses, a
main grandstand with seating for approximately 8,000 patrons, a clubhouse
with seating for approximately 5,250 patrons and a turf club with seating for
approximately 1,500 patrons and parking for over 8,500 cars. Golden Gate
Fields also has over 700 closed-circuit television monitors to show races,
odds, probable payoffs, results and the previous day's races.
THISTLEDOWN
Thistledown is located on approximately 125 acres in North Randall,
Ohio, approximately 10 miles southeast of downtown Cleveland. Thistledown has
one of the longest racing seasons of all North American racetracks,
consisting of 187 racing days each year between mid-March and early December,
encompassing the Summit, Thistledown, Randall and Cranwood meets. In 1999
Thistledown generated a total handle of approximately $238 million.
Simulcasts from Thistledown are exported to approximately 45 other racetracks
in the United States and one race each year is simulcast to Canada. Annually,
Thistledown hosts the Ohio Derby, which is the premier graded stakes race in
Ohio and is one of the top three-year old horse races in the United States.
Prior to our acquisition of Thistledown, the simulcast product from
Thistledown had not been given the exposure necessary in order to generate
growth in Thistledown's attendance and handle. We intend to bundle the signal
from Thistledown with the signals from our other racetracks and promote this
bundled signal under our own brand name. We expect that this will enhance the
quality of horse racing offered at Thistledown and result in an increase in
the number of off-track sites Thistledown's racing signal is exported to. We
expect this to result in growth in Thistledown's handle, especially as we
expand our distribution channels.
Thistledown's facilities include a grandstand with a total capacity
of approximately 16,000 patrons, a luxury suite for corporate and group
events, a one-mile oval track, stalls for approximately 1,500 horses and
parking for approximately 6,000 cars. Thistledown also owns the rights to an
additional 57 racing days plus a further 30 winter racing days which it uses
entirely to host simulcasting at other Ohio racetracks in exchange for a
percentage of the handle on these races.
REMINGTON PARK
Remington Park racetrack is situated on approximately 370 acres in
Oklahoma City, Oklahoma. Remington Park offers a total of approximately 122
live racing days during each year. The racing schedule consists of three
meets, a 40-day Quarter Horse meet from mid-April to mid-June and two
separate thoroughbred meets running three to five days per week, from
mid-August to late March. In 1999 Remington Park generated a total handle of
approximately $170 million. Simulcasts from Remington Park are exported to
approximately 35 other racetracks in the United States. As with Thistledown
Racetrack, the simulcast product from Remington Park has not been given the
exposure necessary to generate growth
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in Remington Park's attendance and handle. We expect that by bundling
Remington Park's signal with the signals from our other racetracks, we will
be able to increase the number of off-track sites Remington Park's racing
signal is exported to and Remington Park's handle, especially as we expand
our distribution channels and enhance the quality of horse racing offered at
Remington Park.
Remington Park's facilities include a grandstand with seating for
approximately 20,000 patrons, 21 luxury suites for corporate and group
events, a one-mile dirt track, a seven-eighths mile turf course, stalls for
approximately 1,300 horses and parking facilities sufficient to accommodate
approximately 8,000 cars. The property on which Remington Park is located is
leased from Oklahoma Zoological Trust under a lease which extends through
2013, with options to renew for five 10-year periods.
GREAT LAKES DOWNS
Great Lakes Downs is situated on approximately 85 acres in Muskegon,
Michigan, approximately 35 miles from Grand Rapids. Great Lakes Downs, which
commenced operations in January 1999, offers a total of 134 live racing days
beginning in late April and ending in early November of each year. In 1999,
Great Lakes Downs generated a total handle of approximately $55 million.
Simulcasts from Great Lakes Downs are exported to approximately 45 other
racetracks in the United States. We anticipate that as the simulcast signal
from Great Lakes Downs is combined with the simulcast signals from our other
racetracks, Great Lakes Downs will become a good regional track in terms of
handle.
Great Lakes Downs' facilities include a grandstand with capacity for
approximately 7,500 patrons, a 5/8 mile dirt track, stalls for approximately
920 horses and parking facilities sufficient to accommodate approximately
2,000 cars.
SAN LUIS REY DOWNS
We own San Luis Rey Downs, a horse boarding and training center
located on approximately 200 acres of land near San Diego, California.
MEDIA SPORTS WAGERING
Media sports wagering is wagering on sporting events conducted
through a variety of different media, including telephone account,
interactive television and Internet-based wagering. We are currently
exploring expansion into each of these areas, possibly in conjunction with
business partners and subject to regulatory approvals in order to expand the
market for our simulcast horse racing product. In connection with this
component of our strategy, we recently acquired certain management, marketing
and merchandising rights to an Austrian soccer club. These rights are
expected to assist us in developing media sports operations in Europe. In the
future, we may build on the experience we develop in pari-mutuel wagering by
expanding our operations to include sports wagering on other sports as well.
See "Item 1 -- Business -- Risk Factors -- Gaming Risks -- OUR GAMING
ACTIVITIES ARE DEPENDENT ON GOVERNMENT APPROVALS WHICH IF NOT GRANTED COULD
ADVERSELY AFFECT OUR EXISTING BUSINESS AND OUR GROWTH" for a discussion of
the risks inherent in expansion into media sports wagering.
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TELEPHONE ACCOUNT WAGERING
We are currently considering the establishment of a telephone
account wagering operation, possibly in conjunction with business partners
and subject to regulatory approval. Once established, this type of system
would involve patrons opening an account with us or our strategic partner and
depositing funds into this account through the use of debit or credit cards.
Patrons would then place wagers over the telephone on horse races offered at
our racetracks and on horse races simulcast by other racetracks to our
simulcast wagering facilities. Wagers placed by patrons would not be allowed
to exceed the amounts on deposit in their accounts and winnings would be
credited to patrons' accounts and would be available for future wagers. We
would derive revenues from our share of the wagers placed as well as fees
charged to patrons for the service.
We expect that telephone account wagering will make wagering on
horse racing more convenient for our patrons and expand the market for our
simulcast product by enabling us to fully utilize an important distribution
channel for our horse racing product. A telephone account operator must be
licensed and a telephone account wagering hub or base must be established in
any one of eight states in which telephone account wagering is permitted.
These states are Connecticut, Kentucky, Maryland, Nevada, New York, Ohio,
Oregon and Pennsylvania. Once an operator has obtained the required licenses
and established a hub, the operator may accept wagers from patrons living in
these eight states and in other states.
INTERNET AND INTERACTIVE TELEVISION-BASED WAGERING
We are exploring the potential of Internet and interactive
television-based wagering on horse racing and potentially other sporting
events, possibly in conjunction with business partners and subject to
regulatory approval. Interactive television-based wagering involves the
transmission of horse racing-related television programming through cable or
satellite delivery into the homes of subscribers. These subscribers are able
to use interactive "real-time" television-based technology, generally through
a remote controlled device connected to a television, to wager on the live
horse races being shown in the program. In order to place wagers, patrons
must deposit money with the sponsoring racetrack through the use of debit or
credit cards. We would derive revenue from our patrons' subscriptions and our
share of the wagers placed on the races broadcast.
Interactive television-based wagering would allow us to increase the
market for our simulcast product by utilizing an important distribution
channel for this product. We currently have the non-exclusive right to
broadcast races from Santa Anita Park, Golden Gate Fields, Thistledown,
Remington Park and Great Lakes Downs. Races from Gulfstream Park are subject
to an exclusive contract with TV Games Network until 2003. Commencing in
2003, we will have the exclusive right to broadcast races from Santa Anita
Park, Gulfstream Park and Golden Gate Fields, three of the most sought-after
racing signals in North America. Interactive television-based wagering would
significantly enhance our ability to cross promote our live horse racing and
we expect it would enable us to attract new patrons to horse racing and
cultivate their loyalty. We would aim to show full racing cards and to
develop an appealing, convenient and easy-to-use
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format which would provide a fresh new look for horse racing. Furthermore, we
would aim to broadcast the programming we develop for interactive
television-based wagering through a variety of sources, including satellite
television, cable television and the Internet. As our operations expand, we
would apply the experience we gain in interactive television-based wagering
on horse races in expanding to wagering in other sports.
Due to the growth of the Internet as a medium of both communication
and commerce, we are exploring the possibility of establishing an
Internet-based gaming service, possibly in conjunction with a strategic
partner and subject to regulatory approval. Establishing this type of service
would enable us to increase the market for our simulcast product by
maximizing the opportunities presented by the Internet as a distribution
channel for our live horse racing product. It would also enable us to achieve
economies of scale since the programming we would aim to broadcast on the
Internet would be the same as that produced for our interactive
television-based wagering. As with interactive television-based wagering, we
would expect to develop a competitive position on the strength of our live
horse racing product and we would expect this competitive position to
strengthen by 2003 when we will have the exclusive right to broadcast races
from Santa Anita Park, Gulfstream Park and Golden Gate Fields. As our
operations expand, we would likely be able to apply the experience we gain in
Internet-based wagering on horse races to other sports.
REAL ESTATE PORTFOLIO
We currently own a portfolio of real estate properties in North
America and Europe, including a gated residential community currently under
development, a golf course and related recreational facilities, another golf
course under development and other real estate. We intend gradually to sell
the balance of our real estate portfolio in order to provide capital to be
used in our horse racing and other related businesses; accordingly, we will
take steps including servicing the land and obtaining zoning and other
approvals to enhance the value of the properties and increase the revenues
from resale.
Our real estate portfolio includes land currently being developed in
Austria and undeveloped and partially developed land in both Austria and
Canada. We are currently developing a gated residential community, known as
Fontana, situated amidst the Fontana Sports golf course and related
recreational facilities owned and operated by us. This residential
development consists of approximately 50 acres of land and is located in
Oberwaltersdorf, Austria, approximately 15 miles south of Vienna. Fontana is
being developed in two phases into a luxury residential community consisting
of 250 apartment units and 100 single family homes. We expect to complete the
second and final phase of Fontana by 2006. We also own approximately 1,000
acres of undeveloped land in Ebreichsdorf, Austria located approximately 15
miles south of Vienna, which includes a golf course leased to a third party.
In addition, our real estate portfolio includes approximately 270 acres of
mixed-use land adjacent to the existing headquarters of Magna in Aurora,
Canada, approximately 30 miles north of Toronto. Part of the Aurora property
could be sold to a developer of a gated residential golf course community,
while other parts could be sold to developers of
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retail, office, commercial, light industrial and other developments. We are
currently servicing, improving and seeking zoning and other approvals for
some of these properties in order to enhance their value on resale.
Our real estate portfolio also includes two golf courses, Fontana
Sports which is in operation and located in Oberwaltersdorf, Austria and a
second golf course which is being completed in Aurora, Canada. Fontana Sports
is a semi-private sports facility adjacent to the Fontana residential
community. The Fontana Sports facility includes an 18-hole golf course,
tennis club, fitness facility and a restaurant. When completed, the Aurora
golf course will be an 18-hole golf course. It is adjacent to the lands we
own in Aurora, Canada which are currently under development. Doug Carrick,
one of Canada's leading golf course architects, designed both Fontana Sports
and the Aurora golf course. The Aurora golf course is scheduled to officially
open in May 2001. We expect that amenities will include a clubhouse with a
restaurant, a members' lounge, a spa and a pro shop. Our parent company,
Magna, is currently paying us an annual access fee of $2.7 million pursuant
to an arrangement effective as of March 1, 1999 to access the Fontana Sports
facility for Magna-sponsored corporate and charitable events as well as for
business development purposes. Upon completion of the Aurora golf course,
Magna will pay us an annual access fee to use the Aurora golf course for
Magna-sponsored corporate and charitable events and business development
purposes. These access arrangements are scheduled to expire five years after
their effective dates. We have also granted Magna a right of first refusal to
purchase these golf courses, if we decide to sell them. We are considering a
variety of options with respect to our golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions (which would require that Magna not exercise its right of first
refusal) or outright sale. For further information regarding these
arrangements with Magna, see "Item 13 -- Certain Relationships and Related
Transactions".
We also hold some of the land adjacent and in close proximity to
both of the above described golf courses. We expect that the ultimate resale
value of these adjacent and proximate lands will be significantly enhanced
through the presence of these golf courses.
Finally, we own a portfolio of other real estate in Austria, Canada
and the United States. We are currently servicing, improving and seeking
zoning and other approvals for some of these properties in order to enhance
their value on resale. We intend to dispose of these properties gradually as
market conditions permit.
For financial information on our operating segments see Note 11 to
the Consolidated Financial Statements included in "Item 8 - Financial
Statements and Supplementary Data" of this Report.
REORGANIZATION
On November 5, 1999, Magna completed a reorganization of our
corporate structure, under which Magna's North American and European
non-automotive businesses and real estate assets were transferred to us,
including the following:
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1. All the outstanding capital stock of The Santa Anita Companies, Inc.,
which owns all the outstanding capital stock of the Los Angeles Turf
Club, Inc., the operator of Santa Anita Park in California, and
approximately 305 acres of related real estate.
2. All the outstanding capital stock of Fontana Beteiligungs AG (formerly
Magna Vierte Beteiligungs AG), which operates the Fontana Sports golf
course and related recreational facilities and is developing the
adjacent Fontana residential development in Oberwaltersdorf, Austria.
3. All the outstanding capital stock of Magna Projektentwicklungs AG,
which, through a subsidiary, owns the land held for development in
Ebreichsdorf, Austria.
4. Rights to acquire approximately 160 acres of land and improvements in
Aurora, Ontario under a conditional sale agreement with Magna, which is
subject to the successful severance of the affected properties. An
additional 200 acres, which comprise the 18-hole golf course currently
under construction, is also subject to a conditional sale agreement
with a company associated with the members of the family of Frank
Stronach, our Chairman and Chief Executive Officer and the Chairman of
Magna.
5. Various other parcels of land and improvements and other non-automotive
assets located in North America and Europe.
During the course of the reorganization, Magna transferred assets
and settled some intercompany indebtedness which was paid for through the
issuance of approximately $300 million of shares of our common stock. Magna
also subscribed for shares of our stock by way of a cash payment of $250
million. Our Certificate of Incorporation was then amended to add share
provisions for our Class A Subordinate Voting Stock and Class B Stock and our
outstanding common stock was then reclassified and further subdivided into
shares of Class B Stock. On December 30, 1999, 14,823,187 shares of our Class
B Stock held by Magna were repurchased by us for $110,000,000. On this date,
$110,000,000 was invested by Magna in MEC Holdings (Canada) Inc. in return
for 14,823,187 of its Exchangeable Shares, each of which is exchangeable on a
one-for-one basis for shares of our Class A Subordinate Voting Stock.
On December 31, 1999, there were 63,712,141 shares of our Class B
Stock, 1,662,890 shares of our Class A Subordinate Voting Stock and
14,823,187 Exchangeable Shares outstanding.
On March 13, 2000, upon completion of our spin-off from Magna, there
were, 7,176,391 shares of our Class A Subordinate Voting Stock issued and
outstanding. In addition, there were 14,823,187 Exchangeable Shares issued
and outstanding 4,362,328 of which are directly or indirectly owned by Magna.
Magna directly and indirectly owns all 58,466,056 shares of our Class B
Stock. As a result Magna is entitled to exercise approximately 99% of the
total votes attached to all our outstanding stock and Magna is able to elect
all our directors and controls us.
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EMPLOYEES
As of March 22, 2000, we employed approximately 3,000 employees,
approximately 1,700 of whom are represented by a union. Since our inception,
we have not had a work stoppage. We consider our relations with our employees
to be good. We also believe that our future success will depend in part on
our continued ability to attract, integrate, retain and motivate highly
qualified technical and managerial personnel, and upon the continued service
of our senior management.
Our contract with the Service Employees International Union, Local
280, which represents approximately 400 pari-mutuel employees at Santa Anita
Park during our racing season, will expire on July 24, 2000. We expect that
we will be able to negotiate a new union contract with Local 280 through the
collective bargaining process involving all California racetracks.
COMPETITION
We generally do not compete directly with other racetracks for
customers because of geographic separation of facilities and differences in
seasonal timing of meets. In some cases, the differences in seasonal timing
of meets results from the regulatory environment in which racetracks operate.
In California, The California Horse Racing Board has annually licensed us and
Oak Tree Racing Association to conduct racing meets at Santa Anita Park and
it has not licensed other thoroughbred racetracks in Southern California to
conduct racing during these meets. However, night harness racing and night
quarterhorse meets are conducted at other racetracks in Southern California
during portions of these meets. Santa Anita Park and Golden Gate Fields may
face competition if licenses are granted to other racetracks during our
meets. In Florida, tax laws currently discourage the three Miami-area
racetracks from applying for race dates outside of their traditional racing
season. Currently, the race dates for the three Miami-area racetracks do not
overlap. However, commencing July 1, 2001 a new tax structure affecting
Florida racetracks is expected to eliminate this deterrent. As a result,
Gulfstream Park racetrack may face direct competition from other Miami- area
racetracks in the future. We currently compete for customers with off-track
wagering facilities and with operators of other forms of gaming and
entertainment. We attempt to attract customers by providing high quality
racing in appealing facilities, value for money spent and good customer
service.
If we implement our strategy to increase the distribution channels
for our simulcast horse racing product to include telephone account,
interactive television and Internet-based wagering, we will likely face
competition from competitors with significant experience and advanced market
penetration in these distribution channels, including TV Games Network, which
is owned by TV Guide, Inc., and The Racing Network. TV Games Network
currently markets the signals of approximately 45 racetracks, ten of which
are under exclusive contract, including the signal from Churchill Downs'
racetracks and the signals from Gulfstream Park and The Oak Tree Meet. TV
Games Network's exclusive right to market the signals from Gulfstream Park
and The Oak Tree Meet expires in December, 2003. We expect that TV Games
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Network's initial competitive advantage may be off-set by the fact that in
2003 we will have exclusive rights to market the signal for Santa Anita Park,
Gulfstream Park and Golden Gate Fields. In addition, we may be able to
eliminate this competitive disadvantage by pursuing this element of our
strategy in conjunction with an experienced strategic partner.
We currently face competition in Austria from developers of
residential real estate projects, some of which have greater experience, name
recognition and resources than us.
ENVIRONMENTAL MATTERS
We are subject to a wide range of environmental laws and regulations
imposed by governmental authorities relating to wastewater discharge, waste
management and storage of hazardous substances. During calendar 2000 we
intend to adopt a Health, Safety and Environmental Policy pursuant to which
we will commit to:
* conducting our operations in a manner that complies with or
exceeds all legal requirements regarding health, safety and the
environment;
* regularly evaluating and monitoring past and present business
activities affecting health, safety and the environment;
* ensuring that a systematic health, safety and environmental
review program is implemented and monitored at all times for
each of our operations, with a goal of continued improvement in
health, safety and environmental matters; and
* ensuring that adequate reports on health, safety and
environmental matters are presented to our Board of Directors,
at a minimum, on an annual basis.
We are currently subject to Magna's Health, Safety and Environmental
Policy, which is substantially similar to the policy we intend to adopt.
To date, compliance with environmental laws and regulations has not
had a material adverse effect on our financial condition and results of
operations, however, changes in governmental laws and regulations are ongoing
and may make environmental compliance increasingly expensive. We cannot
predict future costs that we may incur to meet environmental obligations.
A subsidiary of Magna has agreed to indemnify us in respect of
environmental remediation costs and expenses relating to existing conditions
in some of our Austrian real estate properties.
RECENT ACQUISITIONS
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A significant proportion of our assets were acquired from our parent
company, Magna and its subsidiaries on a non-arm's length basis pursuant to
the Reorganization. Details of the acquisition of Santa Anita Park by some of
Magna's subsidiaries are provided below. In addition, details of material
acquisitions made by us are also provided below:
Pursuant to an asset purchase agreement dated as of November 13,
1998, with Meditrust Corporation, Meditrust Operating Company, The Santa
Anita Companies, Inc. and Santa Anita Enterprises, Inc. (collectively
referred to as Meditrust), the assets of Santa Anita Park and the stock of
Los Angeles Turf Club, Inc. were acquired by one of Magna's subsidiaries, The
Santa Anita Companies, Inc., as of December 10, 1998 and the transaction
closed on December 11, 1998. The purchase price for the assets acquired was
$118.6 million, all of which was paid in cash. We acquired the shares of The
Santa Anita Companies, Inc. from Magna in the course of the reorganization.
Pursuant to an asset purchase agreement dated as of March 8, 1999,
one of our indirect, wholly-owned subsidiaries, SLRD Thoroughbred Training
Center, Inc., agreed to acquire from San Luis Rey Downs Enterprises LLC the
assets of San Luis Rey Downs for a purchase price of approximately $6.4
million, all of which was paid in cash. This transaction was completed on May
1, 1999.
Pursuant to a stock purchase agreement dated as of June 30, 1999
between us and Gulfstream Holdings, Inc. of Illinois and Gulfstream Park
Racing Association Inc., we agreed to acquire from Gulfstream Holdings Inc.
of Illinois all the issued and outstanding stock of Gulfstream Park Racing
Association Inc. for a purchase price of $89.2 million. Gulfstream Park
Racing Association Inc. owns all the assets of Gulfstream Park racetrack in
Hallandale, Florida. We completed the acquisition on September 1, 1999.
Pursuant to a stock purchase agreement dated as of October 21, 1999,
we agreed to acquire from The Edward J. DeBartolo Corporation and Oklahoma
Racing LLC, all the issued and outstanding stock of Thistledown, Inc. and
Remington Park, Inc. for a total purchase price of $24.5 million.
Thistledown, Inc. owns all the assets of Thistledown racetrack in North
Randall, Ohio. Remington Park, Inc. owns all the assets of Remington Park
racetrack in Oklahoma City, Oklahoma. Of the total purchase price of $24.5
million, the stock of Thistledown cost $14.3 million, $9.8 million of which
was paid in cash and the balance of which was paid through the issuance of
650,695 shares of our Class A Subordinate Voting Stock. The stock of
Remington Park, Inc. cost $10.2 million, all of which was paid in cash. We
completed this acquisition on November 12, 1999.
Pursuant to a stock purchase agreement dated as of November 5, 1999,
we agreed to acquire from Ladbroke Racing Corporation, all the issued and
outstanding stock of Ladbroke Land Holdings Inc. and Pacific Racing
Association. These companies collectively own and operate Golden Gate Fields
racetrack in Albany, California. The purchase price for the stock of these
companies was $84.6 million, of which $60.3 million was paid in cash, $7.0
million was paid through the issuance 1,012,195 shares of our Class A
Subordinate Voting Stock and $20.0 million was paid by way of an
interest-free promissory
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note (discounted value of $17.3 million), $10.0 million of which matures on
the first anniversary of the date of closing and $5.0 million of which
matures on each of the second and third anniversaries. We completed this
acquisition on December 10, 1999 and subsequently changed the name of
Ladbroke Land Holdings Inc. to MEC Land Holdings (California) Inc.
Pursuant to an amended and restated asset purchase agreement dated
as of January 31, 2000, with Great Lakes Downs, Inc. and Great Lakes Downs
Cafe, Inc. we acquired the assets and assumed approximately $9.3 million of
liabilities of Great Lakes Downs racetrack in Muskegon, Michigan for a
purchase price of $1.7 million, which was paid through the issuance of
267,416 shares of our Class A Subordinate Voting Stock. We completed this
acquisition on February 29, 2000.
RISK FACTORS
The most significant risks and uncertainties we face are described
below, but other risks and uncertainties that are not known to us or that we
currently believe are not material or that are similar to those faced by
other companies in our industry may also have a material adverse effect on
our business, financial condition or results of operations.
If any of the following risks actually occur, our business,
financial condition and results of operations could be materially and
adversely affected. In this case, the trading price of shares of our Class A
Subordinate Voting Stock and the Exchangeable Shares could decline
substantially, and investors may lose all or part of the value of the shares
of our Class A Subordinate Voting Stock or the Exchangeable Shares held by them.
GENERAL RISKS REGARDING OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE LOSSES IN THE NEAR
FUTURE ON SOME OF OUR RACETRACKS
We were incorporated approximately one year ago and we have a very
short history of operations and earnings and therefore we have little
historical information on which to base future projections. We have
experienced cumulative consolidated net losses since inception totalling
approximately $17.9 million for periods up to December 31, 1999. Santa Anita
Park, Golden Gate Fields, Remington Park, Thistledown and Great Lakes Downs
racetrack have historically operated at a loss and we anticipate they may do
so in the future.
WE DO NOT PLAN TO PAY DIVIDENDS UNTIL FISCAL YEAR 2004, IF AT ALL
We have not paid any dividends to date, we do not plan to pay any
dividends until our fiscal year commencing January 1, 2004 and we cannot give
any assurance that we will be in a position to pay dividends then, or
thereafter.
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OUR BUSINESS AND OUR EXPANSION PLANS MAY BE ADVERSELY AFFECTED IF WE
DO NOT RETAIN OUR KEY PERSONNEL
We will be highly dependent on the services of members of our senior
management, most of whom have only recently been hired by us and therefore
have not established a track record of working together successfully. We also
depend on the local management of our racetracks and other operating units.
The loss of the services of any of these individuals may adversely affect our
leadership and direction, which may impede the implementation of our strategy.
OUR STOCK PRICE MAY BE VOLATILE
The price of shares of our Class A Subordinate Voting Stock and the
Exchangeable Shares may continue to be volatile, particularly if some of
Magna's institutional shareholders sell their holdings of our Class A
Subordinate Voting Stock or Exchangeable Shares because they:
* are prohibited from holding stock of a company with a
significantly smaller market capitalization;
* cannot hold stock of a gaming company; or
* do not want to hold our stock for any other reason.
