SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____________ to _____________ Commission File No. 000-30578 MAGNA ENTERTAINMENT CORP. (Exact Name of Registrant as Specified in Its Charter) - -------------------------------------------------------------------------------- Delaware 98-0208374 -------- ---------- (State or Other Jurisdiction (I.R.S. Employer Identification Number) of Incorporation or Organization) - -------------------------------------------------------------------------------- 337 Magna Drive L4G 7K1 ------- Aurora, Ontario, Canada (Zip Code) ----------------------- (Address of principal executive offices) - -------------------------------------------------------------------------------- Registrant's telephone number, including area code: (905) 726-2462 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Subordinate Voting Stock (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___________ As of March 26, 2001, the aggregate market value of the Class A Subordinate Voting Stock held by non-affiliates of the registrant was approximately $54,036,764 (based on the closing sale price of $4.00 per share of the Class A Subordinate Voting Stock reported on Nasdaq). As of March 26, 2001, the aggregate market value of the Exchangeable Shares of MEC Holdings (Canada) Inc., each of which is exchangeable into one share of Class A Subordinate Voting Stock of the registrant, held by non-affiliates of the registrant was approximately $29,571,940 (based on the closing sale price of $4.00 per share of the Class A Subordinate Voting Stock reported on Nasdaq). The number of shares of Class A Subordinate Voting Stock of the registrant outstanding as of March 26, 2001 was 14,271,491. The number of shares of Class B Stock of the registrant outstanding as of March 26, 2001 was 58,466,056. Documents Incorporated by Reference The registrant's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, with respect to the annual meeting of stockholders scheduled to be held on May 11, 2001, is incorporated by reference in Part III of this Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K, the document incorporated by reference is not deemed to be filed as a part hereof. Item 1. Business Special Note Regarding Forward-Looking Information Certain statements included herein constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties, including, but not limited to those described below under "Risk Factors" and in the other documents which we file with the Securities and Exchange Commission. Consequently, all the forward- looking statements made in this Report are fully qualified by this special note, and there can be no assurance that the actual results or developments anticipated by us will be realized, or even if realized, that they will have the expected consequences to, or effects on, us. See "Risk Factors" below for a description of the most significant risks and uncertainties of our business. Incorporation and Corporate Structure We were incorporated on March 4, 1999 under the laws of the State of Delaware as MI Venture Inc. Our certificate of incorporation was amended by certificate of amendment on August 30, 1999 to reclassify our Common Stock into Class A Common Stock and to add a new class of stock designated as Class C Common Stock. Our certificate of incorporation was further amended on November 4, 1999 to change our name to MI Entertainment Corp., add share provisions for our Class A Subordinate Voting Stock and Class B Stock and reclassify and further subdivide our outstanding stock into shares of Class B Stock. Our certificate of incorporation was further amended on January 26, 2000 to change our name to Magna Entertainment Corp. Our certificate of incorporation was further amended on February 29, 2000 to broaden our corporate purpose, clarify the attributes of our Class A Subordinate Voting Stock and Class B Stock and implement our Corporate Constitution. Subsequently, our certificate of incorporation was restated on March 1, 2000 to consolidate all prior amendments. Our registered office is located at 1209 Orange Street, Wilmington, Delaware, 19801 and our principal executive office is located at 337 Magna Drive, Aurora, Ontario, Canada L4G 7K1. The following chart shows our organizational structure and that of our material subsidiaries, each of which is directly or indirectly wholly-owned, together with the jurisdiction of incorporation of each of the entities shown thereon as of March 29, 2001. 2 Magna Entertainment Corp. (Delaware) Horse Racing Operations Real Estate Operations The Santa Anita Companies, Inc. MEC Holdings (USA) Inc. (Delaware) (Delaware) Los Angeles Turf Club, Inc. MEC Holdings (Canada) Inc. (California) (Ontario) Gulfstream Park Racing Association, Inc. MI Entertainment Holding GmbH (Florida) (Austria) Pacific Racing Association Fontana Beteiligungs AG (California) (Austria) Thistledown, Inc. MEC Projektenwicklungs AG (Ohio) (Austria) Remington Park, Inc. SDP Landholdings GmbH (Oklahoma) (Austria) MI Racing Inc. MEC Land Holdings (California) Inc. (Delaware) (California) Bay Meadows Operating Company LLC (Delaware) SLRD Thoroughbred Training Center, Inc. (Delaware) GPRA Thoroughbred Training Center, Inc. (Delaware) Our Business We acquire, develop and operate horse racetracks and related pari-mutuel wagering operations. As a complement to our horse racing business, we are exploring the development of electronic media wagering operations, including telephone account, interactive television and Internet-based wagering, possibly in conjunction with business partners and subject to regulatory requirements. We are also exploring the development of real estate projects on the land surrounding some of our racetracks. These real estate projects could be pursued in conjunction with developers who would be expected to provide the necessary financing. In addition, we own a real estate portfolio which includes a gated residential project under development, a golf course and related recreational facilities in Oberwaltersdorf, Austria, another golf course scheduled to open in May 2001 in Aurora, Ontario, Canada and other real estate. We intend to continue to gradually sell the balance of our excess non-racing real estate portfolio, excluding the land surrounding our racetracks, in order to provide capital to be used in our business. Accordingly, we are taking steps, including servicing our land and obtaining zoning and other approvals, to enhance the value of certain of these properties and increase the revenues which can be generated from their sale. A brief description of our horse racing business and real estate portfolio follows. 3 Horse Racing and Pari-Mutuel Wagering We currently operate seven horse racetracks, each of which includes a simulcast facility that accepts wagers on races conducted at other racetracks. We also broadcast, or export, simulcasts of our horse races to a number of locations across the United States, Canada, Mexico, the Caribbean region and Australia. Our horse racing and related wagering operations include: Santa Anita Park near Los Angeles, California; Gulfstream Park near Miami, Florida; Golden Gate Fields near San Francisco, California; Thistledown near Cleveland, Ohio; Remington Park in Oklahoma City, Oklahoma; Great Lakes Downs in Muskegon, Michigan and Bay Meadows Racecourse ("Bay Meadows") near San Francisco, California. We also own San Luis Rey Downs, a horse boarding and training center located outside of San Diego, California. We have acquired all these operations since December 1998. We own and operate some of the premier horse racing facilities in North America and, accordingly, we are able to offer a high quality simulcast product. For example, Santa Anita Park has hosted the Breeders' Cup twice since the inception of the Breeders' Cup in 1984 and Gulfstream Park has hosted it three times, the most recent being on November 6, 1999. Furthermore, by many standard industry measures including total handle or total amount wagered, average daily attendance, average daily handle, average daily on-track handle and average daily off-track handle, we believe that Santa Anita Park, Gulfstream Park, Golden Gate Fields and Bay Meadows are four of the top racetracks in North America. With the exception of Bay Meadows and the property on which Remington Park is located, which are leased from third parties, all of our racetracks are owned as well as operated by us. Pari-mutuel wagering on horse racing is pooled betting in which individuals bet against each other on the outcome of a horse race. The racetrack operator has no interest in the order of finish in any given race and therefore has no risk in the outcome. A percentage of the pooled wagers is retained by the operator of the wagering facility, a portion is paid to the regulatory or taxing authorities and a portion is paid to the horsemen in the form of purses which encourage owners and trainers to enter their horses in that track's live races. The balance of the pooled wagers is paid to bettors as winnings. A racetrack's share of pari-mutuel wagering revenues is based on pre-determined percentages of various categories of the pooled wagers at that racetrack and its in-state "off- track" wagering network. The maximum pre-determined percentages are approved by state regulators. Pari-mutuel wagering on horse racing occurs on the live races being conducted at racetracks as well as on televised racing signals or simulcasts received or imported by the simulcast wagering facilities located at such racetracks. This type of wagering is known as on-track wagering. Pari- mutuel wagering on horse racing also occurs at wagering establishments on horse races being conducted at racetracks elsewhere. This type of wagering is known as off-track wagering. 