In addition, the following factors may have a significant effect on
the market price of our Class A Subordinate Voting Stock and Exchangeable
Shares: fluctuations in our operating profits; the announcement of new
wagering and gaming opportunities by us or our competitors; the passage of
legislation affecting horse racing or gaming; developments affecting the
horse racing or gaming industries generally; sales of substantial amounts of
our Class A Subordinate Voting Stock or Exchangeable Shares; and sales by
Magna of our Class A Subordinate Voting Stock held by it, as a result of its
stated intention to reduce its majority equity position in us. Moreover,
publicly-held horse racing and gaming companies have experienced price and
trading volume fluctuations that are often unrelated to these companies'
financial condition and results of operations. A shift away from investor
interest in gaming companies in general could have a material adverse effect
on the market price of our Class A Subordinate Voting Stock and the
Exchangeable Shares, regardless of our financial condition and results of
operations.
WE MAY NOT BE ABLE TO OBTAIN FINANCING OR MAY BE ABLE TO OBTAIN IT ONLY
ON UNFAVOURABLE TERMS WHICH MAY AFFECT THE VIABILITY OF OUR EXPANSION
PROJECTS OR MAKE THEM MORE COSTLY
We may require additional financing in order to expand our operations.
It is possible that this financing will not be available or, if available, will
not be available on terms which are favourable to us. In addition, Magna has
made a commitment to its shareholders that it will not, for a period of seven
years ending May 31, 2006, without the prior consent of the holders of a
majority of Magna's Class A
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Subordinate Voting Shares, make any further debt or equity investment in, or
otherwise provide financial assistance to, us or any of our subsidiaries. See
"Item 13 -- Certain Relationships and Related Transactions -- Relationship
with Magna" for a more detailed description of our relationship with Magna.
IF WE ARE UNABLE TO NEGOTIATE A SATISFACTORY UNION CONTRACT, SOME OF
OUR EMPLOYEES MAY COMMENCE A STRIKE WHICH MAY LEAD TO LOST REVENUES AND
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
As of March 22, 2000, we employed approximately 3,000 employees,
approximately 1,700 of whom are represented by a union. Our contract with the
Service Employees International Union, Local 280, which represents
approximately 400 pari-mutuel employees at Santa Anita Park during our racing
season, will expire on July 24, 2000. Although we expect that we will be able
to negotiate a new union contract with Local 280 through the collective
bargaining process, we cannot guarantee that we will be able to negotiate a
satisfactory contract. If we are unable to negotiate a satisfactory union
contract, some of our employees may commence a strike and any strike, if
commenced, may lead to lost revenues and therefore have a material adverse
effect on our financial condition and results of operations.
OUR RELATIONSHIP WITH MAGNA IS NOT AT "ARM'S LENGTH" AND THEREFORE
MAGNA MAY INFLUENCE US TO MAKE DECISIONS THAT ARE NOT IN THE BEST
INTERESTS OF OUR OTHER STOCKHOLDERS
Our relationship with Magna is not at arm's length. Magna owns all
our Class B Stock and some Exchangeable Shares, but none of our Class A
Subordinate Voting Stock which means that Magna is entitled to exercise
approximately 99% of the total votes attached to all our outstanding stock.
Magna is therefore able to elect all our directors and controls us.
Therefore, Magna is able to cause us to effect certain corporate transactions
without shareholder consent, subject to applicable law. In addition, Magna is
able to cause or prevent a change in our control. In some cases, the
interests of Magna may not be the same as those of other stockholders, and
conflicts of interest may arise after the completion of the distribution that
may be resolved in a manner detrimental to us.
For example, Magna has entered into an arrangement with us so as to
ensure their access to the Fontana Sports golf course and related
recreational facilities in return for an agreed upon fee. Magna will enter
into a similar arrangement in relation to the Aurora golf course and related
facilities. These access arrangements expire five years after their effective
dates, but Magna could prematurely terminate them or amend them. The early
termination, amendment or non-renewal of these access arrangements could have
a material adverse effect on our financial condition and results of
operations. We have also granted Magna a right of first refusal to purchase
these golf courses if we decide to sell them. We are currently considering a
variety of options with respect to these golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions which would require that Magna not exercise its right of first
refusal or outright sale.
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GAMING RISKS
OUR GAMING ACTIVITIES ARE DEPENDENT ON GOVERNMENT APPROVALS WHICH, IF
NOT GRANTED, COULD ADVERSELY AFFECT OUR EXISTING BUSINESS AND OUR
GROWTH
Our existing live racing, pari-mutuel wagering and other operations
are contingent upon the continued governmental approval of these operations
as forms of legalized gaming. All our current and proposed operations are
subject to extensive regulations and could be subjected at any time to
additional or more restrictive regulations, or banned entirely.
As of the date of this Report, we have obtained all governmental
licenses, registrations, permits and approvals necessary for the operation of
our gaming facilities. However, we may be unable to maintain or renew our
existing licenses. The loss of our licenses, registrations, permits or
approvals may materially limit the number of races we conduct and could have
a material adverse effect on our business, financial condition and results of
operations. In addition, we currently devote significant financial and
management resources to complying with the various governmental regulations
to which our operations are subject. Any significant increase in governmental
regulation could materially adversely affect our business, financial
condition and results of operations.
Moreover, any future expansion of our gaming operations will likely
require additional licenses, registrations, permits and approvals. The
licensing process can be both lengthy and costly and there is no assurance of
success.
The high degree of regulation in the gaming industry is a
significant obstacle to our growth strategy, especially with respect to
telephone account, interactive television and Internet-based sports betting.
Telephone account and interactive television-based betting from home may
currently be conducted only through hubs or bases located in eight states.
The Los Angeles County District Attorney has recently challenged the ability
of California residents to conduct account wagering through these hubs or
bases. Our expansion opportunities in this area may be limited unless more
states change their laws to permit telephone account and interactive
television-based betting. Wagering over the Internet is also subject to
extensive legal restriction. The United States Congress is currently
considering enacting the Internet Gambling Prohibition Act, also known as the
"Kyl Bill", which would amend the Interstate Wire Act to make it clear that
persons engaged in the United States in the business of betting or wagering
through the Internet as well as casual bettors who knowingly use a
communication facility for betting or gambling over the Internet can be fined
or imprisoned. Internet service providers would be required to block-out
gambling sites and would be subject to state and federal authority. The Kyl
Bill would permit telephone account, interactive television and
Internet-based account wagering on horse racing, but not other sports. A
similar piece of legislation was recently introduced in the House of
Representatives by Rep. Bob Goodlatte (R. Va.). We cannot predict the final
disposition of either piece of legislation.
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IMPLEMENTATION OF SOME OF THE RECOMMENDATIONS OF THE NATIONAL GAMBLING
IMPACT STUDY COMMISSION COULD ADVERSELY AFFECT OUR GROWTH PROSPECTS
In August 1996, the United States Congress established the National
Gambling Impact Study Commission to conduct a comprehensive study of the
social and economic effects of the gambling industry in the United States.
This commission reviewed existing federal, state and local policy and
practices with respect to the legalization or prohibition of gambling
activities with the aim of formulating and proposing changes in these
policies and practices and recommending legislation and administrative
actions for these proposed changes. On June 18, 1999, the commission issued a
report setting out its findings and conclusions, together with
recommendations for legislation and administrative actions. Some of the
recommendations were:
* prohibiting Internet gambling which is not already authorized
within the United States or among parties in the United States
and any foreign jurisdiction;
* limiting the expansion of gambling into homes through such
mediums as account wagering;
* banning betting on all collegiate and amateur athletic events;
and
* refusing the introduction of casino-style gambling into
pari-mutuel facilities for the primary purpose of saving a
pari-mutuel facility that the market has determined no longer
serves the community or for the purpose of competing with
other forms of gaming.
The recommendations made by the National Gambling Impact Study
Commission could result in the enactment of new laws and/or the adoption of
new regulations which would materially adversely impact the gambling industry
in general and thus would materially adversely affect our growth prospects.
We are unable, at this time, to determine the ultimate disposition of the
commission's recommendations.
WE FACE SIGNIFICANT COMPETITION FROM OPERATORS OF OTHER RACETRACKS AND
OTHER FORMS OF GAMING WHICH COULD DECREASE THE AMOUNT WAGERED AT OUR
FACILITIES AND ADVERSELY AFFECT OUR PROFITABILITY
We face significant competition in each of the jurisdictions in
which we have gaming operations and this competition is expected to intensify
as new gaming operators enter our markets and existing competitors expand
their operations and consolidate management of multiple racetracks. One of
our competitors, Churchill Downs Inc., may have substantially greater name
recognition and financial resources than us. We also compete for customers
with other sports, entertainment and gaming operators, as well as state
governments and native American groups. Competition in the gaming industry is
expected to increase due to limited opportunities for future growth in new
markets. If we lose customers for any reason, including the factors discussed
below, our profitability may be materially adversely affected.
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In addition, Florida tax laws currently discourage the three
Miami-area racetracks, Gulfstream Park, Hialeah Park and Calder Race Course,
from scheduling concurrent races. We expect that a new tax structure will
eliminate this deterrent in 2001. As a result, while the owners of Hialeah
Park have leased Gulfstream Park racetrack for their 2000 race meet,
Gulfstream Park may face direct competition from other Miami-area racetracks
in the future. This competition could affect the profitability of Gulfstream
Park, which could reduce our overall profitability.
State and provincial lotteries benefit from numerous distribution
channels, including supermarkets and convenience stores, as well as from
frequent and extensive advertising campaigns. We do not have the same access
to the gaming public or the advertising resources available to state and
provincial lotteries.
DECLINING ON-TRACK ATTENDANCE AND INCREASING COMPETITION IN
SIMULCASTING MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS
There has been a general decline in the number of people attending
and wagering at live horse races at North American racetracks due to a number
of factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance
at live horse racing events has prompted racetracks to increasingly rely on
revenues from simulcasting and off-track wagering. The industry-wide focus on
simulcasting and off-track wagering has increased competition among
racetracks for outlets to simulcast their live races. A decline in consumer
interest in horse racing, a continued decrease in attendance and on-track
wagering as well as increased competition in the simulcast wagering market
could lead to a decrease in the amount wagered at our facilities and may have
a material adverse effect on the overall profitability of our horse racing
operations.
WE CURRENTLY FACE SIGNIFICANT COMPETITION FROM INTERNET AND ON-LINE
WAGERING WHICH MAY REDUCE OUR PROFITABILITY
Although we currently do not operate any Internet or online gaming
services, we currently face competition from operators of those gaming
services. Internet and online gaming services allow their customers to wager
on a wide variety of sporting events from home. Unlike Internet and on-line
gaming operators, our business requires significant and on-going capital
expenditures in order to continue operations and in order to expand. We
currently cannot offer the diverse gaming options offered by Internet and
on-line gaming operators and face significantly greater costs in operating
our business. Our inability to compete successfully with these operators
could limit our market share and growth and may have a material adverse
effect on our profitability.
EXPANSION OF GAMING CONDUCTED BY CALIFORNIA NATIVE AMERICAN TRIBES MAY
LEAD TO INCREASED COMPETITION IN OUR INDUSTRY WHICH MAY NEGATIVELY
IMPACT OUR GROWTH AND PROFITABILITY
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In November 1998, California voters passed Proposition 5, a ballot
initiative that would have allowed native American tribes to conduct various
gaming activities including pari-mutuel wagering, gambling, some types of
card games, and lotteries. On August 23, 1999, the California Supreme Court
overturned Proposition 5 on the basis that the initiative violated the state
constitution. The California state government recently reached agreements
with California native American tribes to permit a doubling of the number of
gaming machines currently operated by these tribes, as well as the
introduction of slot machines and poker and blackjack tables on California
native reserves. The governor of California, the state legislature and these
native American tribes jointly sponsored a constitutional amendment which
California voters overwhelmingly approved in March 2000. The expansion of
gaming conducted by California native American tribes may lead to increased
competition and may have an adverse effect on the profitability of Santa
Anita Park, Golden Gate Fields and our future growth in California.
IF A U.S. FEDERAL GAMING TAX IS INTRODUCED, OUR FINANCIAL RESULTS MAY
BE ADVERSELY AFFECTED
From time to time, U.S. legislators have proposed the imposition of
a U.S. federal tax on gross gambling revenues. The imposition of this type of
tax could have a material adverse effect on our net income and therefore our
overall financial condition.
OUR PROFITABILITY MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO
INTEGRATE RECENT RACETRACK ACQUISITIONS, WHICH COMPRISE ALL OUR
HORSE RACING OPERATIONS, AND TO COMPLETE AND INTEGRATE FUTURE
ACQUISITIONS
Our racetrack operations have been acquired very recently. The
acquisition of Santa Anita Park was completed in December 1998 and the
acquisition of Gulfstream Park was completed in September 1999. The
acquisition of Remington Park and Thistledown Racetrack was completed in
November 1999 and the acquisition of Golden Gate Fields was completed in
December 1999. In addition, we completed the acquisition of Great Lakes Downs
in February 2000. These operations have been operating independently in the
past under different management. Integrating these recently acquired
businesses into our operations will require a significant dedication of
management resources and an expansion of our information systems. This
dedication may distract us from our day-to-day operations which could result
in less efficient and more costly operations as well as a failure of our
management to focus on other important issues.
We also plan to continue pursuing acquisition opportunities and we
may issue our Class A Subordinate Voting Stock as full or partial
consideration in connection with these acquisitions. Our future profitability
will depend to some degree upon the ability of our management to identify,
complete and integrate commercially viable acquisitions. We cannot give any
assurance that we will successfully complete and integrate the new
acquisitions. Furthermore, to the extent that we issue any shares of our
Class A Subordinate Voting Stock in connection with any of these
acquisitions, the percentage of our voting stock that our shareholders own
will decrease.
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If we do not successfully integrate our new or future acquisitions,
or if this integration consumes a significant amount of our management's
time, then these acquisitions may adversely affect our efficiency and
therefore our profitability.
OUR OPERATING RESULTS MAY BE IMPACTED BY INCLEMENT WEATHER AND MAY
FLUCTUATE SEASONALLY
We experience significant fluctuations in quarterly and annual
operating results due to seasonality. We have a limited number of live racing
days at each of our racetracks and the number of live racing days varies from
year to year. The number of live racing days we have directly affects our
operating results. A significant decrease in the number of live races could
have a material adverse effect on our business, financial condition and
results of operations. Generally our revenues from racetrack operations are
greater in the first and second quarters of the calendar year than in the
third and fourth quarters of the calendar year.
Since horse racing is conducted outdoors, unfavourable weather
conditions, including excessive heat, coolness or rain, may cause races to be
cancelled or may reduce attendance and wagering. Since a substantial portion
of our gaming expenses are fixed, the loss of scheduled racing days or
deterioration of race cards due to unfavourable weather could have a material
adverse effect on the profitability of our horse racing operations.
AN EARTHQUAKE IN CALIFORNIA COULD AFFECT OUR OPERATIONS AT SANTA
ANITA PARK AND GOLDEN GATE FIELDS, WHICH COULD ADVERSELY IMPACT
OUR CASH FLOW FROM THESE RACETRACKS
Two of our primary assets, Santa Anita Park and Golden Gate Fields,
are located in California and are therefore subject to earthquake risks.
Since the structures at our California racetrackS are low-rise buildings, the
risk of earthquake damage is not considered to be high and, as a result, we
do not currently maintain earthquake insurance on these structures. We
currently maintain fire insurance for fire risks, including those resulting
from earthquakes, subject to policy limits and deductibles. There can be no
assurance that earthquakes or the fires often caused by earthquakes will not
seriously damage our California racetracks and related properties or that the
recoverable amount of insurance proceeds will be sufficient to cover
reconstruction costs and other losses suffered fully. If an uninsured or
underinsured loss occurs, we could lose anticipated income and cash flows
from our California racetracks.
REAL ESTATE OWNERSHIP AND DEVELOPMENT RISKS
OWNING AND DEVELOPING REAL ESTATE MAY INVOLVE SIGNIFICANT ONGOING
EXPENDITURES OR LOSSES THAT COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
All real estate investments are subject to risks including: general
economic conditions, such as the availability and cost of financing; local real
estate conditions, such as an over-supply of residential, office,
23
<PAGE>
retail space or warehousing or a reduction in demand for real estate in the
area; governmental regulation, including taxation of property and
environmental legislation; and the attractiveness of properties to potential
purchasers or tenants. Each segment of the real estate industry is capital
intensive and sensitive to interest rates. Further significant expenditures,
including property taxes, mortgage payments, maintenance costs, insurance
costs and related charges, must be made throughout the period of ownership of
real property and during the period of making improvements to the property.
Further, governments can, under eminent domain laws, take real property for
less than an owner might otherwise agree.
If interest rates or other real estate costs escalate, this could
adversely affect our ability to finance our expansion projects and also our
profitability.
WE MAY NOT BE ABLE TO SELL SOME OF OUR REAL ESTATE WHEN WE NEED TO
OR AT THE PRICE WE WANT, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION
At times, it may be difficult for us to dispose of some types of
real estate. The costs of holding real estate are high and, during a
recession, we may be faced with ongoing expenditures with little prospect of
earning revenue on our real estate properties. If we have inadequate cash
reserves, we may have to dispose of properties at prices which are
substantially below the price we desire, and in some cases, below the price
we originally paid for the properties.
WE REQUIRE GOVERNMENT APPROVALS FOR SOME OF OUR PROPERTIES WHICH MAY
TAKE A LONG TIME TO OBTAIN OR WHICH MAY NOT BE GRANTED, EITHER OF
WHICH COULD ADVERSELY AFFECT OUR EXISTING BUSINESS OR OUR GROWTH
Some of our properties will require zoning and other approvals from
local government agencies. For example, our applications for re-zoning land
in Aurora, Canada and Ebreichsdorf, Austria are currently being considered.
The process of obtaining these approvals may take many months and there can
be no assurance that we will obtain the necessary approvals for either of
those lands or any other lands. Furthermore, in the case of the land held by
us in Aurora, Canada, the transfer of this land to us is conditional on
obtaining severance and other approvals. We cannot give any assurance that we
will obtain these approvals and we cannot give any assurance that we will
ultimately acquire this land. Holding costs accrue while regulatory approvals
are being sought and delays can render a project economically unfeasible. If
we do not obtain any of these approvals our plans, growth and profitability
could be affected.
WE MAY NOT BE ABLE TO COMPLETE EXPANSION PROJECTS SUCCESSFULLY, WHICH
WOULD MATERIALLY AFFECT OUR GROWTH AND OUR RESULTS OF OPERATIONS
We intend to develop our racetracks further and possibly expand our
gaming activities. Numerous factors, including regulatory and financial
constraints, could cause us to alter, delay or abandon our existing plans. If
we proceed to develop new facilities or enhance our existing facilities, we
face numerous risks that could require substantial changes to our plans,
including time frames or projected budgets. These risks
24
<PAGE>
include the inability to secure all required permits and the failure to
resolve potential land use issues, as well as risks typically associated with
any construction project, including possible shortages of materials or
skilled labor, unforseen engineering or environmental problems, delays and
work stoppages, weather interference and unanticipated cost overruns. See
"Item 1. Business -- Horse Racing and Pari-Mutuel Wagering -- Santa Anita
Park" for a description of these upgrades. For example, Santa Anita Park
recently completed upgrades to its facilities and is considering more
upgrades in the future. The disruption caused by these upgrades reduced the
total amount wagered at Santa Anita Park's simulcast wagering facilities and
attendance at The Oak Tree Meet in 1999. Even if completed, our expansion
projects may not be successful, which would affect our growth and could have
an adverse effect on our long term financial projections.
WE FACE STRICT ENVIRONMENTAL REGULATION AND MAY BE SUBJECT TO
LIABILITY FOR ENVIRONMENTAL DAMAGE THAT WE DID NOT CAUSE, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Various environmental laws and regulations in the United States,
Canada and Europe impose liability on us as a current or previous owner and
manager of real property, for the cost of maintenance, removal and
remediation of hazardous materials released or deposited on or in properties
now or previously owned or managed by us or disposed of in other locations.
Our ability to sell properties with contamination or hazardous or toxic
substances or borrow using that property as collateral may also be adversely
affected. We cannot give you any assurance that all circumstances giving rise
to exposure under environmental laws are currently known to us. Changes to
environmental laws and regulations, resulting in more stringent terms of
compliance, could expose us to additional liabilities and ongoing expenses.
ITEM 2. PROPERTIES
Information concerning properties required by this item is
incorporated by reference to the information contained in "Item 1. Business"
of this Report.
ITEM 3. LEGAL PROCEEDINGS
One of our Austrian subsidiaries has been named as a defendant in a
class action brought in a United States District Court by Gutwillig et al.
The plaintiffs in this class action claim unspecified compensatory and
punitive damages, for restitution and disgorgement of profits, all in
relation to slave or forced labor performed by the plaintiffs for that
subsidiary and some other Austrian and German corporate defendants at their
facilities in Europe during World War II. As a result of the transactions
described under the heading "Reorganization" above, we acquired the stock of
this subsidiary. Under Austrian law, this subsidiary would be jointly and
severally liable for the damages awarded in respect of this class action
claim. We cannot predict the final outcome of this class action suit, or
establish a reasonable estimate of possible damages or a range of possible
damages that could be awarded to the plaintiffs if their claims are
successful. However, an Austrian subsidiary of Magna has agreed to indemnify
that subsidiary for any damages or expenses associated with this claim.
25
<PAGE>
From time to time, various routine claims incidental to our business
are made against us. None of these claims have had, and we believe that none
of the current claims, if successful, will have, a material adverse effect
upon us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the
fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TRADING HISTORY
Shares of our Class A Subordinate Voting Stock are listed and quoted
for trading on the Nasdaq National Market ("NASDAQ") under the trading symbol
"MIEC" and are listed and posted for trading on The Toronto Stock Exchange
(the "TSE") under the trading symbol "MIE.A". In addition, Exchangeable
Shares of our subsidiary, MEC Holdings (Canada) Inc., each of which is
exchangeable on a one-for-one basis for shares of our Class A Subordinate
Voting Stock, are listed and posted for trading on the TSE under the trading
symbol "MEH". Prior to February 23, 2000, there was no market for the shares
of our Class A Subordinate Voting Stock or for the Exchangeable Shares.
Shares of our Class A Subordinate Voting Stock commenced trading on a "when
issued" basis on February 23, 2000 on NASDAQ and the TSE and commenced
regular trading on March 13, 2000. The Exchangeable Shares commenced trading
on a "when-issued" basis on the TSE on February 23, 2000 and commenced
regular trading on March 13, 2000.
DIVIDENDS AND DIVIDEND POLICY
Holders of shares of our Class A Subordinate Voting Stock, our Class
B Stock and the Exchangeable Shares are entitled to receive their
proportionate shares of dividends as may be declared by our board of
directors, subject to the prior rights attaching to any other stock ranking
in priority to our Class A Subordinate Voting Stock, our Class B Stock and
the Exchangeable Shares.
Subject to applicable law, we intend to pay dividends starting with
the fiscal year commencing January 1, 2004 in respect of the quarter
commencing on that date and each succeeding quarter on our Class A
Subordinate Voting Stock and our Class B Stock. We will declare future
dividends on our Class A Subordinate Voting Stock and our Class B Stock in
accordance with our restated certificate of incorporation and our Corporate
Constitution.
We were incorporated on March 4, 1999 and have not declared any
dividends to date.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
INCOME STATEMENT DATA (1)
The following table sets forth our selected consolidated financial
data as at and for the periods indicated. The selected consolidated financial
data as at December 31, 1998 and 1999 and for the two years ended July 31,
1998, the five month period ended December 31, 1998 and the year ended
December 31, 1999 have been derived from and should be read in conjunction
with our Audited Consolidated Financial Statements for the two-year period
ended July 31, 1998, the five-month period ended December 31, 1998 and the
year ended December 31, 1999. The selected financial and operating
information should also be read in conjunction with "Item 7. - Management's
Discussion and Analysis of Financial Condition and Operating Results"
included in this Report.
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ----------------------------------------------------
1999 1998 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenue
Racetrack $79,426 $3,952 $ -- $ -- $ -- $ --
Real Estate 19,370 6,597 20,486 15,276 2,460 1,166
---------------------------------------------------------------------------------
Total Revenue 98,796 10,549 20,486 15,276 2,460 1,166
Costs and Expenses
Racetrack costs and
expenses 69,289 3,625 -- -- -- --
Real Estate costs and
expenses 19,904 8,462 25,864 13,879 4,613 2,713
Depreciation and
amortization 7,924 1,649 1,852 1,824 330 21
Interest expense
(income), net (920) 1,221 1,380 955 (59) (26)
Other (174) -- -- -- -- --
---------------------------------------------------------------------------------
Income (loss) before
income taxes 2,773 (4,408) (8,610) (1,382) (2,424) (1,542)
=================================================================================
Net loss $ (62) $(4,231) $(8,610) $(1,382) $(2,424) $(1,542)
=================================================================================
Loss per share of
Class A Subordinate
Voting and Class B
Stock and
Exchangeable Shares
Basic and diluted (2) $ 0.00 $ (0.05) $(0.11) $ (0.02) $ (0.03) $ (0.02)
=================================================================================
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Average number of
shares of Class A
Subordinate Voting
and Class B Stock
and Exchangeable
Shares outstanding
during the period
(in thousands)
Basic and diluted (2) 78,686 78,535 78,535 78,535 78,535 78,535
=================================================================================
</TABLE>
(12) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP, which differ in some
respects from accounting principles generally accepted in Canada, or
Canadian GAAP. For a discussion of the principal differences between
U.S. GAAP and Canadian GAAP, see Note 16, "Canadian Generally Accepted
Accounting Principles", to our Audited Consolidated Financial
Statements.