4 Santa Anita Park Santa Anita Park is one of the premier horse racing and pari-mutuel wagering facilities in North America. Santa Anita Park was the site of the Breeders' Cup in 1986 and 1993. Santa Anita Park is situated on approximately 305 acres of land in the City of Arcadia, California, approximately 14 miles northeast of Los Angeles. Over 10 million people are located within a 30 mile radius of Santa Anita Park, providing us with one of North America's largest target populations for live and simulcast horse racing. Santa Anita Park was opened for thoroughbred horse racing in 1934 and The Santa Anita Meet has been held at Santa Anita Park each year since its founding, with the exception of three years during World War II. The Santa Anita Meet runs through the prime winter racing season, commencing December 26 and running until mid or late April each year. In addition, we lease Santa Anita Park to Oak Tree Racing Association which hosts The Oak Tree Meet from the end of September or early October through early November of each year. As a result, Santa Anita Park has one of the longest racing schedules of the top North American tracks, totaling approximately 115 days each year. Santa Anita Park had one of the highest total handles of all North American racetracks in 2000, generating over $1.1 billion in wagers in that year (excluding The Oak Tree Meet). In addition, Santa Anita Park's simulcast program generates significant demand from other racetracks and off-track wagering establishments. Santa Anita Park exports its simulcast signal to approximately 1,000 off-track wagering facilities in 23 countries, including the United States, Canada and Mexico. During periods in which there is no live racing, Santa Anita Park operates as an off-track wagering facility where customers can attend and wager on races via television from other California racetracks as well as two racing programs from other nationally recognized racing circuits. Santa Anita Park's facilities currently include a large art deco-style grandstand structure with seating for approximately 19,000 customers as well as standing room for additional customers, a one-mile oval dirt track as well as a natural turf course, stalls for approximately 2,000 horses and parking facilities sufficient to accommodate approximately 20,000 cars. The grandstand facilities include a clubhouse, a general admission area, and food and beverage facilities, which range from fast food stands to an upscale restaurant known as "Frontrunner." The grounds surrounding the grandstand are extensively landscaped and contain a European-style paddock and infield accommodations, including picnic facilities for special groups and the general public. In December 1999, we completed an extensive capital renovation program at Santa Anita Park in order to enhance our customers' entertainment experience. The improvements to Santa Anita Park include: the construction of the fully enclosed 750 seat Frontrunner restaurant and bar, that is used for racing and group functions throughout the year; the installation of a large format LED screen in the infield track area for racing customers and for use by the restaurant and bar to promote non-racing events, such as the Super Bowl, the World Cup and other similar events; improvements to the Winners' Circle and trackside apron to provide customers with better views of the track; upgrades to the grandstand to current seismic code requirements; 5 completion of fire safety installations as required by the fire marshall; and the initiation of improvements to the entrance way and parking lot of the racetrack. These renovations cost approximately $45.0 million. We are also considering a number of other upgrades to further strengthen Santa Anita Park's ability to attract top horses, trainers and jockeys and to enable us to expand the market for Santa Anita Park's simulcast signal. We are currently considering a variety of retail-based development proposals for approximately 85 acres of available land at Santa Anita Park, some of which could be developed in conjunction with business partners. This development would be intended to further enhance the total entertainment experience at Santa Anita Park, attract new customers from diverse demographic backgrounds and strengthen the loyalty of existing customers. If any proposal turns out to be commercially viable after a detailed review, additional time would be required to obtain the necessary regulatory approvals and negotiate with potential business partners who would be expected to provide the necessary financing, as the Company does not intend to devote its capital to non-racing real estate development. Similar concepts are being explored for available land at Gulfstream Park and Golden Gate Fields. Gulfstream Park Gulfstream Park is also one of the premier horse racing and pari-mutuel wagering facilities in North America. Gulfstream Park is located on approximately 255 acres of land in the cities of Hallandale and Aventura, between Miami and Ft. Lauderdale in Florida. The Miami/Ft. Lauderdale area is home to approximately 3.3 million people, providing Gulfstream Park with a sizeable target market for live racing and off-track wagering. Gulfstream Park first opened in February 1939 and has operated each year since except for the four years from 1940 to 1943. Until recently, the annual meet at Gulfstream Park has lasted for approximately 63 days each year and has been held between early January and mid-March. Beginning in 2002, Gulfstream Park has applied to run its meet for approximately 85 days between early January and mid-April. The Breeders' Cup has been held at Gulfstream Park three times--in 1989, 1992 and 1999. Gulfstream Park ranked as one of the five highest North American racetracks in average daily off-track handle in 2000, generating an average daily off-track handle of approximately $8.5 million on each live racing day in that year. Gulfstream Park also had one of the highest total handles of all North American racetracks in 2000, generating approximately $715 million in wagers in that year. Gulfstream Park exports its simulcast program to approximately 11 million people at approximately 800 off-track wagering facilities in the United States, Canada, the Caribbean region and Mexico. Gulfstream Park's facilities include a grandstand with permanent seating for approximately 8,700 customers, a clubhouse with seating for an additional 5,800 customers, a one-mile main track, a seven-eighths mile turf track, stalls for approximately 1,450 horses and parking for approximately 14,000 cars. The grandstand consists of three levels of seating, casual restaurants, bars and snack bars. There are also three gourmet dining rooms in the clubhouse. 6 Hialeah Park's 2000 race meet was conducted at Gulfstream Park under the terms of a three-month lease agreement. That arrangement has not been renewed for 2001. Golden Gate Fields Golden Gate Fields racetrack is one of the premier horse racing and pari- mutuel wagering facilities in North America in terms of total handle. Golden Gate Fields is located on approximately 181 acres of land in the cities of Albany and Berkeley, California, approximately 8 miles from Oakland and approximately 11 miles from San Francisco. Over 2.5 million people are located within a 30 mile radius of Golden Gate Fields, providing a large target market for live and simulcast horse racing. Golden Gate Fields' racing season comprises approximately 105 racing days. The racing schedule at Golden Gate Fields complements Santa Anita Park's racing schedule by adding racing days between the end of The Oak Tree Meet and the beginning of The Santa Anita Meet. Golden Gate Fields had one of the highest total handles of all North American racetracks in 2000, generating almost $550 million in wagers during that year. Golden Gate Fields' simulcast program also generates strong demand from other racetracks and off-track wagering facilities. Golden Gate Fields exports its simulcast program to approximately 500 sites in the United States, Canada, Mexico and the Caribbean. Golden Gate Fields' facilities include a one-mile main track and a nine- tenths mile turf course, stalls for over 1,400 horses, a main grandstand with seating for approximately 8,000 customers, a clubhouse with seating for approximately 5,250 customers and a turf club with seating for approximately 1,500 customers and parking for over 8,500 cars. Bay Meadows Bay Meadows Racecourse is one of the premier horse racing and pari-mutuel wagering facilities in North America in terms of total handle. Bay Meadows is situated on approximately 100 acres of land in San Mateo, California, between San Francisco and San Jose. The racing season at Bay Meadows is divided into a spring meet, which runs approximately 55 days between early April and mid-June, and a fall meet, which runs approximately 50 days between late August and early November. This schedule complements and does not overlap with the racing schedule of Golden Gate Fields, which is located approximately 31 miles from Bay Meadows. In addition, we sub-lease Bay Meadows to the San Mateo County Exposition and Fair Association, which hosts the San Mateo County Fair Meet for a few weeks during the summer. In 2000, Bay Meadows generated a total handle of over $525 million (excluding the San Mateo County Fair Meet). Bay Meadows exports its simulcast program to over 500 outlets in the United States, Canada, Mexico and the Caribbean. The facilities at Bay Meadows include a grandstand with a total seating capacity of approximately 9,500 (including the clubhouse and turf club), a one- mile oval track with 1-1/4 mile and 6 - furlong chutes, a turf course of approximately 7 furlongs, and stalls for approximately 900 horses with auxiliary stabling available at Golden Gate Fields for 900 more horses. 