(13) Assumes the exchange of Exchangeable Shares of MEC Holdings (Canada)
Inc., each of which is exchangeable on a one-for-one basis for shares
of our Class A Subordinate Voting Stock.
28
<PAGE>
BALANCE SHEET DATA (1)
<TABLE>
<CAPTION>
JULY 31,
DECEMBER 31, DECEMBER 31, ---------------------------------
1999 1998 1998 1997 1996 1995
------------ ------------ ------- ------- ------ ------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........ 50,660 12,442 295 220 133 521
Total assets..................... 760,353 364,142 184,802 113,175 76,219 51,636
Total debt(2).................... 45,884 32,335 19,495 18,938 22,614 12
Magna's net investment/
shareholders' equity......... 547,087 302,502 158,275 87,917 49,985 48,166
</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 16,
"Canadian Generally Accepted Accounting Principles" to our Audited
Consolidated Financial Statements.
(2) Total debt includes Bank indebtedness, Long-term debt (including
Long-term debt due within one year) and Note payable to Magna.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion of our financial condition and operating
results should be read in conjunction with the Audited Consolidated Financial
Statements included in "Item 8 - Financial Statements and Supplementary Data"
in this Report. This discussion contains forward-looking statements that
involve significant risks and uncertainties. Our actual results could differ
materially from those projected in or contemplated by the forward-looking
statements due to a number of factors, including, but not limited to
competition from operators of other racetracks and from other forms of
gaming, including from Internet and on-line wagering, our continued ability
to complete expansion projects designed to generate new revenues and attract
new patrons, our ability to sell some of our real estate when we need to or
at the price we want, the impact of inclement weather and our ability to
integrate recent racetrack acquisitions.
OVERVIEW
We acquire, develop and operate horse racetracks and related
pari-mutuel wagering operations. As a complement to our horse racing
business, we are exploring the development of media sports wagering
operations, including telephone account, interactive television and
Internet-based wagering, as well as leisure and real estate projects on the
land surrounding some of our racetracks, possibly in conjunction with
business partners and subject to regulatory requirements. In addition, we own
a real estate portfolio which includes a gated residential project under
development, a golf course and related recreational facilities, another golf
course under development and other real estate. We are currently considering
a variety of options with respect to the golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions (which would require that Magna not exercise its right of first
refusal) or outright sale. We intend gradually to sell the balance of our
real estate portfolio in order to provide capital to be used in our business.
Accordingly, we will take steps including servicing our land and
29
<PAGE>
obtaining zoning and other approvals to enhance the value of the properties
and increase the revenues from resale.
RACETRACK OPERATIONS
We acquired Santa Anita Park located in Arcadia, California,
approximately 14 miles northeast of Los Angeles, one of the premier
thoroughbred racetracks in North America, in December 1998. Santa Anita Park
operates through the prime winter racing season, commencing December 26 and
running into late April each year. In addition, we lease Santa Anita Park to
Oak Tree Racing Association which hosts The Oak Tree Meet from the end of
September through early November of each year.
On September 1, 1999, we acquired Gulfstream Park, also one of the
premier thoroughbred racetracks and pari-mutuel wagering facilities in North
America and the host site of the Breeders' Cup held on November 6, 1999.
Gulfstream Park is located in the cities of Hallandale and Aventura, Florida,
between Miami and Fort Lauderdale and operates between early January and
mid-March of each year.
On November 12, 1999, we acquired the Thistledown and Remington Park
racetracks in North Randall, Ohio and Oklahoma City, Oklahoma, respectively.
Thistledown has one of the longest racing seasons of all North American
racetracks, consisting of 187 racing days each year between mid-March and
early December of each year. Remington Park offers both a 40-day Quarter
Horse meet from mid-April to mid-June and an 82-day Thoroughbred Horse meet
from mid-August to early December of each year.
On December 10, 1999, we acquired the Golden Gate Fields racetrack
in Albany and Berkeley, California, approximately 8 miles from downtown
Oakland and approximately 11 miles from San Francisco. Golden Gate Field's
racing season consists of two meets, one of which runs from late March to
mid-June of each year and the other of which runs from mid-November of each
year to mid-January of the following year.
Finally, on February 29, 2000, we acquired the assets and assumed
certain liabilities of Great Lakes Downs racetrack in Muskegon, Michigan.
Great Lakes Downs began operations in January 1999 and offers a total of 134
live racing days beginning in April and ending in early November of each year.
Because of the seasonal nature of our racetrack business, racetrack
revenues and operating results for any interim quarter will not be indicative
of the revenues and operating results for the year. Our live racing schedule
also dictates that we will earn a substantial portion of our net earnings
from racetrack operations in the first quarter of each year, which is when
The Santa Anita Meet and the annual meet at Gulfstream Park occur. Our second
quarter of each year will have the second largest net earnings of each year,
which is when the larger of the two annual meets at Golden Gate Fields occurs.
Our primary sources of racetrack revenues are commissions earned
from pari-mutuel wagering.
30
<PAGE>
Pari-mutuel wagering on horse racing is pooled betting in which individuals
bet against each other on the outcome of a horse race. We have no interest in
the order of finish in any given race and therefore have no risk in the
outcome. A percentage of the pooled wagers is retained by us, a portion paid
to the regulatory or taxing authorities and a portion is paid to horsemen in
the form of purses. The balance of the pooled wagers is paid to bettors as
winnings. Our share of pari-mutuel wagering revenues is based on
pre-determined percentages of various categories of the pooled wagers at our
racetracks. The pre-determined percentages are set by state regulators.
Pari-mutuel wagering on horse racing occurs on the live races being conducted
at racetracks as well as on televised racing signals or simulcasts received
or imported by the simulcast wagering facilities located at such racetracks.
Pari-mutuel wagering on horse racing also occurs at wagering establishments
on horse races being conducted at tracks elsewhere. Our racetracks have
simulcast wagering facilities to complement our live horse racing by enabling
our patrons to wager on horse races being held at other racetracks. We also
generate non-wagering revenues consisting primarily of food and beverages,
programs, admissions, parking, and other amounts.
REAL ESTATE OPERATIONS
Our real estate portfolio includes land currently being developed in
Austria and undeveloped and partially developed land in both Austria and
Canada. We are currently developing a gated residential community, known as
Fontana, situated amidst the Fontana Sports golf course and related
recreational facilities owned and operated by us. This residential
development consists of approximately 50 acres and is located in
Oberwaltersdorf, Austria, approximately 15 miles south of Vienna. Fontana is
being developed in two phases into a luxury residential community consisting
of 250 apartment units and 100 single-family homes. We expect to complete the
second and final phase of Fontana by 2006. We also own approximately 1,000
acres of undeveloped land in Ebreichsdorf, Austria, located approximately 15
miles south of Vienna, which includes a golf course leased to a third party.
In addition, our real estate portfolio includes approximately 270 acres of
mixed-use land adjacent to the headquarters of Magna in Aurora, Canada,
approximately 30 miles north of Toronto. Our real estate portfolio also
includes two golf courses, Fontana Sports which is in operation and located
in Oberwaltersdorf, Austria, and a second golf course which is being
completed in Aurora, Canada. We are considering a variety of options with
respect to these golf courses, including direct operation or leasing to third
party operators, as well as sale and leaseback transactions (which would
require that Magna not exercise its right of first refusal) or outright sale.
We intend to gradually sell the balance of our real estate portfolio,
excluding lands adjacent to our racetracks, in order to provide capital to be
used in our business; accordingly we are currently servicing, improving and
seeking zoning and other approvals for some of these properties in order to
enhance their value on resale.
RESULTS OF OPERATIONS
Our parent company Magna changed its fiscal year from July 31 to
December 31 effective December 31, 1998. Throughout this Management's Discussion
and Analysis of Financial Condition and Results of Operations, unless stated
otherwise, operating results are for the year ended December 31, 1998
31
<PAGE>
as this period is determinable from consolidated financial statements. Our
comparative consolidated operating results for the years ended December 31,
1999 and 1998 are as follows:
(United States dollars in thousands, except per share figures)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
- - ----------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Racetrack
Wagering 48,404 2,513
Non-wagering 31,022 1,439
Real estate 19,370 21,239
- - ----------------------------------------------------------------------------------------------
98,795 25,191
- - ----------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Racetrack
Operating costs 63,302 3,461
General and administrative 5,987 164
Real estate
Operating costs 18,071 25,348
General and administrative 1,833 2,004
Depreciation and amortization 7,924 2,762
Interest expense 1,666 2,106
Interest income (2,596) (31)
Other expenses 454 -
Gain on disposal of real estate property (628) -
- - ----------------------------------------------------------------------------------------------
96,023 35,814
- - ----------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,773 (10,623)
Income tax provision (benefit) 2,835 (177)
- - ----------------------------------------------------------------------------------------------
Net loss (62) (10,446)
Other comprehensive income (loss)
Foreign currency translation adjustment (7,493) 2,865
- - ----------------------------------------------------------------------------------------------
Comprehensive loss (7,555) (7,581)
==============================================================================================
Loss per share of Class A Subordinate Voting Stock,
Class B Stock or Exchangeable Share
Basic and diluted $0.00 $ (0.13)
==============================================================================================
Average number of shares of Class A Subordinate
Voting Stock, Class B Stock and Exchangeable Shares
(in thousands)
Basic and diluted 78,686 78,535
==============================================================================================
</TABLE>
YEARS ENDED DECEMBER 31, 1999 AND 1998
RACETRACK OPERATIONS
Revenues from our racetrack operations were $79.4 million for the
year ended December 31, 1999. Santa Anita Park contributed revenues of $71.1
million and the remaining racetracks contributed $8.3 million as they were
acquired late in 1999. Santa Anita Park's complete 1999 operations are
reflected in our consolidated results. The other racetracks' operations are
only reflected in our consolidated results
32
<PAGE>
from the date of acquisition. We earned no revenues from our racetrack
operations at San Luis Rey Downs, Gulfstream Park, Thistledown and Remington
Park, and Golden Gate Fields in the comparable 1998 period as they were
acquired in May 1999, September 1999, November, 1999 and December, 1999,
respectively. Our total revenues from racetrack operations in the comparable
1998 period of $4.0 million were from Santa Anita Park.
In the year-ended December 31, 1999, our share of total pari-mutuel
wagering revenues for our racetracks was $48.4 million and non-wagering revenues
were $31.0 million.
We derived our pari-mutuel wagering revenues at our racetracks from the
following primary sources:
(a) Live race days
* wagers made by patrons at our racetracks on races held at our
racetracks;
* wagers made by patrons at our racetracks on imported simulcast
signals for races held at other racetracks in-state and
out-of-state;
* wagers made by patrons at Northern California Off-track
Wagering, Inc. ("NCOTWINC") sites and at Southern California
Off-Track Wagering, Inc. ("SCOTWINC") sites on exported
signals from races held at Golden Gate Fields and Santa Anita
Park and on races held at other tracks, when the meets at
Golden Gate Fields and Santa Anita Park are operating; and
* wagers made by patrons at an out-of-state site on exported
simulcast signals for races held at our racetracks.
(b) Non-live race days
* NCOTWINC and SCOTWINC are organizations formed by
representatives of the racing associations, fairs and
satellite wagering facilities of Northern California and
Southern California, respectively, to promote off-track
wagering and to equitably divide expenses associated with
off-track betting. We also receive a percentage of the net
profit of NCOTWINC and SCOTWINC - this helps defray the
costs of off-track wagering, including pari-mutuel
departments, television and satellite costs, and supplies.
The excess NCOTWINC and SCOTWINC funds that are not
distributed are split equally between the track and the
horsemen; and
* wagers placed by patrons at our racetracks and Off-Track
Betting ("OTB") sites on imported simulcast signals from
other racetracks in-state and out-of-state.
33
<PAGE>
The distribution of pari-mutuel wagering for the year ended December
31, 1999 is summarized below (in millions except number of live race days):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Total live race day handle $ 1,244.1
==========
Total number of live race days 149
==========
Our share of live race day handle $ 42.6
Our share of non-live race day handle and other 5.8
----------
Total pari-mutuel wagering revenue 48.4
==========
</TABLE>
Our total handle has been positively impacted by the development of
NCOTWINC and SCOTWINC and betting at Golden Gate Fields and Santa Anita Park on
out-of-state races. With the exception of 1997, total wagering has shown an
increase at both tracks since 1994.
Our share of pari-mutuel handle improved in 1999 primarily as a result
of recent changes in the allocation of the handle. On August 11, 1998, the
California Senate passed Bill Number SB27, which gave racetracks in California a
reduction in the state license fees to be paid from the handle and permission to
import up to 20 races per day from out-of-state when running a live meet. The
reduction in the amount of handle allocated to the state resulted in an increase
in allocation to us as well as to purses. The permission to import out-of-state
races is significant, as previously, the only imported races which were wagered
on in California were from outside the U.S., primarily Hong Kong and Australia.
Our non-wagering revenues for the year-ended December 31, 1999 were
$31.0 million. Santa Anita park earned $27.8 million and the other racetracks
earned $3.2 million. The major components of non-wagering revenues were
admission related revenues of $13.7 million (comprising primarily admissions,
parking and program sales) and food and beverage sales of $9.9 million,
collectively representing 76% of total non-wagering revenues.
Racetrack costs and expenses, before depreciation and interest, were
$69.3 million for the year ended December 31, 1999. Santa Anita Park incurred
costs and expenses of $57.9 million with the remaining racetracks
contributing $11.4 million. The major components of our costs and expenses,
before depreciation and interest, were payroll costs ($38.8 million) and
marketing and advertising costs ($6.2 million) representing approximately 65%
of our total costs. The costs and expenses of Gulfstream Park, Thistledown,
Remington Park and Golden Gate Fields were minimal during the year ended
December 31, 1999 since these racetracks' costs are only reflected in our
consolidated results from their respective dates of acquisition, all of which
were in late 1999, and these racetracks had few live race days in 1999
subsequent to their acquisition. With the acquisition of Gulfstream Park,
Thistledown, Remington Park, Golden Gate Fields and Great Lakes Downs, we
intend to continue to implement our strategy which
34
<PAGE>
includes the consolidation of our racetrack acquisition with the objective of
maximizing administrative and other cost efficiencies at our racetracks.
REAL ESTATE OPERATIONS
Revenues from our real estate operations were $19.4 million for the
year ended December 31, 1999 compared to $21.2 million for the year ended
December 31, 1998. The decrease is primarily attributable to a reduction in
housing activity at Fontana which is nearing completion of the first phase of a
two phase development plan. Partially offsetting the decrease in revenues was
increased membership and other usage revenue at Fontana Sports, including $2.3
million related to Magna's access fee agreement with Fontana Sports which
commenced March 1, 1999 and will provide $2.7 million annually until March 1,
2004. We also generated increased rental revenues on some properties acquired
during the comparative period. Revenues from our remaining real estate
operations were substantially unchanged.
Real estate costs and expenses, before depreciation and interest, were
$19.9 million for the year ended December 31, 1999 compared to $27.4 million for
the year ended December 31, 1998. The reduction is attributable to the decrease
in housing activity at the Fontana residential development. In addition, we
incurred costs in the year ended December 31, 1998 related to the potential
development of a theme park on approximately 670 acres of our land in
Ebreichsdorf near Vienna, Austria which was acquired by us during the year ended
July 31, 1997. Costs included consultants' fees associated with feasibility
studies, alternative theme park designs, market analysis, presentation
brochures, site models and alternative site investigations. In May 1999, we
announced that we were unable to obtain the various permits and approvals that
would have been required to potentially develop this property as a theme park.
As a result, we are re-assessing the potential uses for the property. Costs
incurred in the year ended December 31, 1999 were substantially reduced.
Costs and expenses of our remaining real estate operations were
substantially unchanged.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $5.2 million to $7.9 million
for the year ended December 31, 1999, primarily as a result of depreciation
related to our acquisitions of Santa Anita Park on December 10, 1998, San Luis
Rey Downs on May 1, 1999, Gulfstream Park on September 1, 1999, Thistledown and
Remington Park on November 12, 1999 and Golden Gate Fields on December 10, 1999
and a full year of depreciation on properties acquired in calendar 1998. As of
December 31, 1999, some properties have been classified as available for sale
and depreciation has ceased on these properties.
INTEREST INCOME AND EXPENSE
Our interest income net of interest expense for the year ended December
31, 1999 was $0.9 million compared to interest expense net of interest income of
$2.1 million for the year ended December
35
<PAGE>
31, 1998, primarily as a result of higher interest income. The increase in
interest income is attributable to cash arising from Magna's equity
investment during the year.
INCOME TAX PROVISION
We recorded an income tax provision of $2.8 million on income before
income taxes of $2.8 million for the year ended December 31, 1999 compared to
an income tax benefit of $0.2 million on a loss before income taxes of $10.6
million for the year ended December 31, 1998. Our income tax provision
relates primarily to the income of our racetrack operations which was
calculated based on a consolidated tax sharing arrangement. The benefit of
our losses from other operations have not been recognized for accounting
purposes.
FIVE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
RACETRACK OPERATIONS
Revenues from our racetrack operations were $4.0 million for the five
month period ended December 31, 1998, all of which related to the operations of
Santa Anita Park. There were only five racing days during the five month period
ended December 31, 1998 as The Santa Anita Meet did not commence until December
26, 1998. We earned no revenues from our racetrack operations in the comparable
1997 period as Santa Anita Park was acquired in December 1998.
Our share of pari-mutuel wagering was $2.5 million and non-wagering
revenues were $1.4 million. The distribution of pari-mutuel wagering for the
last five racing days of 1998 is summarized below (in millions except number of
live race days):
<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, before depreciation and interest, were
$3.6 million, all of which related to our operation of Santa Anita Park. The
major components of the Santa Anita Park's costs and expenses were payroll costs
($1.8 million) and marketing and advertising costs ($0.3 million) representing
approximately 58% of our total costs.
36
<PAGE>
REAL ESTATE OPERATIONS
Revenues from our real estate operations were $6.6 million for the five
month period ended December 31, 1998 compared to $5.8 million for the five month
period ended December 31, 1997. The increase in revenues is primarily
attributable to rental revenues earned on recently acquired properties. Revenues
from the Fontana residential development, Fontana Sports and other real estate
operations were substantially unchanged between the periods.
Real estate costs and expenses, before depreciation and interest, were
$8.5 million for the five month period ended December 31, 1998 compared to $7.0
million for the five-month period ended December 31, 1997. The increase in costs
and expenses is attributable to increased activity and a change in the mix
between apartment and housing sales at the Fontana residential development. The
costs and expenses of our remaining real estate operations were substantially
unchanged between the periods.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $0.9 million to $1.6 million
for the five month period ended December 31, 1998, primarily as a result of
depreciation related to our acquisition of Santa Anita Park on December 10, 1998
and a full five months of depreciation on properties acquired in calendar 1998.
INTEREST INCOME AND EXPENSE
Our interest expense, net of interest income increased by $0.7 million
to $1.2 million for the five month period ended December 31, 1998 compared to
the five month period ended December 31, 1997. The increase in interest expense
is primarily attributable to an increase in interest bearing borrowings from
Magna to finance the acquisition of Santa Anita Park. These borrowings were
converted to equity in 1999.
INCOME TAX BENEFIT
We recorded an income tax benefit of $0.2 million on a loss before
income taxes of $4.4 million for the five month period ended December 31, 1998
compared to nil on a loss before income taxes of $2.4 million for the five month
period ended December 31, 1997. Our income tax benefit relates solely to the
losses of Santa Anita Park from the date of acquisition to December 31, 1998.
The benefit of our losses from other operations have not been recognized for
accounting purposes. The tax benefits of some of these losses have been utilized
by Magna and are not available to us and valuation allowances have been recorded
against the remaining tax loss carryforward benefits.
YEARS ENDED JULY 31, 1998 AND 1997
REAL ESTATE OPERATIONS
37
<PAGE>
Revenues from our real estate operations were $20.5 million for the
year ended July 31, 1998 compared to $15.3 million for the year ended July 31,
1997. Substantially all of the increase is attributable to an increase in
housing activity at Fontana and increased membership and usage at Fontana
Sports. Revenues from our remaining real estate operations were substantially
unchanged.
Real estate costs and expenses, before depreciation and interest, were
$25.9 million for the year ended July 31, 1998 compared to $13.9 million for the
year ended July 31, 1997. The increase relates to costs and expenses at the
Fontana 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 INCOME AND EXPENSE
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 BENEFIT
The benefit of our losses of $8.6 million and $1.4 million for the
years ended July 31, 1998 and 1997, respectively, has not been recognized for
accounting purposes. The tax benefits of some of these losses have been utilized
by Magna and are not available to us and valuation allowances have been recorded
against the remaining tax loss carryforward benefits.
LIQUIDITY AND CAPITAL RESOURCES
With the exception of the year ended December 31, 1999, we have
generated negative cash flow from operations since inception. We have
financed our operations primarily through contributions by our majority
shareholder, Magna. Magna has made a commitment to its shareholders that for
a period of approximately 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:
38
<PAGE>
(i) make additional debt or equity investments in, or otherwise give
financial assistance to, us or any of our subsidiaries; or
(ii) invest in any non-automotive related businesses or assets other than
through its investment in us.
Given the above-described commitment by Magna to its shareholders, we
will be required to fund our own operations.
At December 31, 1999, we had cash and cash equivalents of $50.7 million
and total shareholder's equity of $547.1 million.
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. The two 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 bear interest at rates ranging between the U.S.
Prime Rate and LIBOR plus 2.2% per annum. The 63.0 million term loan facility is
available for corporate purposes. At December 31, 1999, $6.3 million of the
revolving operating line was drawn, leaving $66.7 million available between the
two facilities.
As of December 31, 1999, our real estate portfolio totals $544.9
million. Included in this amount are properties available for sale with carrying
values totaling $79.7 million and properties under or held for development with
carrying values totaling $179.2 million, components of which could be made
available for sale. In addition, we had revenue producing properties with
carrying values totaling $286.1 million, including the Fontana Sports facilities
and horse racing facilities at Santa Anita Park, Gulfstream Park, Thistledown,
Remington Park, Golden Gate Fields and San Luis Rey Downs.
For the year ended December 31, 1999 we incurred capital expenditures
of approximately $56.5 million. We currently anticipate capital expenditures of
approximately $40.0 million during the year ending December 31, 2000. These
capital expenditures relate to normal ongoing capital improvements to the
racetracks of approximately $10.0 million and extraordinary capital improvements
of approximately $11.0 million required to Santa Anita Park and Golden Gate
Fields related to commitments made on acquisition. In addition, approximately
$15.0 million is anticipated for the completion of the Aurora golf course and
servicing of adjacent lands, and approximately $4.0 million for servicing of
other properties.
We believe that our current cash resources, together with cash flow
from operations from our racetrack activities and real estate operations, 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.
39
<PAGE>
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) operating activities was $15.2 million,
$(6.3) million, $(7.9) million and $(3.9) million for the year ended December
31, 1999, the five month period ended December 31, 1998, and the years ended
July 31, 1998 and 1997, respectively. Cash provided by operating activities in
the year ended December 31, 1999 is primarily a result of cash generated by our
Santa Anita Park operations of $13.3 million and some of our other racetracks
offset by cash usages at some of our racetracks and 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 $215.4 million, $136.7 million,
$72.6 million and $43.6 million for the year ended December 31, 1999, the five
month period ended December 31, 1998, and the years ended July 31, 1998 and
1997, respectively.
During the year ended December 31, 1999, $160.8 million was used for
business acquisitions consisting of $81.2 million to acquire Gulfstream Park,
$18.7 million to acquire Thistledown and Remington Park, $83.4 million to
acquire Golden Gate Fields and $6.4 million to acquire the real estate assets of
San Luis Rey Downs. During such year, $47.5 was spent on real estate property
additions which included spending on the capital renovation program at Santa
Anita Park and the development of the Aurora golf course project. 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 that included 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 670 acre parcel of
land in Ebreichsdorf, near Vienna, Austria and various other properties in
Canada.
FINANCING ACTIVITIES
Cash provided by financing activities was $238.5 million, $155.2
million, $80.6 million and $47.6 million for the year ended December 31,
1999, the five month period ended December 31, 1998, and the years ended July
31, 1998 and 1997, 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 us. Other sources of cash include a bank term line of credit for 240
million Austrian Schillings ($17.6 million), short term debt of $6.8 million
assumed on the acquisition of
40
<PAGE>
Gulfstream Park, and mortgages with various Austrian banks and local
governments totaling $5.5 million at December 31, 1999. The bank term line of
credit was used to finance the Fontana residential and Fontana Sports
developments, and is repayable in six annual installments of 40 million
Austrian Schillings, which began July 31, 1997. The short-term debt assumed
on the acquisition of Gulfstream Park is repayable on June 30, 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. In connection with this component
of our strategy, we recently acquired certain management, marketing and
merchandising rights to an Austrian soccer club. These rights are expected to
assist us in developing media sports operations in Europe. 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 that 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.
ACCOUNTING DEVELOPMENTS
41
<PAGE>
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 shareholders' equity
and comprehensive income. We do not enter into derivative financial
instruments for hedging or trading purposes.
Additionally, we are exposed to interest rate risk, which is sensitive
to many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors that are
beyond our control.