7 The Bay Meadows property is leased under a lease that expires on the later of (i) December 31, 2002, or (ii) the final date of any horse racing meet in progress on December 31, 2002, but in no event later than March 31, 2003. We believe it is unlikely that the lease will be renewed and, as a result, we are exploring various alternatives for the conduct of the Bay Meadows racing days after the expiry of the lease. Those alternatives include the purchase of land in the vicinity which we have under option and the transfer of the Bay Meadows racing days to Golden Gate Fields, subject to regulatory approval. Thistledown Thistledown is located on approximately 125 acres in North Randall, Ohio, approximately 10 miles southeast of downtown Cleveland. Thistledown has one of the longest racing seasons of all North American thoroughbred racetracks, consisting of approximately 185 racing days each year between early April and late December, encompassing the Summit, Thistledown, Randall and Cranwood meets. In 2000, Thistledown generated a total handle of approximately $225 million. Simulcasts from Thistledown are exported to approximately 45 other racetracks in the United States. Annually, Thistledown hosts the Ohio Derby, which is the premier graded stakes race in Ohio and is one of the top three-year old horse races in the United States. Prior to our acquisition of Thistledown, the simulcast product from Thistledown had not been given the exposure necessary in order to generate growth in Thistledown's attendance and handle. We have bundled the signal from Thistledown with the signals from our other racetracks and promoted this bundled signal under the Magna Entertainment Corp. ("MEC") name. We expect that this will continue to enhance the quality of horse racing offered at Thistledown and result in an increase in the number of off-track sites Thistledown's racing signal is exported to. We expect this to result in growth in Thistledown's handle, especially as we expand our distribution channels. Thistledown's facilities include a grandstand with a total capacity of approximately 16,000 customers, a luxury suite for corporate and group events, a one-mile oval track, stalls for approximately 1,500 horses and parking for approximately 6,000 cars. Thistledown also owns the rights to an additional 57 racing days plus a further 30 winter racing days which it uses entirely to host simulcasting from other racetracks in exchange for a percentage of the handle on these races. Remington Park Remington Park racetrack is situated on approximately 370 acres in Oklahoma City, Oklahoma. Remington Park offers a total of approximately 120 live racing days during each year. The racing schedule consists of three meets, a 40-day Quarter Horse meet from mid-April to mid-June and two separate thoroughbred meets running three to five days per week, from mid-August to late February or March. In 2000, Remington Park generated a total handle of over $150 million. Simulcasts from Remington Park are exported to approximately 35 other racetracks in the United States. As with Thistledown, the simulcast product from Remington Park has not been given the exposure necessary to generate growth in Remington Park's attendance and handle. We expect that, by continuing to bundle Remington Park's signal with the signals from our other 8 racetracks, we will be able to increase the number of off-track sites to which Remington Park's racing signal is exported. Remington Park's facilities include a grandstand with seating for approximately 20,000 customers, 21 luxury suites for corporate and group events, a one-mile dirt track, a seven-eighths mile turf course, stalls for approximately 1,300 horses, recently installed lighting to permit night racing and parking facilities sufficient to accommodate approximately 8,000 cars. The property on which Remington Park is located is leased from Oklahoma Zoological Trust under a lease which extends through 2013, with options to renew for five 10-year periods. Great Lakes Downs Great Lakes Downs is situated on approximately 85 acres in Muskegon, Michigan, approximately 35 miles from Grand Rapids. Great Lakes Downs, which commenced operations in January 1999, offers a total of 134 live racing days beginning in late April or early May and ending in late October or early November of each year. In 2000, Great Lakes Downs generated a total handle of approximately $70 million. Simulcasts from Great Lakes Downs are exported to approximately 45 other racetracks in the United States. By bundling the simulcast signal from Great Lakes Downs with the simulcast signals from our other racetracks, we expect to further increase the number of sites to which Great Lakes Downs' simulcast program is exported. Great Lakes Downs' facilities include a grandstand with capacity for approximately 7,500 customers, a 5/8 mile dirt track, stalls for approximately 920 horses and parking facilities sufficient to accommodate approximately 2,000 cars. San Luis Rey Downs San Luis Rey Downs is a horse boarding and training center situated approximately 45 miles north of downtown San Diego. It is located on approximately 200 acres of land and includes over 500 horse stalls, a one mile oval main track, a 3/8 mile training track, an equine exercise pool, and related facilities and equipment. Boynton Beach We recently purchased land in Palm Beach County, Florida, which we are currently developing into a horse boarding and training center. See "Item 1 - Business - Recent Acquisitions." 9 Home Account Wagering Home account wagering is wagering on sporting events, such as horse racing, which is conducted through a variety of different media, including telephone account, interactive television and Internet-based wagering. We are currently exploring expansion into each of these areas, possibly in conjunction with business partners and subject to regulatory approvals in order to expand the market for our simulcast horse racing product. Through the pending acquisition of Ladbroke Racing Pennsylvania, which we expect to complete in April 2001, we will acquire the "Call-A-Bet" telephone account wagering operation based in Pennsylvania. See "Item 1 -Business - Risk Factors - Gaming Risks" - Our gaming activities are dependent on government approvals which if not granted could adversely affect our existing business and our growth" for a discussion of the risks inherent in expansion into home account wagering. Telephone Account Wagering We are currently in the process of acquiring the "Call-A-Bet" telephone account wagering operation as part of the pending acquisition of Ladbroke Racing Pennsylvania, Inc. (see "Item 1-Business - Recent Acquisitions"). Call-A-Bet customers open accounts and deposit funds through the use of credit cards or wire transfers. They may then place wagers over the telephone on horse races offered at various racetracks which have entered into agreements with Ladbroke Racing Pennsylvania, Inc. allowing such wagering. Wagers placed by customers are not allowed to exceed the amounts on deposit in their accounts. Winnings are credited to customers' accounts and are available for future wagers or withdrawal. Call-A-Bet derives revenues primarily from its share of the wagers placed. We expect that telephone account wagering through Call-A-Bet will make wagering on horse racing more convenient for our customers and expand the market for our simulcast product by enabling us to fully utilize an important distribution channel for our horse racing product. In the future, we may expand the operations of Call-A-Bet or use it to develop other telephone account wagering initiatives, subject to applicable legislation and regulatory approvals (see "Item 1 - Business - Risk Factors - Gaming Risks"). Internet and Interactive Television-Based Wagering We are actively exploring the potential of Internet and interactive television-based wagering on horse racing, possibly in conjunction with business partners and subject to legislative reform and regulatory approvals (see "Item 1 - - Business - Risk Factors - Gaming Risks"). Interactive television-based wagering involves the transmission of horse racing-related television programming through cable or satellite delivery into the homes of subscribers. These subscribers are able to use interactive "real-time" television-based technology, generally through a remote controlled device connected to a television, to wager on the live horse races being shown. In order to place wagers, customers must deposit money with the sponsoring racetrack through the use of debit or credit cards. We would derive revenue from our customers' subscriptions and our share of the wagers placed on the races broadcast. 10 Interactive television-based wagering would allow us to increase the market for our simulcast product by utilizing an important distribution channel for this product. At present, we control the rights to broadcast races from our tracks subject to certain limited exceptions. Interactive television-based wagering would enhance our ability to cross promote our live horse racing and we expect it would enable us to attract new customers to horse racing and cultivate their loyalty. We would aim to show full racing cards and to develop an appealing, convenient and easy-to-use format which would provide a fresh new look for horse racing. Furthermore, we would aim to broadcast the programming we develop for interactive television-based wagering through a variety of sources, including satellite television, cable television and the Internet, either alone or in conjunction with others. Due to the growth of the Internet as a medium of both communication and commerce, we are exploring the possibility of establishing an Internet-based gaming service, possibly in conjunction with a strategic partner and subject to regulatory approval. Establishing this type of service would enable us to increase the market for our simulcast product by maximizing the opportunities presented by the Internet as a distribution channel for our live horse racing product. It would also enable us to achieve economies of scale since the programming we would aim to broadcast on the Internet would be the same as that produced for our interactive television-based wagering. As with interactive television-based wagering, we would expect to develop a competitive position on the strength of our live horse racing product. As our operations expand, we would likely be able to apply the experience we gain in Internet-based wagering on horse races to other sports, subject to legislative reform and regulatory approval. Real Estate Portfolio Our real estate portfolio includes undeveloped land, as well as land in various stages of development and excess land in the United States, Canada and Austria. We are currently developing a gated residential community, known as Fontana, situated amidst the Fontana Sports golf course and related recreational facilities owned by us. This residential development consists of approximately 75 acres and is located in Oberwaltersdorf, Austria, approximately 15 miles south of Vienna. Fontana is being developed in two phases into a luxury residential community consisting of 116 apartment units and 150 single family homes. The first phase was substantially completed in prior years and we expect to complete the second and final phase of Fontana by 2006. We have changed our marketing concept for our second phase to exclude construction activity and focus only on the sale of residential lots. We also own approximately 1,050 acres of undeveloped land in Ebreichsdorf, Austria, located approximately 15 miles south of Vienna, which includes a golf course under a long-term lease to a third party. The balance of the land is largely undeveloped, although we are currently grading and performing other preliminary work as we seek zoning and other approvals in order to enhance the value on sale or for other possible uses, including as part of the Company's racing operations. In 2000, we acquired approximately 480 acres of land in Palm Beach County, Florida, which we are currently developing into a horse boarding and training center (see "Item 1 - Business - Recent Acquisitions"). 11 Our real estate portfolio also includes two golf courses. Fontana Sports is a semi-private sports facility which is adjacent to the Fontana residential community. The Fontana Sports facility includes an 18-hole golf course, tennis club, fitness facility and restaurant. The Magna Golf Club, which is being completed in Aurora, Ontario, approximately 30 miles north of Toronto, is scheduled to open in May 2001. We are currently finalizing our marketing plan for the sale of memberships in the Magna Golf Club. The clubhouse is under construction and is expected to be completed in the late summer or early fall of 2001. When completed, the clubhouse will contain a restaurant, a members' lounge and a pro shop. Doug Carrick, one of Canada's leading golf course architects, designed both the Fontana golf course and the Magna Golf Club golf course. Our parent company, Magna International Inc. ("Magna"), is currently paying us an annual access fee of $2.7 million pursuant to an arrangement effective as of March 1, 1999 to access the Fontana Sports facility for Magna-sponsored corporate and charitable events as well as for business development purposes. This access arrangement is scheduled to expire five years after its effective date. Both of our golf courses are subject to rights of first refusal in favor of Magna. For further information regarding these arrangements with Magna, see "Item 13 - Certain Relationships and Related Transactions". Finally, we own a portfolio of other real estate in Austria, Canada and the United States, including excess land adjacent to three of our premier racetracks, Santa Anita Park, Gulfstream Park and Golden Gate Fields, totaling approximately 200 acres, and certain land adjacent to and in close proximity to our golf courses. We are currently considering a variety of options with respect to this excess land, including themed entertainment and retail-based developments. Such projects could be pursued in conjunction with developers who would be expected to provide the necessary financing. We intend to continue to gradually sell the balance of our excess non-racing real estate portfolio, excluding the land adjacent to our racetracks, as market conditions permit, in order to provide capital to be used in our business. Accordingly, we are currently servicing, improving and seeking zoning and other approvals for some of these properties in order to enhance their value on sale. For financial information on our operating segments see Note 11 to the Consolidated Financial Statements included in "Item 8 - Financial Statements and Supplementary Data" of this Report. Reorganization On November 5, 1999, Magna completed a reorganization of our corporate structure (the "Reorganization"), under which Magna's North American and European non-automotive businesses and real estate assets were transferred to us, including the following: 1. All the outstanding capital stock of The Santa Anita Companies, Inc., which owns all the outstanding capital stock of the Los Angeles Turf Club, Inc., the operator of Santa Anita Park in California, and approximately 305 acres of related real estate. 12 2. All the outstanding capital stock of Fontana Beteiligungs AG (formerly Magna Vierte Beteiligungs AG), which operates the Fontana Sports golf course and related recreational facilities and is developing the adjacent Fontana residential development in Oberwaltersdorf, Austria. 3. All the outstanding capital stock of MEC Projektentwicklungs AG (formerly Magna Projektentwicklungs AG), which, through a subsidiary, owns the land held for development in Ebreichsdorf, Austria. 4. Rights to acquire approximately 160 acres of land and improvements in Aurora, Ontario under a conditional sale agreement with Magna, which is subject to the successful severance of the affected properties. An additional 200 acres, which comprise the Magna Golf Club, was also subject to a conditional sale agreement with a company associated with the members of the family of Frank Stronach, our Chairman and the Chairman of Magna. The purchase of the Magna Golf Club by the Company was completed in October 2000. 5. Various other parcels of land and improvements and other non-automotive assets located in North America and Europe. During the course of the Reorganization, Magna transferred assets and settled some intercompany indebtedness which was paid for through the issuance of approximately $300 million of shares of our common stock. Magna also subscribed for shares of our stock by way of a cash payment of $250 million. Our Certificate of Incorporation was then amended to add share provisions for our Class A Subordinate Voting Stock and Class B Stock and our outstanding common stock was then reclassified and further subdivided into shares of Class B Stock. On December 30, 1999, 14,823,187 shares of our Class B Stock held by Magna were repurchased by us for $110,000,000. On this date, $110,000,000 was invested by Magna in MEC Holdings (Canada) Inc. in return for 14,823,187 of its Exchangeable Shares, each of which is exchangeable on a one-for-one basis for shares of our Class A Subordinate Voting Stock. On December 31, 1999, there were 63,712,141 shares of our Class B Stock, 1,662,890 shares of our Class A Subordinate Voting Stock and 14,823,187 Exchangeable Shares outstanding. On March 13, 2000, upon completion of our spin-off from Magna, there were, 7,176,391 shares of our Class A Subordinate Voting Stock issued and outstanding. In addition, there were 14,823,187 Exchangeable Shares issued and outstanding, 4,362,328 of which are directly or indirectly owned by Magna. On March 26, 2001, Magna directly and indirectly owned all 58,466,056 shares of our Class B Stock. As a result, Magna is entitled to exercise approximately 99% of the total votes attached to all our outstanding stock, is able to elect all our directors and controls us. 13 Employees As of December 31, 2000, we employed approximately 3,200 full-time employees. Due to the seasonal nature of the live horse racing industry, the number of seasonal and part-time employees of MEC will vary considerably throughout the year. Since our inception, we have not had a work stoppage. We consider our relations with our employees to be good. We also believe that our future success will depend in part on our continued ability to attract, integrate, retain and motivate highly-qualified technical and managerial personnel, and upon the continued service of our senior management. Competition We generally do not compete directly with other racetracks for customers because of geographic separation of facilities and differences in seasonal timing of meets. In