Our future earnings, cash flows and fair values relating to
financial instruments are primarily dependent upon prevalent market rates of
interest, such as LIBOR and VIBOR. Based on interest rates at December 31,
1999 and 1998, a 1% increase or decrease in interest rates on our line of
credit and variable rate borrowings, except for debt repaid subsequent to
December 31, 1999, would not materially effect annual future earnings and
cash flows. Based on borrowing rates currently available to us, the carrying
amount of debt approximates fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of MAGNA ENTERTAINMENT CORP.
We have audited the accompanying consolidated balance sheets of MAGNA
ENTERTAINMENT CORP. as of December 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive income (loss),
changes in shareholders' equity and cash flows for the year ended December
31, 1999, the five-month period ended December 31, 1998 and for the years
ended July 31, 1998 and 1997. Our audits also included the financial
statement schedule listed on page 80. 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 MAGNA
ENTERTAINMENT CORP. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1999, the five-month period ended December 31, 1998 and for the years ended
July 31, 1998 and 1997 in conformity with accounting principles generally
accepted in the United States, also in our opinion, the related statement
schedule, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Los Angeles, California Ernst & Young LLP
March 3, 2000.
43
<PAGE>
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
[U.S. DOLLARS IN THOUSANDS]
- - ------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
- - ------------------------------------------------------------------------------------------------------------------
Note 1999 1998
- - ------------------------------------------------------------------------------------------------------------------
ASSETS
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 50,660 12,442
Restricted cash 7,752 5,061
Accounts receivable 25,887 8,979
Prepaid expenses and other 3,931 2,572
- - -------------------------------------------------------------------------------------------------------------------
88,230 29,054
- - -------------------------------------------------------------------------------------------------------------------
Real estate properties, net 3 544,899 326,690
- - -------------------------------------------------------------------------------------------------------------------
Fixed assets, net 4 19,890 8,221
- - -------------------------------------------------------------------------------------------------------------------
Other assets 5 100,967 --
- - ------------------------------------------------------------------------------------------------------------------
Deferred income taxes 6 6,367 177
- - -------------------------------------------------------------------------------------------------------------------
760,353 364,142
- - -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Bank indebtedness 7,259 11,889
Accounts payable 34,479 15,409
Accrued salaries and wages 4,442 518
Refundable deposits 1,968 2,008
Other accrued liabilities 20,980 6,955
Income taxes payable 6 7,554 --
Long-term debt due within one year 7 19,119 3,655
Deferred revenue 4,282 3,098
- - -------------------------------------------------------------------------------------------------------------------
100,083 43,532
- - -------------------------------------------------------------------------------------------------------------------
Long-term debt 7 19,506 16,791
- - -------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 14 494 1,317
- - -------------------------------------------------------------------------------------------------------------------
Deferred income taxes 6 93,183 --
- - -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies 12, 13
SHAREHOLDERS' EQUITY:
Magna's net investment -- 302,502
Class A Subordinate Voting Stock 8 11,500 --
Exchangeable Shares 8 110,000 --
Class B Stock 8 429,455 --
Deficit (2,431) --
Accumulated other comprehensive loss 9 (1,437) --
- - -------------------------------------------------------------------------------------------------------------------
547,087 302,502
- - -------------------------------------------------------------------------------------------------------------------
760,353 364,142
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
44
<PAGE>
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
[U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES]
- - -------------------------------------------------------------------------------------------------------------------
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, YEAR ENDED JULY 31,
Note 1999 1998 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE 11, 12, 15
Racetrack
Wagering 48,404 2,513 -- --
Non-wagering 31,022 1,439 -- --
Real estate 19,370 6,597 20,486 15,276
- - -------------------------------------------------------------------------------------------------------------------
98,796 10,549 20,486 15,276
- - -------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Racetrack
Operating costs 63,302 3,461 -- --
General and administrative 5,987 164 -- --
Real estate
Operating costs 18,071 7,293 24,778 13,232
General and administrative 1,833 1,169 1,086 647
Depreciation and amortization 7,924 1,649 1,852 1,824
Interest expense 7 1,666 1,236 1,399 955
Interest income 7 (2,586) (15) (19) --
Other expenses 454 -- -- --
Gain on disposal of real
estate property (628) -- -- --
- - -------------------------------------------------------------------------------------------------------------------
96,023 14,957 29,096 16,658
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 11 2,773 (4,408) (8,610) (1,382)
Income tax provision (benefit) 6 2,835 (177) -- --
- - -------------------------------------------------------------------------------------------------------------------
Net loss (62) (4,231) (8,610) (1,382)
Other comprehensive income (loss)
Foreign currency translation
adjustment (7,493) 4,824 (1,951) (7,184)
- - -------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) (7,555) 593 (10,561) (8,566)
- - -------------------------------------------------------------------------------------------------------------------
Loss per share for Class A
Subordinate Voting Stock,
Class B Stock or
Exchangeable Share:
Basic and diluted 8 $0.00 $(0.05) $(0.11) $(0.02)
- - -------------------------------------------------------------------------------------------------------------------
Average number of shares of Class A
Subordinate Voting Stock, Class B
Stock and Exchangeable Shares
outstanding during the period
[thousands]:
Basic and diluted 8 78,686 78,535 78,535 78,535
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
45
<PAGE>
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
[U.S. DOLLARS IN THOUSANDS]
- - -------------------------------------------------------------------------------------------------------------------
Class A Other
Subordinate Exchange- Accumulated
Magna's net Voting able Class B comprehen-
investment Stock Shares Stock Deficit sive loss
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Magna's net investment at July 31, 1996 49,985
Net loss for the year (1,382)
Net contribution by Magna 46,498
Other comprehensive loss (7,184)
- - ------------------------------------------------------------------------------------------------------------------------------
Magna's net investment at July 31, 1997 87,917
Net loss for the year (8,610)
Net contribution by Magna 80,919
Other comprehensive loss (1,951)
- - ------------------------------------------------------------------------------------------------------------------------------
Magna's net investment at July 31, 1998 158,275
Net loss for the period (4,231)
Net contribution by Magna 143,634
Other comprehensive gain 4,824
- - ------------------------------------------------------------------------------------------------------------------------------
Magna's net investment at December 31, 1998 302,502
ACTIVITY FOR THE THREE-MONTHS ENDED
MARCH 31, 1999:
Net income 9,325
Net distribution to Magna (5,542)
Other comprehensive loss (5,045)
- - ------------------------------------------------------------------------------------------------------------------------------
Magna's net investment at March 31, 1999,
the date at which the net investment
was fixed 301,240
ACTIVITY FOR THE SEVEN-MONTH PERIOD ENDED
ON THE DATE OF THE REORGANIZATION,
NOVEMBER 5, 1999:
Net loss (6,956)
Cash contribution by Magna 250,000
Other comprehensive loss (1,011)
- - -----------------------------------------------------------------------------------------------------------------------------
Magna's net investment at November 5, 1999
prior to the Reorganization 543,273
Completion of the Reorganization
as described in the principles
of consolidation and resulting
allocation to capital stock and
net deferred income tax
liabilities of $3,818 (543,273) 539,455
- - -----------------------------------------------------------------------------------------------------------------------------
Magna's net investment at November 5, 1999
after completion of the Reorganization -- 539,455
ACTIVITY FOR THE TWO-MONTHS ENDED
DECEMBER 31, 1999:
Net loss (2,431)
Other comprehensive loss (1,437)
Conversion of Class B Stock to
Exchangeable Shares 110,000 (110,000)
Issue of shares of Class A Subordinate
Voting Stock on acquisitions 11,500
- - -----------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 -- 11,500 110,000 429,455 (2,431) (1,437)
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
46
<PAGE>
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
[U.S. DOLLARS IN THOUSANDS]
- - -------------------------------------------------------------------------------------------------------------------
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, YEAR ENDED JULY 31,
Note 1999 1998 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED FROM (USED FOR)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (62) (4,231) (8,610) (1,382)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Depreciation and amortization 7,924 1,649 1,852 1,824
- - -------------------------------------------------------------------------------------------------------------------
Deferred taxes 6 (1,295) (177) -- --
Gain on disposal of real estate property (628) -- -- --
5,939 (2,759) (6,758) 442
Changes in assets and liabilities
Residential development inventory (3,403) (1,797) (1,256) (7,620)
Restricted cash (2,691) (5,061) -- --
Accounts receivable (8,607) (7,285) (262) (297)
Prepaid expenses and other 451 (326) (5) (364)
Accounts payable 4,438 8,526 786 693
Accrued salaries and wages 1,653 84 61 195
Refundable deposits 250 207 654 1,140
Other accrued liabilities 11,931 681 266 758
Income taxes payable 6,042 -- -- --
Deferred revenue (777) 1,381 (1,354) 1,159
- - -------------------------------------------------------------------------------------------------------------------
15,226 (6,349) (7,868) (3,894)
- - -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses 2 (160,812) (118,617) -- --
Real estate property additions, exclusive of
change in residential development inventory (47,522) (17,944) (72,460) (41,470)
Fixed asset additions (9,017) (124) (183) (2,109)
Increase in other assets (683) -- -- --
Proceeds on disposal of real estate property 2,636 -- -- --
- - -------------------------------------------------------------------------------------------------------------------
(215,398) (136,685) (72,643) (43,579)
- - -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank indebtedness (2,722) 11,602 (4,280) 3,716
Issuance of long-term debt -- 48 6,553 --
Repayment of long-term debt (3,278) (114) (2,608) (2,638)
Net contribution by Magna 244,458 143,634 80,919 46,498
- - -------------------------------------------------------------------------------------------------------------------
238,458 155,170 80,584 47,576
- - -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (68) 11 2 (16)
- - -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash
equivalents during the period 38,218 12,147 75 87
Cash and cash equivalents, beginning of period 12,442 295 220 133
- - -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 50,660 12,442 295 220
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
47
<PAGE>
MAGNA 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)
1. 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 16
to the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
Magna 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 8), over the period from March 31, 1999,
Magna's announcement date of the planned formation of the Company, to November
5, 1999 the completion date of the reorganization (the "Reorganization").
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") from the date of acquisition, September 1, 1999.
Gulfstream, which operates the Gulfstream Park racetrack, is located on
approximately 255 acres of land in the cities of Hallandale and Aventura,
Florida.
48
<PAGE>
MAGNA 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 the outstanding capital stock of the Pacific Racing Association and
Ladbroke Landholdings, Inc. ("Golden Gate") from the date of acquisition,
December 10, 1999. Golden Gate Fields, which operates the Golden Gate
Fields racetrack, is located on approximately 181 acres of land in the
cities of Albany and Berkeley, California.
* All the outstanding capital stock of Thistledown, Inc. ("Thistledown") and
Remington Park, Inc. ("Remington") from the date of acquisition, November
12, 1999. These companies, which operate the Thistledown and Remington Park
racetracks, are located on approximately 120 acres of land in the city
North Randall, Ohio and 370 acres of land in the city of Oklahoma City,
Oklahoma, respectively. The property on which Remington Park is located is
leased under a lease that extends through 2013, with options to renew for
five 10-year periods.
* 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 200 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.
* 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.
49
<PAGE>
MAGNA 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)
* Rights to acquire, from an affiliated company (see Note 12[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 operations and comprehensive income (loss)
include the following: (a) the historic revenues and expenses of SAC and LATC
from December 10, 1998, Gulfstream from September 1, 1999, Thistledown and
Remington from November 12, 1999 and Golden Gate from December 10, 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 operations 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,
Golden Gate, Thistledown, Remington, 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, Golden Gate, Thistledown, Remington and
50
<PAGE>
MAGNA 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)
certain other U.S. legal entities at December 31, 1999 have been recorded based
on a consolidated tax sharing agreement using the liability method of tax
allocation. Income taxes with respect to the other components of the
consolidated statements of operations and comprehensive income (loss) have been
recorded at statutory rates based on income before taxes as included in the
consolidated statements of operations 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 operations
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, prior to November 5,
1999.
Over the period to the completion of the Reorganization, November 5, 1999,
Magna's net investment also included 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 operations 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.
As of December 31, 1999, the Company and its subsidiaries are comprised of the
following entities:
<TABLE>
<CAPTION>
% Included
----------
<S> <C>
UNITED STATES
Magna 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
MEC Land Holdings (California) Inc. [formerly "Ladbroke Landholdings, 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
</TABLE>
51
<PAGE>
MAGNA 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)
<TABLE>
<CAPTION>
% Included
----------
<S> <C>
MEC Holdings (Canada) Inc. 100
1207302 Ontario Inc. 100
1180482 Ontario Inc. 100
EUROPE
MI 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 restricted cash which represents cash accounts held by the Company
on behalf of the horsemen.
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 available for sale, the Company assesses annually
whether there are indicators of impairment. If such indicators are present, the
Company assess the recoverability by determining whether the carrying value of
such assets can be recovered through projected undiscounted cash flows. If the
sum of expected future cash flows, undiscounted and without interest charges, is
less than net book value, the excess
52
<PAGE>
MAGNA 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)
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 available 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. The
Company evaluates the lower of cost and fair value less costs of disposal
whenever events or changes in circumstance indicate possible impairment.
FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation.
53
<PAGE>
MAGNA 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)
Depreciation is provided on a straight-line basis over the estimated useful
lives of fixed assets over 5 to 15 years for machinery and equipment and over 5
to 7 years 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
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.
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.
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 SAC's racetrack for a portion of the year. Prepaid rent is
recognized over the remaining term of the lease.
SEASONALITY OF REVENUES
54
<PAGE>
MAGNA 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)
The racetrack industry is seasonal in nature. Generally, the Company's
horseracing revenues are greater in the first and second quarters of the
calendar year than in the third and fourth 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 advertising associated with horse racing are
generally expensed when the advertising program commences. Advertising costs for
the year ended December 31, 1999 and the five-month period ended December 31,
1998 were $3.1 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 prior to November 5, 1999.
The accumulated exchange gain or loss resulting from translating each foreign
subsidiary's financial statements from its functional currency to U.S.
dollars is included in other comprehensive income (loss) in equity starting
November 6, 1999. The appropriate amounts of exchange gains or losses
included in accumulated other comprehensive income (loss) 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 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.
55
<PAGE>
MAGNA 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)
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.
2. BUSINESS ACQUISITIONS
The following acquisitions were accounted for using the purchase method:
[a] ACQUISITIONS IN THE YEAR ENDED DECEMBER 31, 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.
GOLDEN GATE FIELDS
On December 10, 1999, the Company completed the acquisition of Golden Gate
for a total purchase price, including estimated transaction costs, of $83.4
million (net of cash acquired of $1.2 million). Of the total purchase price,
$59.1 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 the balance of
$17.3 million, representing the discounted value of a promissory note
payable, was satisfied 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 on each of the second and third anniversaries.
Golden Gate, which operates the Golden Gate Fields racetrack, is located on
approximately 181 acres in the cities of Albany and Berkeley, California.
THISTLEDOWN AND REMINGTON PARK
56
<PAGE>
MAGNA 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)
On November 12, 1999, the Company completed the acquisition of the
Thistledown and Remington for a total purchase price, including estimated
transaction costs, of $18.7 million (net of cash acquired of $5.8 million).
Of the total purchase price, $14.2 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. These companies, which operate the Thistledown and
Remington Park racetracks, are located on approximately 120 acres of land in
the city North Randall, Ohio and 370 acres of land in the city of Oklahoma
City, Oklahoma, respectively. The property on which Remington Park is
located is leased under a lease that extends through 2013, with options to
renew for five 10-year periods.
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>
THISTLEDOWN
GULFSTREAM GOLDEN REMINGTON
PARK GATE PARK SLRD TOTAL
---------- ------ ----------- ---- -------
<S> <C> <C> <C> <C> <C>
Non-cash working capital deficit (3,978) (4,372) (3,739) -- (12,089)
Real estate properties 81,700 81,971 17,683 6,375 187,729
Fixed assets 1,643 2,046 432 -- 4,121
Other assets 62,543 31,614 7,243 -- 101,400
Debt due within one year (6,800) -- -- -- (6,800)
Deferred income tax liabilities (53,904) (27,888) (2,927) -- (84,719)
- - ---------------------------------------------------------------------------------------------------
Net assets acquired and total
purchase price, net of cash
acquired 81,204 83,371 18,692 6,375 189,642
THE PURCHASE CONSIDERATION FOR THESE ACQUISITIONS IS AS FOLLOWS:
Cash 160,812
Long-term debt (including portion due within one year) 17,330
Issuance of shares of Class A Subordinate Voting Stock 11,500
- - --------------------------------------------------------------------------------------------------
Net assets acquired and total purchase 189,642
- - --------------------------------------------------------------------------------------------------
</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
57
<PAGE>
MAGNA 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)
million and $101.0 million, respectively, for total consideration of
$118.6 million.
THE PURCHASE PRICE HAS BEEN ALLOCATED TO THE ASSETS AND LIABILITIES
ACQUIRED AS FOLLOWS:
<TABLE>
- - ------------------------------------------------------------------------------------------------
<S> <C>
Net working capital deficit (7,428)
Building improvements 19,804
Fixed assets 6,513
Other long term liabilities (1,317)
- - ------------------------------------------------------------------------------------------------
17,572
Land and buildings 101,045
- - ------------------------------------------------------------------------------------------------
118,617
- - ------------------------------------------------------------------------------------------------
</TABLE>
[c] PRO-FORMA IMPACT
If the acquisitions completed during the year ended December 31, 1999 and
the five-month period ended December 31, 1998 had occurred on August 1,
1998, the Company's unaudited pro forma revenue would have been $189.3
million for the year ended December 31, 1999 (for the five-month period
ended December 31, 1998 - $44.4 million) and pro forma net income would have
been $5.9 million for the year ended December 31, 1999 (for the five-month
period ended December 31, 1998 - $13.4 million net loss).
3. REAL ESTATE PROPERTIES
Real estate properties consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential development inventory 17,460 16,573
- - -------------------------------------------------------------------------------------------------
Revenue producing properties
Cost
Land and improvements 147,620 36,850
Buildings 135,373 56,840
Construction in progress 9,420 2,814
- - ------------------------------------------------------------------------------------------------
292,413 96,504
Accumulated depreciation
Buildings (6,878) (2,317)
- - ------------------------------------------------------------------------------------------------
Revenue producing properties, net 285,535 94,187
- - ------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
MAGNA 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)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
Properties under and held for development
Cost
Land and improvements 154,402 126,652
Buildings 141 517
Construction in progress 7,168 4,389
- - -------------------------------------------------------------------------------------------------
Properties under and held for development 161,711 131,558
- - -------------------------------------------------------------------------------------------------
Properties available for sale
Cost
Land and improvements 53,271 53,935
Buildings 27,847 30,256
Furniture and fixtures 1,362 1,725
- - -------------------------------------------------------------------------------------------------
82,480 85,916
Accumulated depreciation
Buildings (1,570) (871)
Furniture and fixtures (717) (673)
- - -------------------------------------------------------------------------------------------------
Properties available for sale, net 80,193 84,372
- - -------------------------------------------------------------------------------------------------
544,899 326,690
- - -------------------------------------------------------------------------------------------------
</TABLE>
The classifications of properties above represent the Company's current
intentions with respect to future use (e.g. development or sale).
Properties available for sale consist of properties held in the United States,
Canada and Europe. Included in the results of operations for the year ended
December 31, 1999 were operating income of $0.8 million pertaining to properties
available for sale (for the five-month period ended December 31, 1998 $0.1
million; for the years ended July 31, 1998 - $0.1 million; 1997 - $nil).
4. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost
Machinery and equipment 19,100 7,632
Furniture and fixtures 3,489 2,225
- - ------------------------------------------------------------------------------------------------
22,589 9,857
Accumulated depreciation
Machinery and equipment (2,289) (1,610)
Furniture and fixtures (410) (26)
</TABLE>
59
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C>
- - ------------------------------------------------------------------------------------------------
19,890 8,221
- - ------------------------------------------------------------------------------------------------
</TABLE>
5. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
- - -------------------------------------------------------------------------------
<S> <C> <C>
Racing licenses
Cost 100,077 --
Accumulated amortization (1,108) --
- - -------------------------------------------------------------------------------
98,969 --
Prepaid lease 1,298 --
Other 700 --
- - -------------------------------------------------------------------------------
100,967 --
- - -------------------------------------------------------------------------------
</TABLE>
6. INCOME TAXES
[a] Income taxes for SAC, LATC, Gulfstream, Golden Gate, Thistledown, Remington,
MVB (from January 1, 1999), MGE and other separate tax paying legal entities
prior to November 5, 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 operations
and comprehensive income (loss) have been recorded at statutory rates based
on income before taxes as included in the consolidated statements of
operations 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 operations 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, prior to November
5, 1999.
[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>
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, Year ended July 31,
-------------------
1999 1998 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
60
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C> <C> <C>
Expected provision (benefit):
Federal statutory income
tax rate (35%) 971 (1,543) (3,014) (484)
State income tax, net of federal benefit 234 -- -- --
Losses not benefited 1,512 1,366 3,014 484
Foreign rate differentials 96 -- -- --
Other 22 -- -- --
- - -----------------------------------------------------------------------------------------------
Income tax provision (benefit) 2,835 (177) -- --
- - -----------------------------------------------------------------------------------------------
</TABLE>
The income tax provision relates entirely to the incomes of SAC, LATC,
Golden Gate less losses generated by Gulfstream, Remington, Thistledown and
certain other U.S. legal entities and the income from one European
operation. 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. At December 31, 1999, the Company has U.S. and
European income tax loss carry-forwards of approximately $13.4 million that
have not been recognized for accounting purposes. Of this amount, $7.0
million will have no expiry date and the remainder will expire in the
following years:
<TABLE>
<CAPTION>
Year:
<S> <C>
2011 3,900
2019 2,500
- - -----------------------------------------------------------------------------------------------
6,400
- - -----------------------------------------------------------------------------------------------
</TABLE>
There are annual limitations on the utilization of $3.9 million of the
losses carried forward.
[c] The details of income (loss) before income taxes by jurisdiction are as
follows:
<TABLE>
<CAPTION>
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, Year ended July 31,
--------------------
1999 1998 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States 4,506 (540) (243) (92)
Foreign (1,733) (3,868) (8,367) (1,290)
- - -----------------------------------------------------------------------------------------------
2,773 (4,408) (8,610) (1,382)
- - -----------------------------------------------------------------------------------------------
</TABLE>
[d] The details of the income tax provision (benefit) are as follows:
61
<PAGE>
MAGNA 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)
<TABLE>
<CAPTION>
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, Year ended July 31,
-------------------
1999 1998 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current provision
United States 2,178 -- -- --
Foreign 1,952 -- -- --
- - -----------------------------------------------------------------------------------------------
4,130 -- -- --
- - -----------------------------------------------------------------------------------------------
Deferred provision
United States (345) (177) -- --
Foreign (950) -- -- --
- - -----------------------------------------------------------------------------------------------
(1,295) (177) -- --
- - -----------------------------------------------------------------------------------------------
2,835 (177) -- --
- - -----------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
MAGNA 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)
[e] Deferred income taxes have been provided on temporary differences, which
consist of the following:
<TABLE>
<CAPTION>
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, Year ended July 31,
-------------------
1999 1998 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amortization of purchase accounting
fair value increments, not allowed
for tax purposes (522) -- -- --
Tax gain in excess of book gain
on disposal of real estate property (640) -- -- --
Tax gain on revaluation of foreign
real estate (310) -- -- --
Tax benefit of loss carryforwards (1,512) (451) (689) (45)
Utilization of loss carryforwards 177 -- -- --
Increase in valuation allowance 1,512 274 689 45
- - -----------------------------------------------------------------------------------------------
(1,295) (177) -- --
- - -----------------------------------------------------------------------------------------------
</TABLE>
[f] Deferred tax assets and liabilities for SAC, LATC, Gulfstream, Golden Gate,
Thistledown, Remington, MVB (from January 1, 1999), MGE and other separate
tax paying entities at December 31, 1999 consist of the following temporary
differences:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Real estate properties tax value in excess of book value 18,178 --
Tax benefit of loss carryforwards
Pre-acquisition 1,445 --
Post-acquisition 2,379 1,288
- - -----------------------------------------------------------------------------------------------
22,002 1,288
Valuation allowance
Valuation allowance against tax benefit of loss carryforwards
Pre-acquisition (1,445) --
Post-acquisition (2,379) (1,111)
Valuation allowance against tax benefit of real estate
properties in excess of book value (11,811) --
- - -----------------------------------------------------------------------------------------------
6,367 177
- - -----------------------------------------------------------------------------------------------
Liabilities
Real estate properties book basis in excess of tax basis 51,429 --
Other assets book basis in excess of tax basis 41,321 --
Other 433 --
- - -----------------------------------------------------------------------------------------------
93,183 --
- - -----------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
MAGNA 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)
7. DEBT
[a] The Company's long-term debt, consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing promissory note (imputed interest of 8.675%), payable
in three installments, $10.0 million of which matures in 2000, and $5.0
million in each of 2001 and 2002. 17,330 --
Bank term line of credit with permitted borrowings of $17.6 million
(Austrian Schillings 240 million), bearing interest at EURIBOR
[European Interbank Overnight Rate] plus 0.625% per annum (4.6% at
December 31, 1999), payable quarterly. The advance is repayable in six
annual installments of principal of $2.9 million (Austrian Schillings 40
million) beginning on July 31, 1997. The Company has provided two first
mortgages on real estate properties, with carrying value of $8.8 million
at December 31, 1999, as security for this facility. 8,776 13,567
Bank term line of credit, bearing interest at LIBOR [London Interbank
Overnight Rate] plus 1.25% per annum (7.73% at December 31, 1999),
payable in annual installments with a final balloon payment in June 2000.