some cases, the differences in seasonal timing of meets results from the regulatory environment in which racetracks operate. In California, The California Horse Racing Board has annually licensed us and the Oak Tree Racing Association to conduct racing meets at Santa Anita Park and it has not licensed other thoroughbred racetracks in Southern California to conduct racing during these meets. However, night harness racing and night quarterhorse meets are conducted at other racetracks in Southern California during portions of these meets. Santa Anita Park, Golden Gate Fields and Bay Meadows may face competition if licenses are granted to other racetracks during our meets. In Florida, current tax laws discourage the three Miami-area racetracks from applying for race dates outside of their traditional racing seasons. Currently, the race dates for the three Miami-area racetracks do not overlap. However, commencing July 1, 2001, a new tax structure affecting Florida racetracks is expected to eliminate this deterrent. As a result, Gulfstream Park may face direct competition from other Miami-area racetracks in the future. Gulfstream Park has applied to run its 2002 meet for approximately 85 days between early January and mid-April. Part of this period would overlap with days on which Hialeah Park traditionally operates its meet. We currently compete for customers with off-track wagering facilities and with operators of other forms of gaming and entertainment. We attempt to attract customers by providing high quality racing in appealing facilities, value for money spent and good customer service. Several Native American tribes in Florida have recently expressed interest in opening casinos in southern Florida, which could compete with Gulfstream Park. Construction for a casino which will be operated by the Seminole Tribe began in January 2001 and is expected to be completed duing 2002. The opening and operation of this casino, whose site is approximately 30 miles southwest of Gulfstream Park, may negatively impact the business of Gulfstream Park. As we implement our strategy to increase the distribution channels for our simulcast horse racing product to include telephone account, interactive television and/or Internet-based wagering, we will likely face competition from competitors with significant experience and advanced market penetration in these distribution channels, including Television Games Network ("TVG"), which is affiliated with Gemstar - TV Guide International, Inc. TVG, which offers live racing video signals in conjunction with its interactive television wagering system, currently 14 markets the signals of a large number of racetracks, some of which are under exclusive contract, including the signal from Churchill Downs' racetracks. We may be able to reduce or eliminate this competitive disadvantage by pursuing this element of our strategy in conjunction with an experienced strategic partner, or through The Racing Network (see "Item 1 - Business - Recent Acquisitions"). We currently face competition in Austria from developers of residential real estate projects, some of which have greater experience, name recognition and resources than us. There are a large number of established golf courses in the vicinity of the Magna Golf Club. As a new club, the Magna Golf Club will have to compete for members with these established courses. Environmental Matters We are subject to a wide range of environmental laws and regulations imposed by governmental authorities relating to wastewater discharge, waste management and storage of hazardous substances. During 2001, we intend to adopt a formal Health, Safety and Environmental Policy pursuant to which we will commit to: . conducting our operations in a manner that complies with or exceeds all legal requirements regarding health, safety and the environment; . regularly evaluating and monitoring past and present business activities affecting health, safety and the environment; . ensuring that a systematic health, safety and environmental review program is implemented and monitored at all times at each of our operations, with a goal of continued improvement in health, safety and environmental matters; and . ensuring that adequate reports on health, safety and environmental matters are presented to our Board of Directors, at a minimum, on an annual basis. To date, compliance with environmental laws and regulations has not had a material adverse effect on our financial condition and results of operations; however, changes in governmental laws and regulations are ongoing and may make environmental compliance increasingly expensive. We cannot predict future costs that we may incur to meet environmental obligations. A subsidiary of Magna has agreed to indemnify us in respect of environmental remediation costs and expenses relating to existing conditions in some of our Austrian real estate properties. 15 Recent Acquisitions A significant proportion of our assets were acquired from our parent company, Magna, and its subsidiaries on a non-arm's length basis pursuant to the Reorganization. Details of the material acquisitions we have made since January 1, 2000 are provided below: Pursuant to an amended and restated asset purchase agreement dated as of January 31, 2000, with Great Lakes Downs, Inc. and Great Lakes Downs Cafe, Inc. we acquired the assets and assumed approximately $9.7 million of liabilities of Great Lakes Downs racetrack in Muskegon, Michigan for a purchase price of $1.7 million, which was paid through the issuance of 267,416 shares of our Class A Subordinate Voting Stock. We completed this acquisition on February 29, 2000. Pursuant to a purchase agreement dated as of August 25, 2000, we acquired all the issued and outstanding limited liability company interests of Bay Meadows Operating Company LLC and all the issued and outstanding stock of Bay Meadows Catering Company. Bay Meadows Operating Company LLC operates the Bay Meadows Racecourse in San Mateo, California. The purchase price for these interests and stock was $24.1 million, payable in cash. This transaction was completed on November 17, 2000. On October 18, 2000, we acquired approximately 480 acres of land in Palm Beach County, Florida ("Boynton Beach") for a total purchase price of $22.2 million. The property is located approximately 30 miles north of Gulfstream Park. We are currently developing a horse boarding and training center on this land to be operated in conjunction with Gulfstream Park. Pursuant to a stock purchase agreement dated December 21, 2000, we have agreed to purchase all the issued and outstanding stock of two companies, Ladbroke Racing Pennsylvania, Inc. and Sports Broadcasting, Inc. Ladbroke Racing Pennsylvania, Inc. owns the assets of The Meadows, a harness racetrack located in the Pittsburgh area, four off-track betting facilities located in the Pittsburgh area and a telephone account wagering system known as "Call-A-Bet." Sports Broadcasting, Inc. owns an 18.3 percent equity interest in The Racing Network, which is a television channel devoted to horse race programming which is available by satellite dish. The aggregate purchase price for this acquisition is $53.0 million, of which $26.5 million is payable in cash, $13.25 million is payable by the issuance of a promissory note which is due in two equal instalments on the first and second anniversaries of closing, and the balance of $13.25 million is payable in shares of our Class A Subordinate Voting Stock. This transaction is scheduled to close in early April 2001. 16 Risk Factors The most significant risks and uncertainties we face are described below, but other risks and uncertainties that are not known to us or that we currently believe are not material or are similar to those faced by other companies in our industry may also have a material adverse effect on our business, financial condition or results of operations. If any of the following risks, or any of the risks described in the other documents we file with the Securities and Exchange Commission, actually occur, our business, financial condition and results of operations could be materially and adversely affected. In this case, the trading price of shares of our Class A Subordinate Voting Stock and the Exchangeable Shares could decline substantially, and investors may lose all or part of the value of the shares of our Class A Subordinate Voting Stock or the Exchangeable Shares held by them. General Risks Regarding Our Business We are a relatively new company with a short history of racetrack operations We were incorporated approximately two years ago and acquired our first racetrack in December 1998. Accordingly, we have a relatively short history of racetrack operations and earnings. Two of our seven racetracks, Remington Park and Great Lakes Downs, have historically operated at a loss and we anticipate they may continue to do so for some period of time in the future. Our business and our expansion plans may be adversely affected if we do not retain our key personnel We will be highly dependent on the services of members of our senior management, most of whom have only recently been hired by us. We also depend on the local management of our racetracks and other operating units. The loss of the services of any of these individuals may adversely affect our leadership and direction, which may impede the implementation of our strategy. Our stock price may be volatile The trading price of our Class A Subordinate Voting Stock and the Exchangeable Shares may continue to be volatile. Some of the volatility in the past has been due to Magna's institutional