The Company has pledged the assets of one of its subsidiaries, with
carrying value of $46.6 million at December 31, 1999, as security for
this facility. 6,800 --
Mortgages outstanding with various Austrian banks and local governments
(Austrian Schillings 75 million), bearing interest at rates ranging from
0.5% to 6.75% per annum, payable in semi-annual installments. The
mortgages are repayable over various periods to 2037 and are secured by
properties with carrying values of $34.6 million at December 31,
1999. 5,491 6,578
Term loan, bearing interest at a fixed rate of 4% per annum payable
annually. The advance is repayable in 10 annual installments of principal
of $32 thousand (Austrian Schillings 0.4 million) commencing
December 31, 1997. 228 301
- - -------------------------------------------------------------------------------------------------------
38,625 20,446
</TABLE>
64
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C>
Less due within one year 19,119 3,655
- - -------------------------------------------------------------------------------------------------------
19,506 16,791
- - -------------------------------------------------------------------------------------------------------
</TABLE>
[b] Future principal repayments on long-term debt at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 19,119
2001 7,346
2002 7,008
2003 185
2004 176
Thereafter 4,791
- - -----------------------------------------------------------------------------------------------
38,625
- - -----------------------------------------------------------------------------------------------
</TABLE>
[c] 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 Prime and LIBOR plus 2.2% per annum. At December 31, 1999,
the Company had borrowings of $6.3 million against the $10 million
revolving line of credit. The credit facilities contain certain covenants
that require maintenance of certain financial ratios.
[d] Interest expense and interest income include:
<TABLE>
<CAPTION>
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, Year ended July 31,
-------------------
1999 1998 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest cost, gross
External debt 1,308 371 1,021 829
Magna debt 701 1,055 986 520
- - -----------------------------------------------------------------------------------------------
2,009 1,426 2,007 1,349
Less: Interest capitalized 343 190 608 394
- - -----------------------------------------------------------------------------------------------
Interest expense 1,666 1,236 1,399 955
- - -----------------------------------------------------------------------------------------------
Interest income
External (271) (15) (19) --
Magna (2,315) -- -- --
- - -----------------------------------------------------------------------------------------------
(2,586) (15) (19) --
- - -----------------------------------------------------------------------------------------------
</TABLE>
Interest capitalized relates to real estate properties under or held for
development.
65
<PAGE>
MAGNA 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)
Interest paid in cash for the year ended December 31, 1999 was $2.5 million
(for the five-month period ended December 31, 1998 $1.2 million; for the
years ended July 31, 1998 - $1.9 million; 1997 - $1.4 million).
8. CAPITAL STOCK
[a] The Company's authorized, issued and outstanding capital stock is as
follows:
Class A Subordinate Voting Stock with a par value of $0.01 per share
[authorized - 310,000,000] have the following attributes:
[i] Each share is entitled to one vote per share at all meetings of
stockholders.
[ii] Each share shall participate equally as to dividends with each
share of Class B Stock and Exchangeable Share.
Class B Stock with a par value of $0.01 per share [authorized - 90,000,000]
have the following attributes:
[i] Each share is entitled to 20 votes per share at all meetings of
stockholders.
[ii] Each share shall participate equally as to dividends with each
share of Class A Subordinate Voting Stock and Exchangeable Share.
[iii] Each share may be converted at any time into a fully-paid share of
Class A Subordinate Voting Stock.
In the event that the Class A Subordinate Voting Stock, Class B Stock or
Exchangeable Stock are subdivided or consolidated, the other classes shall
be similarly changed to preserve the relative position of each class.
[b] On November 5, 1999, Magna completed the Reorganization described in the
Principles of Consolidation section set out under "Significant Accounting
Policies" in Note 1 to these consolidated financial statements. In
addition, the Company's capital structure was established. As of November
5, 1999, 78,535,328 shares of Class B Stock and nil shares of 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, MEC Holdings (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
66
<PAGE>
MAGNA 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)
Class A Subordinate Voting Stock and, through a Voting and Exchange
Agreement between Magna, the Company and MEC Holdings (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 MEC Holdings (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. The Exchangeable Shares have no par value
[authorized - unlimited] have the following attributes:
[i] Each share is entitled, by the holder thereof instructing Magna to
exercise one vote attached to a share of the Company's Class A
Subordinate Voting Stock or Class B Stock held by Magna, to one
vote per share at all meetings of stockholders of the Company, but
are non-voting with respect to MEC Holdings (Canada) Inc.
[ii] Each share shall participate equally as to dividends with each
share of Class A Subordinate Voting and Class B Stock.
[iii] Each share may be converted at any time into a fully-paid share of
Class A Subordinate Voting Stock.
On December 30, 1999, 14,823,187 shares of the Company's Class B Stock held
by Magna were redeemed for $110.0 million. On this same date, $110.0
million was invested by Magna in MEC Holdings (Canada) Inc. in return for
14,823,187 Exchangeable Shares. All of the common shares of MEC Holdings
(Canada) Inc. continue to be held by the Company. Given that the
Exchangeable Shares are economically equivalent to shares of Class A
Subordinate Voting Stock of the Company, the Exchangeable Shares are
included in shareholders' equity in the Company's consolidated balance
sheet.
[c] Changes in the Class A Subordinate Voting Stock, Class B Stock and
Exchangeable Shares for the year ended December 31, 1999 are shown in the
following table (number of shares in the following table are expressed in
whole numbers and have not been rounded to the nearest thousand):
<TABLE>
<CAPTION>
Class A Subordinate Exchangeable
Voting Stock Shares Class B Stock
-------------------- -------------------- ---------------------
Number of Stated Number of Stated Number of Stated
shares value shares value shares value
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issued and outstanding
At December 31, 1998 -- -- -- -- -- --
Issued on completion of
</TABLE>
67
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
the Reorganization on
November 5, 1999 -- -- -- -- 78,535,328 539,455
Conversion of Class B
Stock to Exchangeable
Shares -- -- 14,823,187 110,000 (14,823,187) (110,000)
Issued on acquisitions
of subsidiaries 1,662,890 11,500 -- -- -- --
- - ----------------------------------------------------------------------------------------------------
Issued and outstanding
at December 31,
1999 1,662,890 11,500 14,823,187 110,000 63,712,141 429,455
- - ---------------------------------------------------------------------------------------------------
</TABLE>
[d] Basic and diluted loss per share of Class A Subordinate Voting Stock,
Exchangeable Share or Class B Stock for the year ended December 31, 1999
has been calculated using 78,686,300 shares. The total amount is comprised
of 63,712,141 shares of Class B Stock and 14,823,187 Exchangeable Shares
being the number of each class outstanding after the completion of all
capital transactions under the Reorganization, plus 150,972 shares of Class
A Subordinate Voting Stock representing the weighted average number of
shares issued on acquisitions of subsidiaries during the year.
For all periods prior to the year ended December 31, 1999, basic and
diluted loss per share of Class A Subordinate Voting Stock, Exchangeable
Share or Class B Stock have been determined using only the 63,712,141
shares of Class B Stock and 14,823,187 Exchangeable Shares issued under the
Reorganization.
9. 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 year ended December 31, 1999, the Company incurred an unrealized
currency translation loss of $7.5 million, primarily from the weakening of the
Austrian Schilling partially offset by the strengthening of the Canadian dollar,
both 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).
10. 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
68
<PAGE>
MAGNA 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)
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.
11. SEGMENT INFORMATION
OPERATING SEGMENTS
The Company has two operating segments: racetrack and real estate operations.
69
<PAGE>
MAGNA 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)
The following summary presents key information by operating segment.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
- - -----------------------------------------------------------------------------------------------
RACETRACK REAL ESTATE
OPERATIONS OPERATIONS TOTAL
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 79,426 19,370 98,796
- - -----------------------------------------------------------------------------------------------
Income (loss) before income taxes 5,418 (2,645) 2,773
- - -----------------------------------------------------------------------------------------------
Real estate properties and fixed asset additions 48,199 8,340 56,539
- - -----------------------------------------------------------------------------------------------
Real estate properties, fixed and other assets, net 463,723 202,033 665,756
Current assets 88,230
Deferred income tax assets 6,367
- - -----------------------------------------------------------------------------------------------
Total assets 760,353
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<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>
<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)
- - -----------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C> <C>
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
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<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
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
GEOGRAPHIC SEGMENTS
Revenue by geographic segment of the Company is as follows:
<TABLE>
<CAPTION>
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, Years ended July, 31
--------------------
1999 1998 1998 1997
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States 81,742 4,707 1,698 1,617
Europe 17,054 5,842 18,788 13,659
- - ------------------------------------------------------------------------------------------------
98,796 10,549 20,486 15,276
- - ------------------------------------------------------------------------------------------------
</TABLE>
Real estate properties, fixed and other assets by geographic segment of the
Company are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
71
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C>
United States 483,117 146,063
Canada 75,070 64,804
Europe 107,569 124,044
- - -----------------------------------------------------------------------------------------------
665,756 334,911
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
12. 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, the Chairman of the Board and a Director of the Company
and the Chairman of the Board of Magna, and Mr A. Stronach, the
Vice-President, Corporate Development of the Company, 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 December 31, 1999, Magna had paid $9.0 million to the
vendor in connection with this transaction. The rights to acquire this land
and improvements, as well as golf course construction in progress funded by
Magna, have been transferred to the Company as part of the Reorganization.
The total amount included in properties under and held for development on
the consolidated balance sheet at December 31, 1999 for this project is
$19.8 million.
[b] Properties under and held for development includes $21.7 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 $21.7 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 $4.7 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 $4.7 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 ($3.7 million). This property is included in properties
available for sale.
[e] Effective March 1, 1999, the Company began charging Magna an access fee for
its
72
<PAGE>
MAGNA 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)
use of the golf course and related facilities in Oberwaltersdorf,
Austria. The yearly fee amounts to Cdn. $4.0 million ($2.7 million).
During the year ended December 31, 1999, $2.3 million has been
recognized in revenue related to this fee.
The Company has granted Magna a right of first refusal to purchase the
Company's two golf courses.
[f] 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 such subsidiary. Under Austrian law, such subsidiary
would be jointly and severally liable for the damages awarded in respect of
this class action claim. An Austrian subsidiary of Magna has agreed to
indemnify such subsidiary for any damages or expenses associated with this
claim.
[g] 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 Company's Austrian real estate properties.
13. COMMITMENTS AND CONTINGENCIES
[a] The Company generates a substantial amount of its revenue from wagering
activities 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
accurately 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.
[c] At December 31, 1999, the Company had commitments under operating leases
requiring annual rental payments for the fiscal periods ending December 31
as follows:
73
<PAGE>
MAGNA 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)
<TABLE>
- - -------------------------------------------------------------------------------
<S> <C>
2000 1,515
2001 1,090
2002 828
2003 448
2004 172
Thereafter 1,195
- - -------------------------------------------------------------------------------
5,248
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1999, payments under operating leases
amounted to approximately $767 thousand (for the five-month period ended
December 31, 1998 - $39 thousand; for the years ended July 31, 1998 - $44
thousand; 1997 - $49 thousand).
The Company occupies land for the Remington racing facility under an
operating lease that 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 million that 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 $111 thousand to $133 thousand and one-half of
one percent of the wagers made at the track in excess of $187 million
during the racing season.
14. 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.
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 the years
74
<PAGE>
MAGNA 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)
ended July 31, 1998 and 1997. The benefit obligation and fair value of plan
assets as of December 31, 1998 was $8.7 million and $7.4 million,
respectively.
The accrued pension cost is included in other long-term liabilities in the
consolidated balance sheets.
The net periodic pension cost of the Company for the year ended December 31,
1999 included the following components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
COMPONENTS OF NET PERIODIC PENSION COST 1999
-------------------------------------------------------------
<S> <C>
Service cost $ 392
Interest cost on projected benefit obligation 573
Actual return on plan assets (942)
Net amortization and deferral 485
-------------------------------------------------------------
Net periodic pension cost $ 508
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
The following provides a reconciliation of benefits obligations, plan assets and
funded status of the plan.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------------------------
<S> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 8,668
Service cost 392
Interest cost 573
Benefits paid (508)
Actuarial gains (456)
-------------------------------------------------------------------------------------------
Benefit obligation at end of period 8,669
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of period 7,351
Actual return on plan assets 942
Company contributions 502
Benefits paid (508)
-------------------------------------------------------------------------------------------
Fair value of plan assets at end of period 8,287
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Funded status of plan (underfunded) (382)
Unrecognized net gain (112)
-------------------------------------------------------------------------------------------
Net pension liability $ (494)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the funded status of the retirement income plan
are as follows:
75
<PAGE>
MAGNA 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)
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Weighted average discount rate 7.0%
Weighted average rate of increase in compensation levels 5.0%
Expected long-term rate of return 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 $4.8 million for the year ended December 31, 1999. 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.
With the acquisition of the Gulfstream Park in 1999 the Company assumed a 401(k)
profit sharing plan (the "Plan) to provide retirement benefits for the
Gulfstream Park's 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 $25 thousand since acquisition of the Gulfstream Park
on September 1, 1999.
15. SUPPLEMENTARY FINANCIAL INFORMATION
[a] QUARTERLY INFORMATION (UNAUDITED):
Summarized quarterly financial information of the Company for each of the
years in the three year period ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
For the year ended
December 31, 1999 March 31 June 30 September 30 December 31 Total
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 39,907 20,795 10,419 27,675 98,796
Gross profit (loss) 19,277 1,750 (3,402) (202) 17,423
Net income (loss) 9,325 (1,235) (5,090) (3,062) (62)
- - ------------------------------------------------------------------------------------------------
For the year ended
December 31, 1998 March 31 June 30 September 30 December 31 Total
- - ------------------------------------------------------------------------------------------------
Revenue 5,748 4,995 6,453 7,995 25,191
Gross profit (loss) (1,292) (1,300) (1,180) 154 (3,618)
</TABLE>
76
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C> <C> <C> <C>
Net loss (2,300) (2,464) (2,876) (2,806) (10,446)
- - ------------------------------------------------------------------------------------------------
For the year ended
December 31, 1997 March 31 June 30 September 30 December 31 Total
- - ------------------------------------------------------------------------------------------------
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>
[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 (UNAUDITED):
Racetrack wagering revenues are shown net of state and local taxes, stakes,
purses and awards as follows:
<TABLE>
<CAPTION>
Five-month
YEAR ENDED period ended
DECEMBER 31, December 31, Year ended July 31,
-------------------
1999 1998 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total live race day handle less
patrons' winning tickets 183,521 14,385 -- --
State and local taxes and other fees 96,257 9,845 -- --
Horsemen stakes, purses, and awards 44,938 2,320 -- --
- - -----------------------------------------------------------------------------------------------
42,326 2,220 -- --
- - -----------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
MAGNA 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)
<TABLE>
<S> <C> <C> <C> <C>
Company share of non-live race
day handle and other 6,078 293 -- --
- - -----------------------------------------------------------------------------------------------
48,404 2,513 -- --
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
16. 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. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the Company, including those related to customers,
suppliers, or other third parties, have been fully resolved.
[c] Under Canadian GAAP, there is no requirement to disclose comprehensive
income (loss).
17. SUBSEQUENT EVENTS
[a] On February 29, 2000 the Company acquired the assets and assumed
approximately $9.3 million of 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
267,416 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.
[b] On February 14, 2000, the Company's registration statement, previously
filed with the Securities and Exchange Commission in the United States, was
declared effective
78
<PAGE>
MAGNA 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)
and a final prospectus was filed with the securities regulators in the
Provinces of Canada in connection with Magna's planned distribution, by
way of dividend, of approximately 15.7 million shares comprising of a
combination of:
(i) Exchangeable Shares of MEC Holdings (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 Class
A Subordinate Voting Stock to effect the dividend.
79
<PAGE>
MAGNA ENTERTAINMENT CORP.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
[AMOUNTS IN THOUSANDS, U.S. DOLLARS]
<TABLE>
<CAPTION>
Initial Costs to Company
------------------------------------
Building and
Description Encumbrance Land Improvements
- - --------------------------------------------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
RACETRACK OPERATIONS
Racing Facilities
Santa Anita Park (Arcadia, California, U.S.A.) - 25,072 43,277
Gulfstream Park (Hallandale, Florida, U.S.A.) - 46,344 20,264
Golden Gate Fields (Albany, California, U.S.A.) - 56,986 11,128
Thistledown (North Randall, Ohio, U.S.A.) - 1,062 8,114
Remington Park (Oklahoma City, Oklahoma, U.S.A.) - 3,206 5,302
SLRD (San Diego, California, U.S.A.) - 3,845 2,500
Land held for development
Santa Anita Park (Arcadia, California, U.S.A.) - 52,500 -
Gulfstream Park (Hallandale, Florida, U.S.A.) - 14,201 -
Golden Gate Fields (Albany, California, U.S.A.) - 13,857 -
REAL ESTASTE OPERATIONS
Golf Course Facilities
Niederoesterreich, Austria - 3,721 -
Ontario, Canada - 11,008 -
Land
Ontario, Canada - 13,479 -
Ontario, Canada - 11,314 -
Ontario, Canada - 2,963 -
Ontario, Canada - 4,452 -
Ontario, Canada - 986 -
Ontario, Canada - 1,645 -
Ontario, Canada - 1,868 -
Ontario, Canada - 377 -
Ontario, Canada - 861 -
Ontario, Canada - 1,189 -
Ontario, Canada - 2,559 -
Ontario, Canada - 1,669 -
Ontario, Canada - 14 -
Kentucky, U.S.A. - 2,847 -
Michigan, U.S.A. - 1,161 -
Michigan, U.S.A. - 2,782 -
Maryland, U.S.A. - 997 -
Florida, U.S.A. - 1,918 -
Florida, U.S.A. - 669 1,242
New York, U.S.A. - 725 -
Niederoesterreich, Austria - 7,099 -
Niederoesterreich, Austria - 21,449 -
Austria - 5,922 -
Steiermark, Austria - 2,149 -
Commercial/Industrial properties
Colorado, U.S.A. - - 1,045
Oberoesterreich, Austria - 3,376 8,193
Oberoesterreich, Austria - 1 3,063
Wien, Austria - 4,888 2,277
Residential properies
Ontario, Canada - 70 112
Colorado, U.S.A. - - 1,557
Colorado, U.S.A. - - 3,600
Austria 5,839 7,644 7,941
Other - 45 -
----------------- ----------------- ------------------
5,839 338,920 119,615
----------------- ----------------- ------------------
</TABLE>
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent to Acquisition Foreign Exchange Impact
----------------------------------- ------------------------------------
Building and Building and
Description Land Improvements Land Improvements
- - --------------------------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
RACETRACK OPERATIONS
Racing Facilities
Santa Anita Park (Arcadia, California, U.S.A.) 426 39,765 - -
Gulfstream Park (Hallandale, Florida, U.S.A.) 230 617 - -
Golden Gate Fields (Albany, California, U.S.A.) - (60) - -
Thistledown (North Randall, Ohio, U.S.A.) - - - -
Remington Park (Oklahoma City, Oklahoma, U.S.A.) 5 145 - -
SLRD (San Diego, California, U.S.A.) 50 238 - -
Land held for development
Santa Anita Park (Arcadia, California, U.S.A.) - 281 - -
Gulfstream Park (Hallandale, Florida, U.S.A.) - - - -
Golden Gate Fields (Albany, California, U.S.A.) - - - -
REAL ESTASTE OPERATIONS
Golf Course Facilities
Niederoesterreich, Austria 7,374 19,523 (682) (6,301)
Ontario, Canada 895 6,915 701 253
Land
Ontario, Canada 9,271 - (1,036) -
Ontario, Canada 159 - (125) -
Ontario, Canada 389 619 (152) 25
Ontario, Canada 786 - (46) -
Ontario, Canada 69 - (9) -
Ontario, Canada 55 - (16) -
Ontario, Canada 56 - (99) -
Ontario, Canada 2 - (21) -
Ontario, Canada 30 - (47) -
Ontario, Canada 782 - (108) -
Ontario, Canada 276 - (130) -
Ontario, Canada 239 - (104) -
Ontario, Canada - - 1 -
Kentucky, U.S.A. 23 - - -
Michigan, U.S.A. 95 - - -
Michigan, U.S.A. 10 - - -
Maryland, U.S.A. 18 - - -
Florida, U.S.A. 103 - - -
Florida, U.S.A. - 354 - -
New York, U.S.A. 875 141 - -
Niederoesterreich, Austria 703 - (1,279) -
Niederoesterreich, Austria 2,800 - (4,193) -
Austria 4 - (459) -
Steiermark, Austria - - (165) -
Commercial/Industrial properties
Colorado, U.S.A. - 1 - -
Oberoesterreich, Austria (251) - (260) (633)
Oberoesterreich, Austria - 906 - (350)
Wien, Austria - 14 (378) (176)
Residential properies
Ontario, Canada - 14 (1) (1)
Colorado, U.S.A. - 60 - -
Colorado, U.S.A. 127 (67) - -
Austria (2) 34 (592) (619)
Other - - (27) (1)
----------------- ----------------- ----------------- -----------------
25,599 69,500 (9,227) (7,803)
----------------- ----------------- ----------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which
Carried at Close of Period
-------------------------------------------------------
Buildings and Accumulated
Description Land Improvements Total Depreciation
- - --------------------------------------------------------- ------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
RACETRACK OPERATIONS
Racing Facilities
Santa Anita Park (Arcadia, California, U.S.A.) 25,498 83,042 108,540 3,010
Gulfstream Park (Hallandale, Florida, U.S.A.) 46,574 20,881 67,455 746
Golden Gate Fields (Albany, California, U.S.A.) 56,986 11,068 68,054 58
Thistledown (North Randall, Ohio, U.S.A.) 1,062 8,114 9,176 114
Remington Park (Oklahoma City, Oklahoma, U.S.A.) 3,211 5,447 8,658 190
SLRD (San Diego, California, U.S.A.) 3,895 2,738 6,633 39
Land held for development
Santa Anita Park (Arcadia, California, U.S.A.) 52,500 281 52,781 -
Gulfstream Park (Hallandale, Florida, U.S.A.) 14,201 - 14,201 -
Golden Gate Fields (Albany, California, U.S.A.) 13,857 - 13,857 -
REAL ESTASTE OPERATIONS
Golf Course Facilities
Niederoesterreich, Austria 10,413 13,222 23,635 2,741
Ontario, Canada 12,604 7,168 19,772 -
Land
Ontario, Canada 21,714 - 21,714 -
Ontario, Canada 11,348 - 11,348 -
Ontario, Canada 3,200 644 3,844 -
Ontario, Canada 5,192 - 5,192 -
Ontario, Canada 1,046 - 1,046 -
Ontario, Canada 1,684 - 1,684 -
Ontario, Canada 1,825 - 1,825 -
Ontario, Canada 358 - 358 -
Ontario, Canada 844 - 844 -
Ontario, Canada 1,863 - 1,863 -
Ontario, Canada 2,705 - 2,705 -
Ontario, Canada 1,804 - 1,804 -
Ontario, Canada 15 - 15 -
Kentucky, U.S.A. 2,870 - 2,870 -
Michigan, U.S.A. 1,256 - 1,256 -
Michigan, U.S.A. 2,792 - 2,792 -
Maryland, U.S.A. 1,015 - 1,015 -
Florida, U.S.A. 2,021 - 2,021 -
Florida, U.S.A. 669 1,596 2,265 325
New York, U.S.A. 1,600 141 1,741 -
Niederoesterreich, Austria 6,523 - 6,523 -
Niederoesterreich, Austria 20,056 - 20,056 -
Austria 5,467 - 5,467 -
Steiermark, Austria 1,984 - 1,984 -
Commercial/Industrial properties
Colorado, U.S.A. - 1,046 1,046 504
Oberoesterreich, Austria 2,865 7,560 10,425 937
Oberoesterreich, Austria 1 3,619 3,620 -
Wien, Austria 4,510 2,115 6,625 42
Residential properies
Ontario, Canada 69 125 194 10
Colorado, U.S.A. - 1,617 1,617 93
Colorado, U.S.A. 127 3,533 3,660 -
Austria 7,050 7,356 14,406 377
Other 18 (1) 17 (21)
------------------- ----------------- ----------------- -----------------
355,292 181,312 536,604 9,165
------------------- ----------------- ----------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation in
Lastest income
Date of Date statement is
Description Construction Acquired Computed (1)
- - --------------------------------------------------------- ---------------- ---------------- -----------------
<S> <C> <C> <C>
RACETRACK OPERATIONS
Racing Facilities
Santa Anita Park (Arcadia, California, U.S.A.) n/a 1998 40 years
Gulfstream Park (Hallandale, Florida, U.S.A.) n/a 1999 40 years
Golden Gate Fields (Albany, California, U.S.A.) n/a 1999 40 years
Thistledown (North Randall, Ohio, U.S.A.) n/a 1999 40 years
Remington Park (Oklahoma City, Oklahoma, U.S.A.) n/a 1999 40 years
SLRD (San Diego, California, U.S.A.) n/a 1999 40 years
Land held for development
Santa Anita Park (Arcadia, California, U.S.A.) n/a 1998 n/a
Gulfstream Park (Hallandale, Florida, U.S.A.) n/a 1999 n/a
Golden Gate Fields (Albany, California, U.S.A.) n/a 1999 n/a
REAL ESTASTE OPERATIONS
Golf Course Facilities
Niederoesterreich, Austria 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
Ontario, Canada n/a 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
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
Steiermark, Austria n/a 1998 n/a
Commercial/Industrial properties
Colorado, U.S.A. n/a 1992 n/a
Oberoesterreich, Austria n/a 1998 n/a
Oberoesterreich, Austria n/a 1998 n/a
Wien, Austria n/a 1998 n/a
Residential properies
Ontario, Canada n/a 1998 n/a
Colorado, U.S.A. n/a 1992 n/a
Colorado, U.S.A. n/a 1995 n/a
Austria n/a 1998 n/a
Other
</TABLE>
(1) Depreciation has ceased on properties available for sale. See note 3 to
the Company's Consolidated Financial Statements.