shareholders selling their holdings of our Class A Subordinate Voting Stock or Exchangeable Shares because they: . are prohibited from holding stock of a company with a significantly smaller market capitalization; . cannot hold stock of a gaming company; or 17 . do not want to hold our stock for any other reason. In addition, the following factors have had and may continue to have a significant effect on the market price of our Class A Subordinate Voting Stock and the Exchangeable Shares: fluctuations in our operating profits; the announcement of new wagering and gaming opportunities by us or our competitors; the passage of legislation affecting horse racing or gaming; developments affecting the horse racing or gaming industries generally; sales of substantial amounts of our Class A Subordinate Voting Stock or the Exchangeable Shares; and sales by Magna of our Class A Subordinate Voting Stock held by it, as a result of its stated intention to reduce its majority equity position in us. Moreover, publicly-held horse racing and gaming companies have experienced price and trading volume fluctuations that are often unrelated to these companies' financial condition and results of operations. A shift away from investor interest in gaming companies in general could have a material adverse effect on the market price of our Class A Subordinate Voting Stock and the Exchangeable Shares, regardless of our financial condition and results of operations. We may not be able to obtain financing or may be able to obtain it only on unfavorable terms which may affect the viability of our expansion projects or make them more costly We may require additional financing in order to expand our operations. It is possible that this financing will not be available or, if available, will not be available on terms which are favorable to us. In addition, Magna has made a commitment to its shareholders that it will not, during the period ending May 31, 2006, without the prior consent of the holders of a majority of Magna's Class A Subordinate Voting Shares, make any further debt or equity investment in, or otherwise provide financial assistance to, us or any of our subsidiaries. See "Item 13 - Certain Relationships and Related Transactions" for a more detailed description of our relationship with Magna. We do not plan to pay dividends until the 2004 fiscal year, if at all We have not paid any dividends to date, we do not plan to pay any dividends until our fiscal year commencing January 1, 2004 and we cannot give any assurance that we will be in a position to pay dividends then, or thereafter. Our relationship with Magna is not at "arm's length" and therefore Magna may influence us to make decisions that are not in the best interests of our other stockholders Our relationship with Magna is not at arm's length. Magna owns all our Class B Stock and some Exchangeable Shares, but none of our Class A Subordinate Voting Stock. Accordingly, Magna is entitled to exercise approximately 99% of the total votes attached to all our outstanding stock. Magna is therefore able to elect all our directors and controls us. 18 Therefore, Magna is able to cause us to effect certain corporate transactions without shareholder consent, subject to applicable law and the fiduciary duties of our directors and officers. In addition, Magna is able to cause or prevent a change in our control. In some cases, the interests of Magna may not be the same as those of other stockholders, and conflicts of interest may arise from time to time that may be resolved in a manner detrimental to us. For example, Magna has entered into an arrangement with us so as to ensure its access to the Fontana Sports golf course and related recreational facilities in return for an agreed upon fee. This access arrangement expires five years after its effective date, but Magna could prematurely terminate or amend it. The early termination, amendment or non-renewal of this access arrangement could have a material adverse effect on our financial condition and results of operations. Both of our golf courses are subject to rights of first refusal in favor of Magna. If we are unable to continue to negotiate satisfactory union contracts, some of our employees may commence a strike which may lead to lost revenues and could have a material adverse effect on our business As of December 31, 2000, we employed approximately 3,200 full-time employees, approximately 2,000 of whom are represented by a union. A contract between Gulfstream Park and a local of the International Association of Pari- Mutuel Employees, which covers approximately 500 employees, will expire on March 31, 2001. Although we expect that we will be able to negotiate a new agreement through the collective bargaining process, there is no assurance that we will be able to negotiate a satisfactory contract. Since our inception, we have not had a work stoppage and we consider our relations with our employees to be good; however, we realize that a strike or other work stoppage could lead to lost revenues and have a material adverse effect on our business. Gaming Risks Our gaming activities are dependent on governmental approvals which, if not granted, could adversely affect our existing business and our growth Our existing live racing, pari-mutuel wagering and other operations are contingent upon the continued governmental approval of these operations as forms of legalized gaming. All our current and proposed operations are subject to extensive regulations and could be subjected at any time to additional or more restrictive regulations, or banned entirely. As of the date of this Report, we have obtained all governmental licenses, registrations, permits and approvals necessary for the operation of our gaming facilities. However, we may be unable to maintain or renew our existing licenses. The loss of our licenses, registrations, permits or approvals may materially limit the number of races we conduct and could have a material adverse effect on our business, financial condition and results of operations. In addition, we currently devote significant financial and management resources to complying with the various governmental regulations to which our operations are subject. Any significant increase in 19 governmental regulation could materially adversely affect our business, financial condition and results of operations. Moreover, any future expansion of our gaming operations will likely require additional licenses, registrations, permits and approvals. The licensing process can be both lengthy and costly and there is no assurance of success. The high degree of regulation in the gaming industry is a significant obstacle to our growth strategy, especially with respect to telephone account, interactive television and Internet-based wagering. Telephone account and interactive television-based wagering from home may currently be conducted only through hubs or bases located in certain states. Our expansion opportunities in this area may be limited unless more states change their laws to clearly permit telephone account and interactive television-based wagering. Wagering over the Internet is also subject to extensive legal restriction. In the past, certain state and district attorneys general have expressed concern over the legality of interstate home account wagering. In December 2000, legislation was enacted which amends the Interstate Horse Racing Act of 1978. We believe that this amendment clarifies that simulcasting and home account wagering, as conducted by the horse racing industry currently, are authorized under U.S. federal law. It is not entirely clear at this point in time, however, that the amendment will be interpreted in this manner by all concerned, and there may be future challenges to this activity by both state and federal law enforcement authorities. Implementation of some of the recommendations of the National Gambling Impact Study Commission could adversely affect our growth prospects In August 1996, the United States Congress established the National Gambling Impact Study Commission to conduct a comprehensive study of the social and economic effects of the gambling industry in the United States. This commission reviewed existing federal, state and local policy and practices with respect to the legalization or prohibition of gambling activities with the aim of formulating and proposing changes in these policies and practices and recommending legislation and administrative actions for these proposed changes. On June 18, 1999, the Commission issued a report setting out its findings and conclusions, together with recommendations for legislation and administrative actions. Some of the recommendations were: . prohibiting Internet gambling which is not already authorized within the United States or among parties in the United States and any foreign jurisdiction; . limiting the expansion of gambling into homes through such mediums as account wagering; . banning betting on all collegiate and amateur athletic events; and 20 . refusing the introduction of casino-style gambling into pari-mutuel facilities for the primary purpose of saving a pari-mutuel facility that the market has determined no longer serves the community or for the purpose of competing with other forms of gaming. The recommendations made by the National Gambling Impact Study Commission could result in the enactment of new laws and/or the adoption of new regulations which would materially adversely impact the gambling industry in general and thus would materially adversely affect our growth prospects. We are unable, at this time, to determine the