80
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
81
<PAGE>
DIRECTORS
Our directors are as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE PRINCIPAL OCCUPATION
---------------- --- --------------------
<S> <C> <C>
Jerry D. Campbell............. 59 President and Chief Executive Officer of
Jackson, Michigan the Company
William G. Davis(1)(3)........ 70 Counsel, Torys
Brampton, Ontario
Peter M. George(2)............ 56 Vice Chairman and Chief Executive Officer
Watford, England of 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(2).......... 56 Chairman of the Board and Chairman of the
Pasadena, California Executive Committee of MGM
Grand Inc.
Edward C. Lumley(1)(2)........ 60 Vice Chairman, Nesbitt Burns Inc.
South Lancaster, Ontario
Earle I. Mack................. 61 Senior Partner and Chief Financial Officer
Rochelle Park, New Jersey of The Mack Company
James Nicol(1)(3)............. 45 Vice-Chairman of the Company and
Toronto, Ontario Vice-Chairman of Magna
Gino Roncelli................. 64 Chief Executive Officer of Roncelli
Arcadia, California Plastics Inc. and Councilman for the
City of Arcadia, California
Andrew Stronach(4)............ 31 Vice-President, Corporate Development of
Aurora, Ontario the Company
Frank Stronach(1)(4).......... 67 Chairman of the Company, Partner, Frank
Oberwaltersdorf, Austria Stronach & Co. and Chairman of
Magna
Ronald J. Volkman(3).......... 61 Chairman of the Board and President of
San Bruno, California ATX, 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) Member of Audit Committee.
(3) Member of Corporate Governance, Human Resources and Compensation
Committee.
(4) Mr. Andrew Stronach is the son of Mr. Frank Stronach.
82
<PAGE>
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 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 may appoint one additional independent director to fill a vacancy
on our Board of Directors. This independent director will be free from any
material interest, business or other relationship with us or Magna.
EXECUTIVE OFFICERS
Our executive officers are as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE PRINCIPAL OCCUPATION
---------------- --- --------------------
<S> <C> <C>
Jerry D. Campbell........... 59 President and Chief Executive Officer of
Jackson, Michigan the Company (since March 2000)
David A. Mitchell........... 46 Executive Vice-President and Chief
Las Vegas, Nevada Financial Officer of the Company (since
March 2000)
James Nicol................. 45 Vice-Chairman of the Company (since March
Toronto, Ontario 1999) and Vice-Chairman of Magna
Lonny T. Powell............. 40 Executive Vice-President, Racetrack
Glendora, California Operations 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
Aurora, Ontario the Company (since March 2000)
Frank Stronach.............. 67 Chairman of the Company (since March 1999)
Oberwaltersdorf, Austria and Chairman of Magna
83
<PAGE>
Frank De Marco, Jr.......... 74 Vice-President, Regulatory Affairs of the
Studio City, California Company (since November 1999) and
Executive Director, Secretary and General
Counsel of Los Angeles Turf Club, Inc.
</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. 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 Operating 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.
As of March 13, 2000 our directors and executive officers other than
Frank Stronach and Andrew Stronach owned directly and indirectly less than 1%
of the outstanding shares of our Class A Subordinate Voting Stock (assuming
the exchange of the Exchangeable Shares) and none of our Class B stock. Frank
and Andrew Stronach are trustees and members of the class of beneficiaries of
the Stronach Trust. The Stronach Trust beneficially owned approximately 66%
of the Class B Shares of Magna, which shares represented approximately 58%
of the voting equity of Magna as of March 13, 2000. Magna directly and
indirectly owns shares entitling it to vote approximately 99% of the votes
attaching to our stock.
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Mr. Campbell which
provides 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
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<PAGE>
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 also provides for the
issuance of stock options to purchase 1,000,000 shares of our Class A
Subordinate Voting Stock at an exercise price of $6.90 per share. These stock
options were approved by our Board of Directors on March 5, 2000.
We have entered into an employment agreement with Mr. Mitchell which
provides 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. Mitchell's contract also provides for the issuance of
stock options to purchase 25,000 shares of our Class A Subordinate Voting
Stock at an exercise price equal to the last sale price of such shares on
NASDAQ on the trading day prior to the date of grant. These stock options
were approved by our Board of Directors on March 5, 2000 with an exercise
price of $4.875 and three year vesting.
We have entered into an employment agreement with Mr. Powell which
provides for a base salary of $250,000 per annum, an annual bonus based on a
percentage of pre-tax profits of Santa Anita Park, confidentiality
obligations, non-competition covenants and a termination provision permitting
his employment to be terminated by us giving minimum advance written notice
of termination or by paying a retiring allowance instead. Mr. Powell's
contract also provides for the issuance of stock options to purchase 25,000
shares of our Class A Subordinate Voting Stock at an exercise price equal to
the last sale price of such shares on NASDAQ on the trading day prior to the
date of grant. These stock options were approved by our Board of Directors on
March 5, 2000 with an exercise price of $4.875 and three year vesting.
We have entered or will enter into employment contracts with the
other members of our senior management. 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.
Our Corporate Constitution provides 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.
We are not required to make payments under any employment contract
with our senior officers
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<PAGE>
in the event of a change in control.
LONG-TERM INCENTIVE PLAN
We have adopted a long-term incentive plan, referred to as the
"Long-Term Incentive Plan", the purposes of which are: (i) to align the
interests of our stockholders and the recipients of awards under the
Long-Term Incentive Plan by giving recipients of awards an interest in our
growth and success; (ii) to enable us to attract and retain directors,
officers, employees, consultants, independent contractors and agents; and
(iii) to motivate these persons to act in our long-term best interests and
those of our stockholders. Under the Long-Term Incentive Plan, we may grant
nonqualified stock options, incentive stock options, free standing stock
appreciation rights, tandem stock appreciation rights, restricted stock,
bonus stock and performance shares.
The Long-Term Incentive Plan is administered by the Corporate
Governance, Human Resources and Compensation Committee (the "Committee") of
our Board of Directors, which consists of at least two outside directors. The
members of the Committee serve at the pleasure of the Board of Directors.
NONQUALIFIED STOCK OPTIONS
Each of our outside directors will receive a grant of a nonqualified
stock option to purchase 10,000 shares of Class A Subordinate Voting Stock
immediately following such director's election to our Board of Directors, and
immediately following the completion of each five-year period of continuous
service as a director. Such stock options will vest as to 20% of the shares
of Class A Subordinate Voting Stock included in each such grant on the date
of such grant, with an additional 20% of the shares vesting on the second,
third, fourth and fifth anniversaries of such grant. On March 5, 2000, our
Board of Directors approved stock options for each outside director to
purchase 10,000 shares of our Class A Subordinate Voting Stock at an exercise
price of $4.875 per share pursuant to the provisions of the Long-Term
Incentive Plan.
INCENTIVE STOCK OPTIONS
Incentive stock options may be granted only to our employees and
employees of our subsidiaries. If the recipient of an incentive stock option
owns more than ten percent of the voting power of all shares of our common
stock, the option will not be exercisable later than five years after its
grant date and the exercise price of the option will not be less than the
greater of (i) the price required by the Internal Revenue Code (currently
110% of the fair market value of our Class A Subordinate Voting Stock on the
option's grant date) and (ii) the price of the last traded board lot of
shares of our Class A Subordinate Voting Stock sold on The Toronto Stock
Exchange prior to the date of grant of the option.
BONUS STOCK AND RESTRICTED STOCK AWARDS
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The Long-Term Incentive Plan permits the Committee to grant bonus
stock awards, which are vested upon grant, and restricted stock awards which
are subject to a restriction period. An award of restricted stock may be
subject to performance measures during the restriction period. Unless the
Committee decides otherwise, the holder of a restricted stock award will have
rights as our stockholder, including the right to vote and receive dividends
with respect to the shares of restricted stock. Dividends, however, will be
subject to the same restrictions that apply to the shares for which the
dividend was paid.
PERFORMANCE SHARE AWARDS
The Long-Term Incentive Plan also permits the Committee to grant
performance shares. Each performance share is a right, subject to the
attainment of performance measures during a performance period, to receive
one share of Class A Subordinate Voting Stock, which may be restricted stock,
or the fair market value of the performance share in cash. Before a
performance share award is settled in shares of Class A Subordinate Voting
Stock, the holder of the award will have no rights as our stockholder with
respect to the shares of stock subject to the award. All the terms relating
to the satisfaction of performance measures and the termination of the
performance period relating to a performance share award, or any cancellation
or forfeiture of the performance share award upon the holder's termination of
employment with us, whether by reason of disability, retirement, death or
other termination, shall be contained in the award agreement.
PERFORMANCE GOALS. Under the Long-Term Incentive Plan, the vesting
or payment of performance share awards and certain awards of restricted stock
will be subject to the satisfaction of certain performance objectives and
criteria. These objectives and criteria may include one or more of the
following: the attainment by a share of Class A Subordinate Voting Stock of a
specified fair market value for a specified period of time, earnings per
share, return to stockholders (including dividends), return on equity,
earnings, revenues, market share, cash flow or cost reduction goals, or any
combination of these criteria.
ITEM 11. EXECUTIVE COMPENSATION
No compensation was awarded to, earned by or paid to any of the
named executives required to be reported in the fiscal year covered by this
Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of March 13, 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 7,176,391.
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outstanding shares of our Class A Subordinate Voting Stock as of March 13,
2000 and 58,466,056 outstanding shares of Class B Stock outstanding as of
March 13, 2000. In addition, as of March 13, 2000 there were 14,823,187
outstanding Exchangeable Shares, each of which is exchangeable on a
one-for-one basis for shares of our Class A Subordinate Voting Stock.
<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 58,466,056 100%
International
Inc.(1)(2)
337 Magna Drive
Aurora, Ontario
L4G 7K1
Exchangeable Shares................... Magna 4,362,328 29%
International Inc.
337 Magna Drive
Aurora, Ontario
L4G 7K1
</TABLE>
(1) Magna directly owns 53,253,064 or 91.1% of these shares of our Class B
Stock and also owns 4,362,328 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 represented approximately 58% of the voting
equity of Magna as of March 13, 2000.
ITEM 13. 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 TSE. Magna's Class B Shares are listed on the TSE.
Magna is currently the sole stockholder of 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 is therefore able to elect all
our directors and controls us.
Our Corporate Constitution requires 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 also requires that a majority of our
directors be individuals who are not our officers or employees or individuals
related to these persons. Policies of applicable securities regulatory
authorities also recommend that issuers involved in a "related party
transaction" have such 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
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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 approximately 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, or
otherwise give financial assistance to, us or any of our subsidiaries; or
(ii) invest in any non-automotive-related businesses or assets other than
through its investment in us. Magna's commitment is contained in a
Forebearance Agreement dated as of February 8, 2000 between us and Magna and
in which Magna's shareholders are express third party beneficiaries.
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. 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
Magna is able to elect all our directors and controls us. Therefore,
Magna is able to cause us to effect some corporate transactions without the
consent of our minority stockholders, subject to applicable law. In addition,
Magna is 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. Frank Stronach and Mr. Andrew Stronach
are also two of the members of the class of potential beneficiaries of the
Stronach Trust.
PURCHASE OF LAND IN AURORA, CANADA
In 1998, a subsidiary of 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,
and Mr. Andrew Stronach, our Vice-President, Corporate Development,
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 December 31, 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 based upon two independent
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<PAGE>
valuations of the property. 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. Title will
be transferred to us from the vendor upon completion of the registration of
the subdivision plan and receipt of related consents and approvals.
TRANSACTIONS WITH MAGNA
Pursuant to a conditional sale agreement, Magna transferred land in
Aurora, Canada to us with a value of $21.7 million, which represents the book
value of the land. 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 this Aurora
property, Magna must return $21.7 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 $4.7 million, which represents the book value of
the land. 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 $4.7 million to us with interest.
We have granted a limited term option to Magna to reacquire a real
estate property in Austria for a fixed price equal to its book value of 50
million Austrian Schillings (approximately $3.7 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 prior to December 31, 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 "Item 1. Business -- Reorganization". Also, for
details on the legal action, see "Item 3 -- 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
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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 year ended
December 31, 1999, Magna paid us $2.3 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 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 an amended and restated purchase agreement dated as of
January 31, 2000, with Great Lakes Downs, Inc. and Great Lakes Downs Cafe,
Inc., we acquired the assets and assumed approximately $9.3 million of
liabilities of Great Lakes Downs racetrack 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 directors
and our President and Chief Executive Officer is the principal shareholder of
Great Lakes Downs, Inc.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The following Consolidated Financial Statements of Magna Entertainment Corp.
for the year ended December 31, 1999 are included in Part II, Item 8 of this
Report:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive
Income (Loss)
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Schedule III - Real estate and accumulated depreciation
FORM 8-KS
Magna Entertainment Corp. filed a current report on Form 8-K dated March 6,
2000 reporting its financial results for the year ended December 31, 1999
Magna Entertainment Corp. filed a current report on Form 8-K dated March 16,
2000 to file its Restated Certificate of Incorporation and General By-Law No.
2
EXHIBITS
Please refer to the exhibit index below.
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SIGNATURES
Pursuant to the general requirements of Section 12 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated March 29, 2000
MAGNA ENTERTAINMENT CORP.
By: /s/ Jerry D. Campbell
-----------------------
Jerry D. Campbell
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Jerry D. Campbell
- - -------------------------------
Jerry D. Campbell President and Chief Executive March 29, 2000
Officer and Director
/s/ David A. Mitchell
- - -------------------------------
David A. Mitchell Executive Vice-President and March 29, 2000
Chief Financial Officer
/s/ James Bromby
- - -------------------------------
James Bromby Corporate Controller March 29, 2000
/s/ William G. Davis
- - -------------------------------
William G. Davis Director March 29, 2000
/s/ Peter M. George
- - -------------------------------
Peter M. George Director March 29, 2000
/s/ Joseph W. Harper
- - -------------------------------
Joseph W. Harper Director March 29, 2000
/s/ J. Terrence Lanni
- - -------------------------------
J. Terrence Lanni Director March 29, 2000
/s/ Edward C. Lumley
- - -------------------------------
Edward C. Lumley Director March 29, 2000
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- - -------------------------------
Earle I. Mack Director March 29, 2000
/s/ James Nicol
- - -------------------------------
James Nicol Vice-Chairman and Director March 29, 2000
/s/ Gino Roncelli
- - -------------------------------
Gino Roncelli Director March 29, 2000
- - -------------------------------
Andrew Stronach Director March 29, 2000
- - -------------------------------
Frank Stronach Chairman and Director March 29, 2000
/s/ Ronald J. Volkman
- - -------------------------------
Ronald J. Volkman Director March 29, 2000
- - -------------------------------
John C. York II Director March 29, 2000
</TABLE>
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EXHIBIT INDEX
Listed below are all Exhibits filed as part of this Report. Certain
Exhibits are incorporated herein by reference to (1) our Registration
Statement on Form S-1 originally filed on January 14- 2000 (File number
333-94791) and (2) documents previously filed by us with The Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Restated Certificate of Incorporation(2)
3.2 General By-Law No. 2(2)
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.(1)
10.2 Stock Purchase Agreement dated as of June 30,
1999 between Magna Entertainment Corp.. and
Gulfstream Park Racing Association Inc.(1)
10.3 Stock Purchase Agreement dated as of October 21,
1999 between Magna Entertainment Corp., The
Edward J. DeBartolo Corporation and Oklahoma
Racing LLC (1)
10.4 Stock Purchase Agreement dated as of November 5,
1999 between Magna Entertainment Corp. and
Ladbroke Racing Corporation (1)
10.5 Exchangeable Share Support Agreement dated as of
February 14, 2000 among Magna Entertainment
Corp. and MEC Holdings (Canada) Inc.(1)
10.6 Voting and Exchange Agreement dated as of
February 14, 2000 among Magna International
Inc., Magna Entertainment Corp. and MEC Holdings
(Canada) Inc.(1)
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 (1)
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10.8 Revolving Credit Agreement dated as of November
15, 1999 between Los Angeles Turf Club,
Incorporated and Wells Fargo National Bank (1)
10.9 Forebearance Agreement dated as of February 8,
2000 between Magna International Inc. and Magna
Entertainment Corp.(1)
10.10 Access Agreement dated as of March 1, 1999
between Magna International Inc. and Magna
Liegenschaftsverwaltungs-GmbH (1)
10.11 Magna Entertainment Corp. Long-Term Incentive
Plan
10.12 Employment Agreement with Jerry D. Campbell
dated January 1, 2000
10.13 Employment Agreement with David A. Mitchell
dated November 26, 1999 (1)
10.14 Employment Agreement with Lonny Powell dated
July 1, 1999
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
</TABLE>
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EXHIBIT 10.11
MAGNA ENTERTAINMENT CORP. LONG-TERM INCENTIVE PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the Long-Term Incentive Plan (the "PLAN")
of Magna Entertainment Corp. (the "COMPANY") are (i) to align the interests
of the Company's stockholders and the recipients of awards under this Plan by
increasing the proprietary interest of such recipients in the Company's
growth and success, (ii) to advance the interests of the Company by
attracting and retaining outside directors, officers, employees, consultants,
independent contractors and agents and (iii) to motivate such persons to act
in the long-term best interests of the Company and its stockholders.
1.2 CERTAIN DEFINITIONS.
"AGREEMENT" shall mean the written Stock Option Agreement evidencing an
award hereunder between the Company and the recipient of such award.
"BOARD" shall mean the Board of Directors of the Company.
"BONUS STOCK" shall mean shares of Common Stock which are not subject
to a Restriction Period or Performance Measures.
"BONUS STOCK AWARD" shall mean an award of Bonus Stock under this Plan.
"CAUSE" shall mean the willful and continued failure substantially to
perform the duties assigned by the Company (other than a failure resulting from
the optionee's Disability), the willful engaging in conduct which is
demonstrably injurious to the Company or any Subsidiary, monetarily or
otherwise, including conduct that, in the reasonable judgment of the Company, no
longer conforms to the standard of the Company's executives or employees, any
act of dishonesty, commission of a felony, or a significant violation of any
statutory or common law duty of loyalty to the Company.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean the Corporate Governance, Human Resources and
Compensation Committee of the Board.
"COMMON STOCK" shall mean the Class A Subordinate Voting Stock of the
Company.
"COMPANY" has the meaning specified in Section 1.1.
"DISABILITY" shall mean the inability of the holder of an award to
perform substantially such holder's duties and responsibilities for a continuous
period of at least six months, as determined solely by the Committee.
"ELIGIBLE PARTICIPANTS" shall mean the persons specified in Section
1.4(a).
"ELIGIBLE DIRECTOR" shall mean those Outside Directors specified in
Section 1.4(b).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FAIR MARKET VALUE" shall mean the closing transaction price of a
share of Common Stock as reported on The Nasdaq Stock Market on the trading
day immediately prior to the date as of which such value is being determined;
provided, however, that Fair Market Value may be determined by the Committee
by whatever means or method as the Committee, in the good faith exercise of
its discretion, shall at such time deem appropriate.
"FREE-STANDING SAR" shall mean a SAR which is not issued in tandem
with, or by reference to, an option, which entitles the holder thereof to
receive, upon exercise, shares of Common Stock
<PAGE>
(which may be Restricted Stock), cash or a combination thereof with an
aggregate value equal to the excess of the Fair Market Value of one share of
Common Stock on the date of exercise over the base price of such SAR,
multiplied by the number of such SARs which are exercised.
"INCENTIVE STOCK OPTION" shall mean an option to purchase shares of
Common Stock that meets the requirements of Section 422 of the Code, or any
successor provision, which is intended by the Committee to constitute an
Incentive Stock Option.
"INSIDER" means (i) an insider as defined in the Securities Act
(Ontario), other than a person who falls within that definition solely by virtue
of being a director or senior officer of a Subsidiary; and (ii) an associate of
any person who is an insider by virtue of (i).
"MATURE SHARES" shall mean previously-acquired shares of Common Stock
for which the holder thereof has good title, free and clear of all liens and
encumbrances and which such holder either (i) has held for at least six months
or (ii) has purchased on the open market.
"NON-STATUTORY STOCK OPTION" shall mean an option to purchase shares of
Common Stock which is not an Incentive Stock Option.
"OUTSTANDING ISSUE" means the total number of shares of Common Stock,
Class B stock of the Company and Common Stock reserved for issuance by the
Company upon the exchange, retraction or redemption, of the Exchangeable Shares
of MEC (Holdings) Inc. issued and outstanding at the date of calculation
(excluding any such shares issued pursuant to share compensation arrangements
during the 12-month period prior to the date of calculation).
"OUTSIDE DIRECTOR" shall mean directors of the Company who are not
officers or employees of the Company or any affiliate.
"PERFORMANCE MEASURES" shall mean the criteria and objectives,
established by the Committee, which shall be satisfied or met (i) as a condition
to the exercisability of all or a portion of a Stock Option or SAR, (ii) as a
condition to the grant of a Stock Award or (iii) during the applicable
Restriction Period or Performance Period as a condition to the holder's receipt,
in the case of a Restricted Stock Award, of the shares of Common Stock subject
to such award, or, in the case of a Performance Share Award, of the shares of
Common Stock subject to such award and/or of payment with respect to such award.
In the sole discretion of the Committee, the Committee may amend or adjust the
Performance Measures or other terms and conditions of an outstanding award in
recognition of unusual or nonrecurring events affecting the Company or its
financial statements or changes in law or accounting principles. Such criteria
and objectives may include one or more of the following: the attainment by a
share of Common Stock of a specified Fair Market Value for a specified period of
time, earnings per share, return to stockholders (including dividends), return
on equity, earnings of the Company, revenues, market share, cash flow or cost
reduction goals, or any combination of the foregoing. If the Committee desires
that compensation payable pursuant to any award subject to Performance Measures
be Aqualified performance-based compensation" within the meaning of Section
162(m) of the Code, the Performance Measures (i) shall be established by the
Committee no later than 90 days after the beginning of the Performance Period or
Restriction Period, as applicable (or such other time designated by the Internal
Revenue Service) and (ii) shall satisfy all other applicable requirements
imposed under Treasury Regulations promulgated under Section 162(m) of the Code,
including the requirement that such Performance Measures be stated in terms of
an objective formula or standard.
"PERFORMANCE PERIOD" shall mean any period designated by the Committee
during which the Performance Measures applicable to a Performance Share Award
shall be measured.
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EXHIBIT 10.11
"PERFORMANCE SHARE" shall mean a right, contingent upon the
attainment of specified Performance Measures within a specified Performance
Period, to receive one share of Common Stock, which may be Restricted Stock,
or in lieu of all or a portion thereof, the Fair Market Value of such
Performance Share in cash.
"PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares
under this Plan.
"POST-TERMINATION EXERCISE PERIOD" shall mean the period specified in
or pursuant to Section 2.3(a), Section 2.3(b), Section 2.3(d) or Section 2.3(e)
following termination of employment with or the service to the Company during
which a Stock Option or SAR may be exercised.
"RESTRICTED STOCK" shall mean shares of Common Stock which are subject
to a Restriction Period.
"RESTRICTED STOCK AWARD" shall mean an award of Restricted Stock under
this Plan.
"RESTRICTION PERIOD" shall mean any period designated by the Committee
during which the Common Stock subject to a Restricted Stock Award may not be
sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or
disposed of, except as provided in this Plan or the Agreement relating to such
award.
"RETIREMENT" shall mean termination of employment with or service to
the Company by reason of retirement on or after age 60 with the consent of the
Company.
"SAR" shall mean a stock appreciation right which may be a
Free-Standing SAR or a Tandem SAR.
"STOCK AWARD" shall mean a Restricted Stock Award or a Bonus Stock
Award.
"STOCK OPTION" shall mean an Incentive Stock Option or a Non-Statutory
Stock Option.
"SUBSIDIARY" and "SUBSIDIARIES" shall have the meanings set forth in
Section 1.4.
"TANDEM SAR" shall mean an SAR which is granted in tandem with, or by
reference to, a Stock Option (including a Non-Statutory Stock Option granted
prior to the date of grant of the SAR), which entitles the holder thereof to
receive, upon exercise of such SAR and surrender for cancellation of all or a
portion of such Stock Option, shares of Common Stock (which may be Restricted
Stock), cash or a combination thereof with an aggregate value equal to the
excess of the Fair Market Value of one share of Common Stock on the date of
exercise over the base price of such SAR, multiplied by the number of shares of
Common Stock subject to such Stock Option, or portion thereof, which is
surrendered.
"TAX DATE" shall have the meaning set forth in Section 5.5.
"TEN PERCENT HOLDER" shall have the meaning set forth in Section
2.1(a).
1.3 ADMINISTRATION. This Plan shall be administered by the Committee.
Any one or a combination of the following awards may be made under this Plan
to eligible persons: (i) Stock Options in the form of Incentive Stock Options
or Non-Statutory Stock Options, (ii) SARs in the form of Tandem SARs or
Free-Standing SARs, (iii) Stock Awards in the form of Restricted Stock or
Bonus Stock and (iv) Performance Shares. The Committee shall, subject to the
terms of this Plan, select eligible persons for participation in this Plan
and determine the form, amount and timing of each award to such persons and,
if applicable, the number of shares of Common Stock, the number of SARs and
the number of Performance Shares subject to such an award, the exercise price
or base price associated with the award, the time and conditions of exercise
or settlement of the award and all other terms and conditions of the award,
including, without limitation, the form of the Agreement evidencing the
award. The Committee may, in its sole discretion and for any reason at any
time, take
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action such that (i) any or all outstanding Stock Options and SARs shall
become exercisable in part or in full, (ii) all or a portion of the
Restriction Period applicable to any outstanding Restricted Stock Award shall
lapse, (iii) all or a portion of the Performance Period applicable to any
outstanding Performance Share Award shall lapse and (iv) the Performance
Measures applicable to any outstanding award (if any) shall be deemed to be
satisfied at the maximum or any other level. Any such action by the Committee
shall be subject to the requirements of Section 162(m) of the Code and
regulations thereunder in the case of an award intended to be qualified
performance-based compensation, except if the action is determined in good
faith by the Committee to be necessary in order to facilitate a transaction
involving a Change of Control of the Company. The Committee shall, subject to
the terms of this Plan, interpret this Plan and the application thereof,
establish rules and regulations it deems necessary or desirable for the
administration of this Plan and may impose, incidental to the grant of an
award, conditions with respect to the award, such as limiting competitive
employment or other activities. All such interpretations, rules, regulations
and conditions shall be final, binding and conclusive.
The Committee may delegate some or all of its power and authority
hereunder to the Board, the Chairman of the Board, the President and Chief
Executive Officer or other executive officer of the Company as the Committee
deems appropriate; provided, however, that (i) the Committee may not delegate
its power and authority to the Board, the Chairman of the Board, or the
President and Chief Executive Officer or other executive officer of the Company
with regard to the grant of an award to any person who is a "covered employee"
within the meaning of Section 162(m) of the Code or who, in the Committee's
judgment, is likely to be a covered employee at any time during the period an
award hereunder to such employee would be outstanding and (ii) the Committee may
not delegate its power and authority to the Chairman of the Board, President and
Chief Executive Officer or other executive officer of the Company with regard to
the selection for participation in this Plan of an officer or other person
subject to Section 16 of the Exchange Act or decisions concerning the timing,
pricing or amount of an award to such an officer or other person.
A majority of the Committee shall constitute a quorum. The acts of the
Committee shall be either (i) acts of a majority of the members of the Committee
present at any meeting at which a quorum is present or (ii) acts approved in
writing by all of the members of the Committee without a meeting.
1.4 ELIGIBILITY. (a) Participants in this Plan shall consist of such
officers and other employees, consultants, independent contractors and agents
of the Company, its subsidiaries from time to time and any other entity
designated by the Board or the Committee (individually a "SUBSIDIARY" and
collectively the "SUBSIDIARIES") as the Committee in its sole discretion may
select from time to time. For purposes of this Plan, references to employment
shall also mean an agency or independent contractor relationship and
references to employment by the Company shall also mean employment by a
Subsidiary. The Committee's selection of a person to participate in this Plan
at any time shall not require the Committee to select such person to
participate in this Plan at any other time; and (b) Outside Directors shall
also be participants in the Plan.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 5.7,
8,000,000 shares of Common Stock shall be available for awards under this
Plan, consisting of: (i) 6,500,000 shares of Common Stock which shall be
available for issuance pursuant to Stock Options and Tandem SARs, and (ii)
1,500,000 shares of Common Stock which shall be available for issuance
pursuant to any type of award under this Plan other than Stock Options and
Tandem SARs. To the extent that shares of Common Stock subject to an
outstanding Stock Option (except to the extent shares of Common
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EXHIBIT 10.11
Stock are issued or delivered by the Company in connection with the exercise
of a Tandem SAR), Free-Standing SAR, Stock Award or Performance Share are not
issued or delivered by reason of the expiration, termination, cancellation or
forfeiture of such award or by reason of the delivery or withholding of
shares of Common Stock to pay all or a portion of the exercise price of an
award, if any, or to satisfy all or a portion of the tax withholding
obligations relating to an award, then such shares of Common Stock shall
again be available under this Plan.
Shares of Common Stock shall be made available from authorized and
unissued shares of Common Stock, or authorized and issued shares of Common Stock
reacquired and held as treasury shares or otherwise or a combination thereof.
To the extent necessary for an award to be qualified performance-based
compensation under Section 162(m) of the Code and the regulations thereunder,
the maximum number of shares of Common Stock with respect to which Stock Options
or SARs or a combination thereof may be granted during any calendar year to any
person shall be 4,000,000, subject to adjustment as provided in Section 5.7.
Notwithstanding anything else in the Plan, at no time shall:
(a) the aggregate number of shares of Common Stock reserved for
awards under the Plan (subject to adjustment as provided in Section 5.7),
together with the number of shares of Common Stock of the Company reserved
for issuance under any other share compensation arrangements of the Company,
result in the number of shares of Common Stock of the Company reserved for
issuance pursuant to share compensation arrangements exceeding 10% of the
Outstanding Issue;
(b) the number of shares of Common Stock reserved for awards under
the Plan to any one person (subject to adjustment as provided in Section
5.7), exceed 5% of the Outstanding Issue;
(c) the aggregate number of shares of Common Stock issued within a
one-year period pursuant to awards under the Plan, together with the number of
shares of Common Stock of the Company issued within such period under any other
share compensation arrangements of the Company, exceed 10% of the Outstanding
Issue;
(d) the aggregate number of shares of Common Stock reserved for awards
under the Plan to Insiders of the Company, together with the number of shares of
Common Stock of the Company reserved for issuance to such persons under any
other share compensation arrangements of the Company, exceed 10% of the
Outstanding Issue;
(e) the aggregate number of shares of Common Stock issued within a
one-year period to Insiders of the Company pursuant to awards under the Plan,
together with the number of shares of Common Stock of the Company issued within
such period to such persons under any other share compensation arrangements of
the Company, exceed 10% of the Outstanding Issue; or
(f) the aggregate number of shares of Common Stock issued within a
one-year period to any one Insider of the Company and that Insider's associates
(as defined in the Securities Act (Ontario)) pursuant to awards under the Plan,
together with the number of shares of Common Stock of the Company issued within
such period to such persons under any other share compensation arrangements of
the Company, exceed 5% of the Outstanding Issue.
For the purposes of paragraphs (d), (e) and (f) above, shares of Common
Stock of the Company issued and awards granted to a person prior to such person
becoming an Insider may be excluded in determining the number of shares of
Common Stock of the Company issuable to Insiders.
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II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 STOCK OPTIONS. The Committee may, in its discretion, grant Stock
Options to purchase shares of Common Stock to such Eligible Participants as
may be selected by the Committee. Each Stock Option, or portion thereof, that
is not an Incentive Stock Option, shall be a Non-Statutory Stock Option. An
Incentive Stock Option may not be granted to any person who is not an
employee of the Company or any parent or subsidiary (as defined in Section
424 of the Code). Each Incentive Stock Option shall be granted within ten
years of the date this Plan is adopted by the Board. To the extent that the
aggregate Fair Market Value (determined as of the date of grant) of shares of
Common Stock with respect to which Stock Options designated as Incentive
Stock Options are exercisable for the first time by a participant during any
calendar year (under this Plan or any other plan of the Company, or any
parent or subsidiary as defined in Section 424 of the Code) exceeds the
amount (currently $100,000) established by the Code, such Stock Options shall
constitute Non-Statutory Stock Options.
The Committee shall grant Stock Options to purchase 10,000 shares of
Common Stock to each Eligible Director in each of the following circumstances:
(i) immediately following each such Eligible Director's
election to the Board;
and
(ii) immediately following the completion of each five (5)
years of continuous service as a director of the
Corporation.
Stock Options granted to Eligible Directors shall vest as to 20% of the
shares of Common Stock included in each such grant to Eligible Directors on the
date of such grant, with an additional 20% of the shares vesting on each of the
second, third, fourth and fifth anniversary dates of each such grant.
Stock Options shall be subject to the following terms and conditions
and shall contain such additional terms and conditions, not inconsistent with
the terms of this Plan, as the Committee shall deem advisable:
(a) NUMBER OF SHARES AND PURCHASE PRICE. The number of shares of Common
Stock subject to a Stock Option, other than those granted to Eligible Directors
and the purchase price per share of Common Stock purchasable upon exercise of
the Stock Option shall be determined by the Committee; provided, however, that
the purchase price per share of Common Stock purchasable upon exercise of a
Stock Option shall not be less than 100% of the greater of (i) the Fair Market
Value of a share of Common Stock on the date of grant of such Stock Option and
(ii) the price of the last board lot of shares of Common Stock sold on The
Toronto Stock Exchange on the last business day prior to the date of grant of
such Stock Option on which a board lot of shares of Common Stock traded on The
Toronto Stock Exchange (the "TSE Permitted Price"); provided further, that if an
Incentive Stock Option shall be granted to any person who, at the time such
Stock Option is granted, owns capital stock possessing more than ten percent of
the total combined voting power of all classes of capital stock of the Company
(or of any parent or subsidiary as defined in Section 424 of the Code) (a "TEN
PERCENT HOLDER"), the purchase price per share of Common Stock shall be the
greater of (i) the price (currently 110% of Fair Market Value) required by the
Code in order to constitute an Incentive Stock Option and (ii) the TSE Permitted
Price.
(b) OPTION PERIOD AND EXERCISABILITY. The period during which a
Stock Option may be exercised shall be determined by the Committee; provided,
however, that no Stock Option shall be exercisable later than ten years after
its date of grant and shall expire at the end of such period;
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EXHIBIT 10.11
provided further, that if an Incentive Stock Option shall be granted to a Ten
Percent Holder, such Stock Option shall not be exercised later than five
years after its date of grant. The Committee may, in its discretion,
establish Performance Measures which shall be satisfied or met as a condition
to the grant of a Stock Option or to the exercisability of all or a portion
of a Stock Option other than those granted to Eligible Directors. The
Committee shall determine whether a Stock Option shall become exercisable in
cumulative or non-cumulative installments and in part or in full at any time.
An exercisable Stock Option, or portion thereof, may be exercised only with
respect to whole shares of Common Stock.
(c) METHOD OF EXERCISE. A Stock Option may be exercised (i) by giving
written notice to the Company specifying the number of whole shares of Common
Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (A) in
cash, (B) by delivery (either actual delivery or by attestation procedures
established by the Company) of Mature Shares having an aggregate Fair Market
Value, determined as of the date of exercise, equal to the aggregate purchase
price payable by reason of such exercise, (C) in cash by a broker-dealer
acceptable to the Company to whom the optionee has submitted an irrevocable
notice of exercise or (D) a combination of (A) and (B), in each case to the
extent set forth in the Agreement relating to the Stock Option, (ii) if
applicable, by surrendering to the Company any Tandem SARs which are canceled by
reason of the exercise of the Stock Option and (iii) by executing such documents
as the Company may reasonably request. The Company shall have sole discretion to
disapprove of an election pursuant to any of clauses (B)-(D). Any fraction of a
share of Common Stock which would be required to pay such purchase price shall
be disregarded and the remaining amount due shall be paid in cash by the
optionee. No certificate representing Common Stock shall be delivered until the
full purchase price therefor has been paid (or arrangement made for such payment
to the Company's satisfaction).
2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion,
grant SARs to Eligible Participants. The Agreement relating to a SAR shall
specify whether the SAR is a Tandem SAR or a Free-Standing SAR.
SARs shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms of
this Plan, as the Committee shall deem advisable:
(a) NUMBER OF SARS AND BASE PRICE. The number of SARs subject to an
award shall be determined by the Committee. Any Tandem SAR related to an
Incentive Stock Option shall be granted at the same time that such Incentive
Stock Option is granted. The base price of a Tandem SAR shall be the purchase
price per share of Common Stock of the related Stock Option. The base price of a
Free-Standing SAR shall be determined by the Committee; provided, however, that
such base price shall not be less than 100% of the greater of (i) the Fair
Market Value of a share of Common Stock on the date of grant of such SAR or (ii)
the price of the last board lot of shares of Common Stock sold on The Toronto
Stock Exchange on the last business day prior to the date of grant of such SAR
on which a board lot of shares of Common Stock traded on The Toronto Stock
Exchange.
(b) EXERCISE PERIOD AND EXERCISABILITY. The Agreement relating to an
award of SARs shall specify whether such award may be settled in shares of
Common Stock (including shares of Restricted Stock) or cash or a combination
thereof. The period for the exercise of an SAR shall be determined by the
Committee; provided, however, that no Tandem SAR shall be exercised later than
the expiration, cancellation, forfeiture or other termination of the related
Stock Option; provided
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further, that no SAR shall be exercisable later than ten years after its date
of grant and shall expire at the end of such period. The Committee may, in
its discretion, establish Performance Measures which shall be satisfied or
met as a condition to the grant of an SAR or to the exercisability of all or
a portion of an SAR. The Committee shall determine whether an SAR may be
exercised in cumulative or non-cumulative installments and in part or in full
at any time. An exercisable SAR, or portion thereof, may be exercised, in the
case of a Tandem SAR, only with respect to whole shares of Common Stock and,
in the case of a Free-Standing SAR, only with respect to a whole number of
SARs. If an SAR is exercised for shares of Restricted Stock, a certificate or
certificates representing such Restricted Stock shall be issued in accordance
with Section 3.2(c) and the holder of such Restricted Stock shall have such
rights of a stockholder of the Company as determined pursuant to Section
3.2(d). Prior to the exercise of an SAR for shares of Common Stock, including
Restricted Stock, the holder of such SAR shall have no rights as a
stockholder of the Company with respect to the shares of Common Stock subject
to such SAR and shall have rights as a stockholder of the Company in
accordance with Section 5.9.
(c) METHOD OF EXERCISE. A Tandem SAR may be exercised (i) by giving
written notice to the Company specifying the number of whole SARs which are
being exercised, (ii) by surrendering to the Company any Stock Options which are
canceled by reason of the exercise of the Tandem SAR and (iii) by executing such
documents as the Company may reasonably request. A Free-Standing SAR may be
exercised (i) by giving written notice to the Company specifying the whole
number of SARs which are being exercised and (ii) by executing such documents as
the Company may reasonably request.
2.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) DISABILITY. Unless otherwise specified in the Agreement relating
to a Stock Option or SAR, as the case may be, if the employment with or
service to the Company of the holder of a Stock Option or SAR terminates by
reason of Disability, each Stock Option and SAR held by such holder shall be
fully exercisable and may thereafter be exercised by such holder (or such
holder's legal representative or similar person) until and including the
earliest to occur of (i) in the case of a holder who is an employee of the
Company, the date which is three (3) years or, in the case of a holder who is
not an employee of the Company, the date which is one (1) year, (or such
other period as set forth in the Agreement relating to such Stock Option or
SAR) after the effective date of such holder's termination of employment or
service and (ii) the expiration date of the term of such Stock Option or SAR.
(b) RETIREMENT. Unless otherwise specified in the Agreement relating to
a Stock Option or SAR, as the case may be, if the employment with or service to
the Company of the holder of a Stock Option or SAR terminates by reason of
Retirement, each Stock Option and SAR held by such holder shall be fully
exercisable and may thereafter be exercised by such holder (or such holder's
legal representative or similar person) until and including the earliest to
occur of (i) in the case of a holder who is an employee of the Company, the date
which is three (3) years or, in the case of a holder who is not an employee of
the Company, the date which is one (1) year, (or such other period as set forth
in the Agreement relating to such Stock Option or SAR) after the effective date
of such holder's termination of employment or service and (ii) the expiration
date of the term of such Stock Option or SAR.
(c) DEATH. Unless otherwise specified in the Agreement relating to a
Stock Option or SAR, as the case may be, if the employment with or service to
the Company of the holder of a Stock Option or SAR terminates by reason of
death, each Stock Option and SAR held by such holder shall be fully exercisable
by such holder's executors, administrators, legal representatives,
beneficiaries,
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EXHIBIT 10.11
or similar person until and including the earliest to occur of (i) the date
which is 1 year (or such other period as set forth in the Agreement relating
to such Stock Option or SAR) after the date of death and (ii) the expiration
date of the term of such Stock Option or SAR.
(d) OTHER TERMINATION. Unless otherwise specified in the Agreement
relating to a Stock Option or SAR, as the case may be, if the employment with
the Company of the holder of a Stock Option or SAR terminates for any reason
other than Disability, Retirement, death, or for Cause, each Stock Option and
SAR held by such holder shall be exercisable only to the extent that such Stock
Option or SAR is exercisable on the effective date of such holder's termination
of employment or service and may thereafter be exercised by such holder (or such
holder's legal representative or similar person) until and including the
earliest to occur of (i) the date which is three (3) months (or such other
period as set forth in the Agreement relating to such Stock Option or SAR) after
the effective date of such holder's termination of employment and (ii) the
expiration date of the term of such Stock Option or SAR.
(e) CAUSE. Notwithstanding anything to the contrary in this Plan or in
any Agreement relating to a Stock Option or SAR, as the case may be, if the
employment with or service to the Company of the holder of a Stock Option or SAR
is terminated by the Company for Cause, each Stock Option and SAR held by such
holder shall be automatically canceled by the Company on the effective date of
such holder's termination of employment or service.
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III. STOCK AWARDS
3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock
Awards to Eligible Participants. The Agreement relating to a Stock Award
shall specify whether the Stock Award is a Restricted Stock Award or Bonus
Stock Award.
3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Committee
shall deem advisable.
(a) NUMBER OF SHARES AND OTHER TERMS. The number of shares of Common
Stock subject to a Restricted Stock Award or Bonus Stock Award and the
Performance Measures (if any) and Restriction Period applicable to a
Restricted Stock Award shall be determined by the Committee.
(b) VESTING AND FORFEITURE. The Agreement relating to a Restricted
Stock Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of the
shares of Common Stock subject to such award (i) if specified Performance
Measures are satisfied or met during the specified Restriction Period or (ii) if
the holder of such award remains continuously in the employment of or service to
the Company during the specified Restriction Period and for the forfeiture of
all or a portion of the shares of Common Stock subject to such award (x) if
specified Performance Measures are not satisfied or met during the specified
Restriction Period or (y) if the holder of such award does not remain
continuously in the employment of or service to the Company during the specified
Restriction Period.
Bonus Stock Awards shall not be subject to any Performance Measures or
Restriction Periods.
(c) SHARE CERTIFICATES. During the Restriction Period, a certificate or
certificates representing a Restricted Stock Award may be registered in the
holder's name or a nominee name at the discretion of the Company and may bear a
legend, in addition to any legend which may be required pursuant to Section 5.6,
indicating that the ownership of the shares of Common Stock represented by such
certificate is subject to the restrictions, terms and conditions of this Plan
and the Agreement relating to the Restricted Stock Award. As determined by the
Committee, all certificates registered in the holder's name shall be deposited
with the Company, together with stock powers or other instruments of assignment
(including a power of attorney), each endorsed in blank with a guarantee of
signature if deemed necessary or appropriate by the Company, which would permit
transfer to the Company of all or a portion of the shares of Common Stock
subject to the Restricted Stock Award in the event such award is forfeited in
whole or in part. Upon termination of any applicable Restriction Period (and the
satisfaction or attainment of applicable Performance Measures), or upon the
grant of a Bonus Stock Award, in each case subject to the Company's right to
require payment of any taxes in accordance with Section 5.5, a certificate or
certificates evidencing ownership of the requisite number of shares of Common
Stock shall be delivered to the holder of such award.
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EXHIBIT 10.11
(d) RIGHTS WITH RESPECT TO RESTRICTED STOCK AWARDS. Unless otherwise
set forth in the Agreement relating to a Restricted Stock Award, and subject
to the terms and conditions of a Restricted Stock Award, the holder of such
award shall have all rights as a stockholder of the Company, including, but
not limited to, voting rights, the right to receive dividends and the right
to participate in any capital adjustment applicable to all holders of Common
Stock; provided, however, that a distribution with respect to shares of
Common Stock, other than a regular cash dividend, shall be deposited with the
Company and shall be subject to the same restrictions as the shares of Common
Stock with respect to which such distribution was made.
(e) AWARDS TO CERTAIN EXECUTIVE OFFICERS. Notwithstanding any other
provision of this Article III, and only to the extent necessary to ensure the
deductibility to the Company of an award, the number of shares of Common Stock
subject to a Stock Award granted to a Acovered employee" within the meaning of
Section 162(m) of the Code in any calendar year shall not exceed 4,000,000.
3.3 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) DISABILITY, RETIREMENT AND DEATH. Unless otherwise set forth in
the Agreement relating to a Restricted Stock Award, if the employment with or
service to the Company of the holder of such award terminates by reason of
Disability, Retirement or death, the Restriction Period shall terminate as of
the effective date of such holder's termination of employment or service and
all Performance Measures, if any, applicable to such award shall be deemed to
have been satisfied at the minimum target level.
(b) OTHER TERMINATION. Unless otherwise set forth in the Agreement
relating to a Restricted Stock Award, if the employment with or service to the
Company of the holder of a Restricted Stock Award terminates for any reason
other than Disability, Retirement or death, the portion of such award which is
subject to a Restriction Period on the effective date of such holder's
termination of employment or service shall be forfeited by such holder and such
portion shall be automatically canceled by the Company.
IV. PERFORMANCE SHARE AWARDS
4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion,
grant Performance Share Awards to Eligible Participants.
4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be
subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of this
Plan, as the Committee shall deem advisable.
(a) NUMBER OF PERFORMANCE SHARES AND PERFORMANCE MEASURES. The
number of Performance Shares subject to any award and the Performance
Measures and Performance Period applicable to such award shall be determined
by the Committee.
(b) VESTING AND FORFEITURE. The Agreement relating to a Performance
Share Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of such
award, if specified Performance Measures are satisfied or met during the
specified Performance Period, and for the forfeiture of all or a portion of such
award, if specified Performance Measures are not satisfied or met during the
specified Performance Period.
(c) SETTLEMENT OF VESTED PERFORMANCE SHARE AWARDS. The Agreement
relating to a Performance Share Award (i) shall specify whether such award may
be settled in shares of Common Stock (including shares of Restricted Stock) or
cash or a combination thereof and (ii) may specify whether the holder thereof
shall be entitled to receive, on a current or deferred basis, dividend
equivalents, and, if determined by the Committee, interest on or the deemed
reinvestment of any
11
<PAGE>
deferred dividend equivalents, with respect to the number of shares of Common
Stock subject to such award. If a Performance Share Award is settled in
shares of Restricted Stock, a certificate or certificates representing such
Restricted Stock shall be issued in accordance with Section 3.2(c) and the
holder of such Restricted Stock shall have such rights of a stockholder of
the Company as determined pursuant to Section 3.2(d). Prior to the settlement
of a Performance Share Award in shares of Common Stock, including Restricted
Stock, the holder of such award shall have no rights as a stockholder of the
Company with respect to the shares of Common Stock subject to such award and
shall have rights as a stockholder of the Company in accordance with Section
5.9.
4.3 TERMINATION OF EMPLOYMENT.
(a) DISABILITY, RETIREMENT AND DEATH. Unless otherwise set forth in
the Agreement relating to a Performance Share Award, if the employment with
or service to the Company of the holder of such award terminates by reason of
Disability, Retirement or death, all Performance Measures applicable to such
award shall be deemed to have been satisfied at the minimum target level and
the Performance Period applicable to such award shall thereupon terminate.
(b) OTHER TERMINATION. Unless otherwise set forth in the Agreement
relating to a Performance Share Award, if the employment with or service to the
Company of the holder of a Performance Share Award terminates for any reason
other than Disability, Retirement or death, the portion of such award which is
subject to a Performance Period on the effective date of such holder's
termination of employment shall be forfeited and such portion shall be
automatically canceled by the Company.
V. GENERAL
5.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan was approved by the
directors of the Company on March 1, 2000 and was approved by the written
consent of the holders of a majority of the votes attached to the outstanding
stock of the Company on March 1, 2000, which date is the effective date of
this Plan. This Plan shall terminate when shares of Common Stock are no
longer available for the grant, exercise or settlement of awards, unless
terminated earlier by the Board. Termination of this Plan shall not affect
the terms or conditions of any award granted prior to termination.
5.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation, including Section 162(m) and Section 422 of the Code;
provided, however, that no amendment shall be made without stockholder approval
if such amendment would (a) increase the maximum number of shares of Common
Stock available under this Plan (subject to Section 5.7) or (b) effect any
change applicable to Incentive Stock Options that is inconsistent with Section
422 of the Code, unless the Board has determined in good faith that such change
is inconsistent with Section 422 of the Code and is necessary in order to
facilitate a transaction involving a Change of Control of the Company. No
amendment may impair the rights of a holder of an outstanding award without the
consent of such holder.
5.3 AGREEMENT. No award shall be valid until an Agreement is executed by
the Company and the recipient of such award and, upon execution by each party
and delivery of the Agreement to the Company, such award shall be effective
as of the effective date set forth in the Agreement.
5.4 NON-TRANSFERABILITY OF AWARDS. No award shall be transferable other
than by will or by the laws of descent and distribution. Each award may be
exercised or settled during the
12
<PAGE>
EXHIBIT 10.11
holder's lifetime only by the holder. Except to the extent permitted by the
second preceding sentence or the Agreement relating to an award, no award may
be sold, transferred, assigned, pledged, hypothecated, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be
subject to execution, attachment or similar process. Upon any attempt to so
sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of
any such award, such award and all rights thereunder shall immediately become
null and void.