ultimate disposition of the Commission's recommendations. We face significant competition from operators of other racetracks and other forms of gaming which could decrease the amount wagered at our facilities and adversely affect our profitability We face significant competition in each of the jurisdictions in which we have wagering operations and this competition is expected to intensify as new gaming operators enter our markets and existing competitors expand their operations and consolidate management of multiple racetracks. One of our competitors, Churchill Downs Inc., has been in operation for a longer period of time than MEC and may have greater name recognition. We also compete for customers with other sports, entertainment and gaming operators, as well as state governments and native American groups. Competition in the gaming industry is expected to increase due to limited opportunities for future growth in new markets. If we lose customers for any reason, including the factors discussed below, our profitability may be materially adversely affected. In addition, Florida tax laws currently discourage the three Miami-area racetracks, Gulfstream Park, Hialeah Park and Calder Race Course, from scheduling concurrent races. We expect that a new tax structure, effective as of July 1, 2001, will eliminate this deterrent. As a result, Gulfstream Park may face direct competition from other Miami-area racetracks in the future. This competition could affect the profitability of Gulfstream Park, which could reduce our overall profitability (see "Item 1- Business - Competition"). State and provincial lotteries benefit from numerous distribution channels, including supermarkets and convenience stores, as well as from frequent and extensive advertising campaigns. We do not have the same access to the gaming public or the advertising resources available to state and provincial lotteries. Declining on-track attendance and increasing competition in simulcasting may adversely affect our financial results There has been a general decline in the number of people attending and wagering at live horse races at North American racetracks due to a number of factors, including increased competition from other forms of gaming, unwillingness of customers to travel a significant distance to racetracks and the increasing availability of off-track wagering. The declining 21 attendance at live horse racing events has prompted racetracks to increasingly rely on revenues from simulcasting and off-track wagering. The industry-wide focus on simulcasting and off-track wagering has increased competition among racetracks for outlets to simulcast their live races. A decline in consumer interest in horse racing, a continued decrease in attendance and on-track wagering as well as increased competition in the simulcast wagering market could lead to a decrease in the amount wagered at our facilities and may have a material adverse effect on the overall profitability of our horse racing operations. We currently face significant competition from Internet and on-line wagering which may reduce our profitability Although we currently do not operate any Internet or online gaming services, we currently face competition from operators of those gaming services. Internet and online gaming services allow their customers to wager on a wide variety of sporting events from home. Unlike Internet and on-line gaming operators, our business requires significant and on-going capital expenditures in order to continue operations and in order to expand. We currently cannot offer the diverse gaming options offered by Internet and on-line gaming operators and face significantly greater costs in operating our business. Our inability to compete successfully with these operators could limit our market share and growth and may have a material adverse effect on our profitability. Expansion of gaming conducted by Native American tribes may lead to increased competition in our industry which may negatively impact our growth and profitability In November 1998, California voters passed Proposition 5, a ballot initiative that would have allowed native American tribes to conduct various gaming activities including pari-mutuel wagering, gambling, some types of card games, and lotteries. On August 23, 1999, the California Supreme Court overturned Proposition 5 on the basis that the initiative violated the state constitution. The California state government has reportedly reached agreements with certain Native American tribes to permit a doubling of the number of gaming machines currently operated by these tribes, as well as the introduction of slot machines and poker and blackjack tables on California native reserves. The governor of California, the state legislature and these Native American tribes jointly sponsored a constitutional amendment which California voters overwhelmingly approved in March 2000. The expansion of gaming conducted by California Native American tribes may lead to increased competition and may have an adverse effect on the profitability of Santa Anita Park, Golden Gate Fields, Bay Meadows and our future growth in California. It may also affect the purses that those tracks are able to offer and therefore negatively affect our ability to attract top horses. In addition, several Native American tribes in Florida have recently expressed interest in opening casinos in southern Florida, which could compete with Gulfstream Park (see "Item 1 - Business - Competition"). 22 If a U.S. federal gaming tax is introduced, our financial results may be adversely affected From time to time, U.S. legislators have proposed the imposition of a U.S. federal tax on gross gaming revenues. The imposition of this type of tax could have a material adverse effect on our net income and therefore our overall financial condition. Our profitability may be adversely affected if we are unable to integrate recent racetrack acquisitions, which comprise all our horse racing operations, and to complete and integrate future acquisitions Our racetrack operations have all been acquired relatively recently. The acquisition of Santa Anita Park was completed in December 1998 and the acquisition of Gulfstream Park was completed in September 1999. The acquisition of Remington Park and Thistledown was completed in November 1999 and the acquisition of Golden Gate Fields was completed in December 1999. In addition, we completed the acquisition of Great Lakes Downs in February 2000 and the acquisition of Bay Meadows in November 2000. These operations have been operating independently in the past under different management. Integrating these businesses into our operations will require a significant dedication of management resources and further expansion of our information systems. This dedication may distract us from our day-to-day operations which could result in less efficient and more costly operations as well as a failure of our management to focus on other important issues. We also plan to continue pursuing acquisition opportunities and we may issue our Class A Subordinate Voting Stock as full or partial consideration in connection with these acquisitions. Our future profitability will depend to some degree upon the ability of our management to identify, complete and integrate commercially viable acquisitions. We cannot give any assurance that we will successfully complete and integrate the new acquisitions. Furthermore, to the extent that we issue any shares of our Class A Subordinate Voting Stock in connection with any of these acquisitions, the percentage of our voting stock that our shareholders own will decrease. If we do not successfully integrate our new or future acquisitions, or if this integration consumes a significant amount of our management's time, then these acquisitions may adversely affect our efficiency and therefore our profitability. Our operating results may be impacted by inclement weather and may fluctuate seasonally We experience significant fluctuations in quarterly and annual operating results due to seasonality. We have a limited number of live racing days at each of our racetracks and the number of live racing days varies from year to year. The number of live racing days we have directly affects our operating results. A significant decrease in the number of live races could have a material adverse effect on our business, financial condition and results of operations. 