5.5 TAX WITHHOLDING. The Company shall have the right to require, prior
to the issuance or delivery of any shares of Common Stock or the payment of
any cash pursuant to an award made hereunder, payment by the holder of such
award of any Federal, state, local or other taxes which may be required to be
withheld or paid in connection with such award. An Agreement may provide that
(i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered to a holder, having an aggregate Fair Market Value
determined as of the date the obligation to withhold or pay taxes arises in
connection with an award (the "TAX DATE"), or withhold an amount of cash
which would otherwise be payable to a holder, in the amount necessary to
satisfy any such obligation or (ii) the holder may satisfy any such
obligation by any of the following means: (A) a cash payment to the Company,
(B) delivery (either actual delivery or by attestation procedures established
by the Company) to the Company of Mature Shares having an aggregate Fair
Market Value, determined as of the Tax Date, equal to the amount necessary to
satisfy any such obligation, (C) authorizing the Company to withhold whole
shares of Common Stock which would otherwise be delivered having an aggregate
Fair Market Value, determined as of the Tax Date, or withhold an amount of
cash which would otherwise be payable to a holder, equal to the amount
necessary to satisfy any such obligation, (D) in the case of the exercise of
a Stock Option, a cash payment by a broker-dealer acceptable to the Company
to whom the optionee has submitted an irrevocable notice of exercise or (E)
any combination of (A), (B) and (C), in each case to the extent set forth in
the Agreement relating to the award; provided, however, that the Company
shall have sole discretion to disapprove of an election pursuant to any of
clauses (B)-(E). Shares of Common Stock to be delivered or withheld may not
have an aggregate Fair Market Value in excess of the amount determined by
applying the minimum statutory withholding rate. Any fraction of a share of
Common Stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the holder.
5.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject
to the requirement that if at any time the Company determines that the
listing, registration or qualification of the shares of Common Stock subject
to such award upon any securities exchange or under any law, or the consent
or approval of any governmental body, or the taking of any other action is
necessary or desirable as a condition of, or in connection with, the exercise
or settlement of such award or the delivery of shares thereunder, such award
shall not be exercised or settled and such shares shall not be delivered
unless such listing, registration, qualification, consent, approval or other
action shall have been effected or obtained, free of any conditions not
acceptable to the Company. The Company may require that certificates
evidencing shares of Common Stock delivered pursuant to any award made
hereunder bear a legend indicating that the sale, transfer or other
disposition thereof by the holder is prohibited except in compliance with the
Securities Act of 1933, as amended, and the rules and regulations thereunder.
5.7 ADJUSTMENT. Notwithstanding anything to the contrary contained in
this Plan, in the event of any stock split, stock dividend, recapitalization,
reorganization, merger, consolidation, combination, exchange of shares,
liquidation, spin-off, sale of substantially all assets or other similar
13
<PAGE>
change in capitalization or event, or any distribution to holders of Common
Stock other than a regular cash dividend, the number and class of securities
available under this Plan, the number and class of securities subject to each
outstanding Stock Option and the purchase price per security, the per person
limits imposed by Sections 1.5 and 3.2 on grants of Stock of SAR's and Stock
Awards in a Calendar Year, the terms of each outstanding SAR, the number and
class of securities subject to each outstanding Stock Award, and the terms of
each outstanding Performance Share shall be adjusted by the Committee, such
adjustments to be made in the case of outstanding Stock Options and SARs
without an increase in the aggregate purchase price or base price. The
decision of the Committee regarding any such adjustment shall be final,
binding and conclusive. If any such adjustment would result in a fractional
security being (a) available under this Plan, such fractional security shall
be disregarded, or (b) subject to an award under this Plan, the Company shall
pay the holder of such award, in connection with the first vesting, exercise
or settlement of such award in whole or in part occurring after such
adjustment, an amount in cash determined by multiplying (i) the fraction of
such security (rounded to the nearest hundredth) by (ii) the excess, if any,
of (A) the Fair Market Value on the vesting, exercise or settlement date over
(B) the exercise or base price, if any, of such award.
5.8 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any
right to participate in this Plan other than Eligible Directors. Neither this
Plan nor any award made hereunder shall confer upon any person any right to
continued employment by the Company, any Subsidiary or any affiliate of the
Company or affect in any manner the right of the Company, any Subsidiary or
any affiliate of the Company to terminate the employment of any person at any
time without liability hereunder.
5.9 RIGHTS AS STOCKHOLDER. No person shall have any right as a
stockholder of the Company with respect to any shares of Common Stock or
other equity security of the Company which is subject to an award hereunder
unless and until such person becomes a stockholder of record with respect to
such shares of Common Stock or equity security.
5.10 DESIGNATION OF BENEFICIARY. If permitted by the Company, a holder of
an award may file with the Committee a written designation of one or more
persons as such holder's beneficiary or beneficiaries (both primary and
contingent) in the event of the holder's death. To the extent an outstanding
Stock Option or SAR granted hereunder is exercisable, such beneficiary or
beneficiaries shall be entitled to exercise such Stock Option or SAR.
Each beneficiary designation shall become effective only when filed in
writing with the Committee during the holder's lifetime on a form prescribed by
the Committee. The spouse of a married holder domiciled in a community property
jurisdiction shall join in any designation of a beneficiary other than such
spouse. The filing with the Committee of a new beneficiary designation shall
cancel all previously filed beneficiary designations.
If a holder fails to designate a beneficiary, or if all designated
beneficiaries of a holder predecease the holder, then each outstanding Stock
Option and SAR hereunder held by such holder, to the extent exercisable, may be
exercised by such holder's executor, administrator, legal representative or
similar person.
5.11 GOVERNING LAW. This Plan, each award hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United
States, shall be governed by the laws of the State of Delaware and construed
in accordance therewith without giving effect to principles of conflicts of
laws.
5.12 FOREIGN EMPLOYEES. Without amending this Plan, the Committee may
grant awards to Eligible Participants or Eligible Directors who are foreign
nationals on such terms and conditions
14
<PAGE>
EXHIBIT 10.11
different from those specified in this Plan as may in the judgment of the
Committee be necessary or desirable to foster and promote achievement of the
purposes of this Plan and, in furtherance of such purposes the Committee may
make such modifications, amendments, procedures, subplans and the like as may
be necessary or advisable to comply with provisions of laws in other
countries or jurisdictions in which the Company or its Subsidiaries operates
or has employees in or in which an Eligible Director resides.
15
<PAGE>
EXHIBIT 10.12
January 1, 2000
PRIVATE & CONFIDENTIAL
Mr. Jerry Campbell
1677 Hayball Road
Jackson, Michigan
49201
Dear Jerry:
RE: EMPLOYMENT WITH MI ENTERTAINMENT CORP.
- - -------------------------------------------
In accordance with our recent discussions, we are delighted to confirm the
terms and conditions of your employment with MI Entertainment Corp. (the
"Corporation"), as follows:
1. POSITION: You are appointed President and CEO of the Corporation
reporting to the Chairman and carrying out your day-to-day duties
from an office in Michigan and the Corporation's head office at
Santa Anita Race Track. You will also be appointed to the Board of
Directors of the Corporation at the earliest opportunity after
commencement of your employment.
2. BASE SALARY: Your Base Salary shall be U.S. $300,000 per annum (less
statutorily required deductions), payable monthly in arrears and
otherwise in accordance with the Corporation's standard payroll
practices.
3. ANNUAL BONUS: In addition to your Base Salary, you shall receive (a)
a bonus (the "Basic Bonus") equal to 2% of the pre-tax profits of
the Corporation at the end of each year of employment, and (b) a
discretionary bonus (the "Discretionary Bonus") as determined by the
Board based on your progress with respect to the guidelines set
forth in Schedule A (the Basic Bonus and the Discretionary Bonus are
referred to herein collectively as the "Annual Bonus"). The Annual
Bonus shall be inclusive of all entitlement to vacation pay, and
less statutorily required deductions.
4. BENEFITS: During your employment by the Corporation, you will be
entitled to:
(a) participate in all group insurance and benefit programs
generally applicable to salaried employees of the
Corporation from time to time, with the exception of any
Employee Equity Participation and Profit Sharing Plan or
any equivalent or related plans in effect from time to time;
<PAGE>
2
(b) four weeks vacation in respect of each completed twelve
month period, to be taken at such time or times as are
mutually convenient to you and the Corporation, but not
payment in lieu thereof;
(c) receive an automobile allowance of U.S. $875 per month for
a North American vehicle; provided that you shall be
responsible for all automobile operating costs including,
without limitation, fuel, repairs, maintenance, insurance
premiums and insurance deductibles; and
(d) reimbursement for all reasonable and documented business
expenses incurred on behalf of the Corporation in carrying
out your duties, in accordance with the Corporation's
policies from time to time, but excluding automobile
operating costs.
5. MIE STOCK OPTIONS: Subject to the express approval of the Board of
Directors of the Corporation and any regulatory bodies having
jurisdiction (including the consent of The New York Stock Exchange
and/or NASDAQ to the listing of the underlying shares), and subject
to you entering into a Stock Option Agreement with the Corporation
in the standard form contemplated by the Corporation's Incentive
Stock Option Plan, the Corporation shall grant you options (vesting
over three years) to purchase 1,000,000 Shares at an exercise price
per share which is equal to the issue price of the Shares to
shareholders of Magna International Inc. Such options shall be
exercisable by you only in accordance with the terms and conditions
set forth in the Stock Option Agreement referred to above. Upon
receipt of an executed copy of this agreement, we will place this
matter before the Board of Directors of the Corporation at the
earliest opportunity.
The above noted stock option agreement will contain a provision that
in the event that your employment with the corporation is terminated
for reasons other than just cause or your voluntary resignation, the
above-noted options will vest in their entirety and be exercisable
for a period of ninety (90) days.
6. TERMINATION: Your employment and this agreement, including all
benefits provided for under this agreement, will terminate on: (a)
the acceptance by the Corporation of your voluntary resignation; (b)
at the Corporation's option, your disability for an aggregate of six
months or more in any twenty-four month period, subject to any
statutory requirement to accommodate such disability; (c) your
death; or (d) your dismissal for just cause or by reason of your
breach of the terms of this agreement.
Otherwise, you or the Corporation may, at any time, terminate your
employment and this agreement by providing the other party with
twelve months prior written notice of intention to terminate. In
addition the Corporation may elect to terminate your employment
immediately by paying you a retiring allowance of U.S. $300,000
(less statutorily required deductions) either in a lump sum within
thirty days of the day of termination or monthly in arrears in
twelve equal instalments commencing thirty days after the day of
termination. If your employment is terminated pursuant to this
paragraph, the Corporation shall maintain on your behalf the
benefits referred to in paragraph 4(a) for a period of not less than
the period required by applicable statute.
In the event that you breach the provisions of paragraph 7, the
payment of any further instalments of such retiring allowance will
immediately cease. Further, the amount paid in each instalment will
be offset by any income earned, during the period you are entitled
to receive instalments, from alternate or self-employment.
<PAGE>
3
On termination of this agreement other than for dismissal for cause
or for breach under sub-paragraph 6(d), the Corporation will also
pay your Annual Bonus on a prorated basis and, to the extent that
any stock options referenced in paragraph 5 have vested, they will
continue to be exercisable in accordance with the said Stock Option
Agreement.
The termination provisions set forth above represent all severance
pay entitlement, notice of termination or pay in lieu thereof,
salary, bonuses, automobile allowances, vacation and/or vacation pay
and other remuneration and benefits payable or otherwise provided to
you in relation to your employment by the Corporation or any
affiliates of Magna International Inc. (the "Magna Group").
7. OTHER CONDITIONS: You hereby acknowledge as reasonable and agree that
you shall abide by the following terms and conditions:
a) TECHNOLOGY, KNOW-HOW, INVENTIONS, PATENTS: That all
designs, devices, improvements, inventions and ideas made
or conceived by you resulting from your access to the
business of the Corporation and/or the Magna Group shall be
exclusive property of the Magna Group, and you and your
estate agree to take all necessary steps to ensure that
such property rights are protected.
b) CONFIDENTIALITY: You shall keep confidential at any time
during or after your employment, any information (including
proprietary or confidential information) about the business
and affairs of, or belonging to, the Corporation or any
member of the Magna Group or their respective customers or
suppliers, including information which, though technically
not trade secrets, the dissemination or knowledge whereof
might prove prejudicial to any of them.
c) NON-COMPETITION: During the term of your employment with
the Corporation and for a period of six months after the
termination of your employment, you shall not, directly or
indirectly, in any capacity compete with the business of
the Corporation or of any member of the Magna Group in
respect of which you have had access to proprietary or
confidential information or solicit the employees thereof.
8. TERM: Subject to earlier termination in accordance with the terms of
this agreement, your employment with the Corporation shall commence
on January 1, 2000, or such earlier or later date as may be mutually
agreed upon, (the "Start Date") and shall expire on December 31,
2002. This Agreement may be renewed for a subsequent term on such
terms and conditions as be mutually agreed upon in writing. Upon
expiry or other termination of this agreement, paragraph 7 shall
continue in full force and effect. This agreement shall be null and
void and of no effect if you do not commence employment by January
1, 2000.
9. ASSIGNABILITY: The Corporation may, in its sole discretion, assign
this agreement to an affiliated or other organization at any time.
Upon any such assignment, the terms and conditions of this agreement
shall continue in full force and affect.
If the terms of employment as set out in this agreement are acceptable to
you, please sign and date three copies in the places indicated and return two
fully signed copies to the attention of the Chairman by January 1, 2000,
after which, if not so signed and returned, this agreement shall become null
and void and of no effect. Upon execution by you, this agreement (i) replaces
any prior written or oral employment contract or other agreement concerning
remuneration between you and the Corporation or any member of the Magna
Group, (ii) will continue to apply to your employment in a similar or other
capacity with the Corporation or any member of the Magna Group, and (iii) will
<PAGE>
4
continue to be applicable in the event that your employment with the
Corporation continues beyond the expiry date of the term specified above
without this agreement being formally extended or replaced.
Yours very truly,
MAGNA VENTURES INC.
Per: ____________________
Frank Stronach
-------------------
I hereby accept the terms and conditions set out above and acknowledge that
this agreement contains all the terms and conditions of my employment with MI
Entertainment Corp. and that no other terms, conditions or representations
other than those within this letter form part of this agreement and confirm
that I am not subject to any restrictions (contractual or otherwise) arising
from my former employment which would prevent or impair me in carrying out my
duties and functions with the Corporation. Furthermore, I confirm that during
the term of my employment I will not offer to the Corporation any
confidential or proprietary information that I have knowledge of with respect
to my former employers, nor will I provide such information to the
Corporation should I be requested to do so, until such time as such
information is no longer confidential, proprietary or comes into the public
domain.
- - ------------------------- --------------------------------
Date , 1999 Jerry Campbell
<PAGE>
SCHEDULE A
You Shall be entitled to a Discretionary Bonus equal to $1,000,000 less Base
Salary and Basic Bonus based on your success in furthering the foregoing:
(a) Furthering of our corporate strategy, i.e.:
(1) completing our racetrack consolidation strategy;
(2) "bundling", or combining, our simucast horse racing products and
marketing the signal under the corporate brand name;
(3) leveraging our competitive position in the horse racing industry
and, ultimately, our brand name, in expanding our distribution
channels and sports wagering products;
(4) enhancing the facilities at some of our horse racetracks; and
(5) developing total entertainment destinations centered on some of
our horse racetracks.
(b) Effecting synergies related to pursuing Corporate Strategy including:
(1) improving business systems;
(2) rationalising financial reporting;
(3) cost cutting; and
(4) advance IT network.
<PAGE>
EXHIBIT 10.14 LOS ANGELES TURF CLUB, INCORPORATED
285 WEST HUNTINGTON DRIVE
ARCADIA, CALIFORNIA 91007
July 1, 1999
PRIVATE & CONFIDENTIAL
Mr. Lonny Powell
1501 West Bell Road
Phoenix, Arizona 85023
Dear Lonny:
RE: EMPLOYMENT WITH LOS ANGELES TURF CLUB, INCORPORATED DBA "SANTA ANITA PARK"
In accordance with our recent discussions, this letter will confirm that the
terms and conditions of your employment with Los Angeles Turf Club, Incorporated
(the "Corporation"), shall be as follows:
1. POSITION: You are appointed President and CEO of Los Angeles Turf Club,
Incorporated and Vice-President, Venture Co. ("Ventures") reporting to
the Chairman of Ventures or his designee.
2. BASE SALARY: Your Base Salary shall be U.S. $250,000 per annum (less
statutorily required deductions), payable in arrears in accordance with
the Corporation's standard payroll practices.
3. ANNUAL BONUS: In addition to your Base Salary, you shall receive an
annual bonus (inclusive of all entitlement to vacation pay, and less
statutorily required deductions) in an amount equal to one percent
(1.0%) of the net profits before income tax of the Santa Anita Park
racing operations for each full fiscal year of the Corporation
completed during your employment. Your Annual Bonus for the 1999 fiscal
year will, however, be prorated from the Start Date to December 31,
1999.
Net profits before income tax of the Santa Anita Park racing operations
for the purposes of this agreement shall be determined and paid in
accordance with the stated policies prescribed by the Corporation
and/or Ventures, from time to time, in their sole discretion.
4. SIGNING BONUS: In addition, you shall receive a one-time lump-sum
signing bonus of U.S.$100,000 (less taxes and other statutory
deductions), payable immediately upon the execution of this agreement
by both you and the Corporation.
5. BENEFITS: During your employment by the Corporation, you will be
entitled to:
(a) participate in all group insurance and benefit programs
generally applicable to salaried employees of the Corporation
from time to time, with the exception of the Magna Employee
Equity Participation and Profit Sharing Plan or any equivalent
or related plans in effect from time to time;
(b) four (4) weeks vacation in respect of each completed twelve
(12) month period, to be taken at such time or times as are
mutually convenient to you and the Corporation, but not
payment in lieu thereof;
(c) receive an automobile allowance of U.S. $700 per month;
provided that you shall be responsible for all automobile
operating costs including, without limitation, fuel, repairs,
maintenance, insurance premiums and insurance deductibles; and
(d) reimbursement for all reasonable and documented business
expenses incurred on behalf of the Corporation in carrying out
your duties, in accordance with the Corporation's policies
from time to time, but excluding automobile operating costs.
<PAGE>
6. VENTURES STOCK OPTIONS: Subject to the express approval of the Board of
Directors of Ventures and any regulatory bodies having jurisdiction
(including the consent of The New York Stock Exchange and/or NASDAQ to
the listing of the underlying shares), and subject to you entering into
a Stock Option Agreement with Ventures in the standard form
contemplated by Ventures Incentive Stock Option Plan, Ventures shall
grant you options to purchase 25,000 Class A Subordinate Voting Shares
of Ventures at an exercise price per share which is equal to 100% of
the last sale price of such shares on The New York Stock Exchange
and/or NASDAQ on the trading day prior to the date of Ventures Board
approval. Such options shall be exercisable by you only in accordance
with the terms and conditions set forth in the Stock Option Agreement
referred to above. Upon receipt of an executed copy of this agreement,
we will place this matter before the Board of Directors of Ventures at
the earliest opportunity.
7. TERMINATION: Your employment and this agreement, including all benefits
provided for under this agreement, will terminate on: (a) the
acceptance by the Corporation of your voluntary resignation; (b) at the
Corporation's option, your disability for an aggregate of six (6)
months or more in any twenty-four (24) month period, subject to any
statutory requirement to accommodate such disability; (c) your death;
or (d) your dismissal for just cause or by reason of your breach of the
terms of this agreement.
Otherwise, you or the Corporation may, at any time, terminate your
employment and this agreement by providing the other party with twelve
months prior written notice of intention to terminate. In addition the
Corporation may elect to terminate your employment immediately by
paying you a retiring allowance of U.S. $250,000 (less statutorily
required deductions) either in a lump sum within thirty (30) days of
the day of termination or monthly in arrears in twelve (12) equal
instalments commencing thirty (30) days after the day of termination.
If your employment is terminated pursuant to this paragraph, the
Corporation shall maintain on your behalf the benefits referred to in
paragraph 5(a) for a period of not less than the period required by
applicable statute.
In the event that you breach the provisions of paragraph 8, the payment
of any further instalments of such retiring allowance will immediately
cease. Further, the amount paid in each instalment will be offset by
any income earned, during the period you are entitled to receive
instalments, from alternate or self-employment.
On termination of this agreement other than for dismissal for cause or
for breach under sub-paragraph 7(d), the Corporation will also pay your
Annual Bonus on a prorated basis and, to the extent that any stock
options referenced in paragraph 6 have vested, they will continue to be
exercisable in accordance with the said Stock Option Agreement.
The termination provisions set forth above represent all severance pay
entitlement, notice of termination or pay in lieu thereof, salary,
bonuses, automobile allowances, vacation and/or vacation pay and other
remuneration and benefits payable or otherwise provided to you in
relation to your employment by the Corporation (including,
specifically, any preceding employment by Magna International Inc.,
Magna Interior Systems Inc., Atoma International Corp.; Cosma
International Inc., Decoma International Inc., Tesma International
Inc., Magna Mirror Systems Inc. and/or their respective affiliated or
associated companies as the case may be (all of the foregoing are
hereinafter collectively referred to as the "Magna Group")), and the
termination of your employment and this agreement.
8. OTHER CONDITIONS: You hereby acknowledge as reasonable and agree that
you shall abide by the following terms and conditions:
i) TECHNOLOGY, KNOW-HOW, INVENTIONS, PATENTS: That all designs,
devices, improvements, inventions and ideas made or conceived
by you resulting from your access to the business of the
Corporation, Ventures and/or the Magna Group shall be
exclusive property of the Magna Group, and you and your estate
agree to take all necessary steps to ensure that such property
rights are protected.
ii) CONFIDENTIALITY: You shall keep confidential at any time
during or after your employment, any information (including
proprietary or confidential information) about the business
and affairs of, or belonging to, the Corporation, Ventures or
any member of the Magna Group or their respective
<PAGE>
customers or suppliers, including information which,
though technically not trade secrets, the dissemination or
knowledge whereof might rpove prejudicial to any of them.
iii) NON-COMPETITION: During the term of your employment with the
Corporation and for a period of six (6) months after the
termination of your employment, you shall not, directly or
indirectly, in any capacity compete with the business of the
Corporation, Ventures or of any member of the Magna Group in
respect of which you have had access to proprietary or
confidential information or solicit the employees thereof.
9. TERM: Subject to earlier termination in accordance with the terms of
this agreement, your employment with the Corporation shall commence on
July 1, 1999, or such earlier or later date as may be mutually agreed
upon, (the "Start Date") and shall expire on June 30, 2004. Upon expiry
or other termination of this agreement, paragraph 8 shall continue in
full force and effect. This agreement shall be null and void and of no
effect if you do not commence employment by July 1, 1999.
10. ASSIGNABILITY: The Corporation may, in its sole discretion, assign this
agreement to an affiliated or other organization at any time. Upon any
such assignment, the terms and conditions of this agreement shall
continue in full force and affect.
If the terms of employment as set out in this agreement are acceptable to you,
please sign and date three copies in the places indicated and return two fully
signed copies to the attention of Frank Stronach by July 15, 1999, after which,
if not so signed and returned, this agreement shall become null and void and of
no effect. Upon execution by you, this agreement (i) replaces any prior written
or oral employment contract or other agreement concerning remuneration between
you and the Corporation, Ventures or any member of the Magna Group, (ii) will
continue to apply to your employment in a similar or other capacity with the
Corporation, Ventures or any member of the Magna Group, and (iii) will continue
to be applicable in the event that your employment with the Corporation
continues beyond the expiry date of the term specified above without this
agreement being formally extended or replaced.
Yours very truly,
Frank Stronach
/jm
-------------------
I hereby accept the terms and conditions set out above and acknowledge that this
agreement contains all the terms and conditions of my employment with Los
Angeles Turf Club, Incorporated and that no other terms, conditions or
representations other than those within this letter form part of this agreement
and confirm that I am not subject to any restrictions (contractual or otherwise)
arising from my former employment which would prevent or impair me in carrying
out my duties and functions with the Corporation. Furthermore, I confirm that
during the term of my employment I will not offer to the Corporation any
confidential or proprietary information that I have knowledge of with respect to
my former employers, nor will I provide such information to the Corporation
should I be requested to do so, until such time as such information is no longer
confidential, proprietary or comes into the public domain.
- - ------------------------- --------------------------------
Date , 1999 Lonny Powell
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<S> <C>
UNITED STATES
Magna 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
MEC Land Holdings (California) 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
1207302 Ontario Inc. 100
1180482 Ontario Inc. 100
EUROPE
MI 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
Fontana Beteiligungs AG 100
Magna Projektentwicklungs AG 100
Magna Grundstucksentwicklungs GmbH 100
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration statement on
Form S-8 (No. 333-32414) pertaining to the Magna Entertainment Corp.
Long-Term Incentive Plan and the Registration Statement on Form S-1 (No.
333-94791), each of Magna Entertainment Corp., of our report dated March 30,
2000 with respect to the consolidated financial statements and schedule of
Magna Entertainment Corp. included in the Annual Report (Form 10-K) for the
year ended December 31, 1999 filed with the Securities and Exchange
Commission.
Ernst & Young LLP
March 30, 2000
Los Angeles, California