23 Generally our revenues from racetrack operations are greater in the first and second quarters of the calendar year than in the third and fourth quarters of the calendar year. Since horse racing is conducted outdoors, unfavorable weather conditions, including excessive heat, coolness or rain, may cause races to be cancelled or may reduce attendance and wagering. Since a substantial portion of our gaming expenses are fixed, the loss of scheduled racing days or deterioration of race cards due to unfavorable weather could have a material adverse effect on the profitability of our horse racing operations. An earthquake in California could affect our operations at Santa Anita Park, Golden Gate Fields and Bay Meadows, which could adversely impact our cash flow from these racetracks Three of our prime racetracks, Santa Anita Park, Golden Gate Fields and Bay Meadows, are located in California and are therefore subject to earthquake risks. Since the structures at our California racetracks are low-rise buildings, the risk of earthquake damage is not considered to be high and, as a result, we do not currently maintain earthquake insurance on these structures. We currently maintain fire insurance for fire risks, including those resulting from earthquakes, subject to policy limits and deductibles. There can be no assurance that earthquakes or the fires often caused by earthquakes will not seriously damage our California racetracks and related properties or that the recoverable amount of insurance proceeds will be sufficient to cover reconstruction costs and other losses suffered fully. If an uninsured or underinsured loss occurs, we could lose anticipated income and cash flows from our California racetracks. The current lease of the Bay Meadows property expires in approximately two years and is unlikely to be renewed As described under "Item 1 - Business - Bay Meadows" above, the Bay Meadows site lease expires on December 31, 2002 (or March 31, 2003, at the latest). Although we are exploring various alternatives for the conduct of these racing dates at another site, there is a risk that we will be unable to relocate on favorable terms, which could have a material adverse effect on our business, financial condition and results of operations. The profitability of our racetracks is partially dependent upon the size of the local horse population in the areas in which our racetracks are located Horse population is a factor in a racetrack's profitability, because it generally affects the average number of horses which run in races during a race meet (i.e. the average "field size"). Larger field sizes generally mean higher wagering and higher wagering revenues due to a number of factors, including the availability of exotic bets. Various factors have posed risks to the horse population in certain areas of the country, including competition from other racetracks and volatility of economics for owners and breeders. Unless we are able to address these challenges by offering a competitive environment, including improved facilities, well-maintained racetracks 24 and better living conditions for backstretch personnel, the profitability of our racetrack operations may be adversely affected. Real Estate Ownership and Development Risks Owning and developing real estate may involve significant ongoing expenditures or losses that could adversely affect our results of operations All real estate investments are subject to risks including: general economic conditions, such as the availability and cost of financing; local real estate conditions, such as an over-supply of residential, office, retail or warehousing space, or a reduction in demand for real estate in the area; governmental regulation, including taxation of property and environmental legislation; and the attractiveness of properties to potential purchasers or tenants. Each segment of the real estate industry is capital intensive and sensitive to interest rates. Further significant expenditures, including property taxes, mortgage payments, maintenance costs, insurance costs and related charges, must be made throughout the period of ownership of real property and during the period of making improvements to the property. Further, governments can, under eminent domain laws, take real property for less than an owner might otherwise agree. If interest rates or other real estate costs escalate, this could adversely affect our ability to finance our expansion projects and also our profitability. We may not be able to sell some of our real estate when we need to or at the price we want, which could adversely affect our financial condition At times, it may be difficult for us to dispose of some types of real estate. The costs of holding real estate are high and, during a recession, we may be faced with ongoing expenditures with little prospect of earning revenue on our real estate properties. If we have inadequate cash reserves, we may have to dispose of properties at prices which are substantially below the price we desire, and in some cases, below the price we originally paid for the properties. We require governmental approvals for some of our properties which may take a long time to obtain or which may not be granted, either of which could adversely affect our existing business or our growth Some of our properties will require zoning and other approvals from local government agencies. The process of obtaining these approvals may take many months and there can be no assurance that we will obtain the necessary approvals. Furthermore, in the case of the land held by us in Aurora, Ontario, the transfer of this land to us is conditional on obtaining severance and other approvals. We cannot give any assurance that we will obtain these approvals and we cannot give any assurance that we will ultimately acquire this land. Holding costs accrue while regulatory approvals are being sought and delays can render a project economically unfeasible. If we do not obtain all of these approvals, our plans, growth and profitability could be affected. 25 We may not be able to complete expansion projects successfully, which would materially affect our growth and our results of operations We intend to develop our racetracks further and possibly expand our gaming activities. Numerous factors, including regulatory and financial constraints, could cause us to alter, delay or abandon our existing plans. If we proceed to develop new facilities or enhance our existing facilities, we face numerous risks that could require substantial changes to our plans, including time frames or projected budgets. These risks include the inability to secure all required permits and the failure to resolve potential land use issues, as well as risks typically associated with any construction project, including possible shortages of materials or skilled labor, unforeseen engineering or environmental problems, delays and work stoppages, weather interference and unanticipated cost overruns. For example, Santa Anita Park completed certain upgrades to its facilities in 1999. The disruption caused by these upgrades reduced the total amount wagered at Santa Anita Park's simulcast wagering facilities and attendance at The Oak Tree Meet in 1999. Even if completed in a timely manner, our expansion projects may not be successful, which would affect our growth and could have an adverse effect on our long-term financial projections. We face strict environmental regulation and may be subject to liability for environmental damage that we did not cause, which could adversely affect our financial results Various environmental laws and regulations in the United States, Canada and Europe impose liability on us as a current or previous owner and manager of real property, for the cost of maintenance, removal and remediation of hazardous materials released or deposited on or in properties now or previously owned or managed by us or disposed of in other locations. Our ability to sell properties with contamination or hazardous or toxic substances or borrow using that property as collateral may also be adversely affected. We cannot give you any assurance that all circumstances giving rise to exposure under environmental laws are currently known to us. Changes to environmental laws and regulations, resulting in more stringent terms of compliance, could expose us to additional liabilities and ongoing expenses. Item 2. Properties Information concerning properties required by this item is incorporated by reference to the information contained in "Item 1. Business" of this Report. Item 3. Legal Proceedings One of our subsidiaries has been named as a defendant in four class actions brought in United States District Courts by various plaintiffs. The plaintiffs in these actions claim unspecified compensatory and punitive damages, for restitution and disgorgement of profits, all in relation to forced labor performed by the plaintiffs for such subsidiary and certain other Austrian and German corporate defendants at their facilities in Europe during World War II. As a result of the transactions described under "Item 1 - Business - Reorganization" above, we 26 acquired the stock of such subsidiary. Under Austrian law, such subsidiary would be jointly and severally liable for the damages awarded in respect of these class action claims. After consolidation of three of these cases in the United States District Court for the District of New Jersey together with over 50 other cases, the presiding judge entered voluntary dismissal orders with prejudice of these three cases and various other cases as a result of agreements reached with plaintiffs' attorneys and the Governments of the United States and the Federal Republic of Germany to dismiss all slave labor cases as a result of the creation of the German Remembrance Fund. The fourth action was not consolidated and awaits finalization of similar Austrian funds dealing with slave labor and property right claims. An Austrian subsidiary of Magna has agreed to indemnify such subsidiary for any damages or expenses associated with this case. From time to time, various routine claims incidental to our business are made against us. None of these claims have had, and we believe that none of the current claims, if successful, will have, a material adverse effect upon us. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of our shareholders during the fourth quarter of the fiscal year covered by this Report. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Trading History Shares of our Class A Subordinate Voting Stock are listed and quoted for trading on the Nasdaq National Market ("NASDAQ") under the trading symbol "MIEC" and are listed and posted for trading on The Toronto Stock Exchange (the "TSE") under the trading symbol "MIE.A". In addition, Exchangeable Shares of our subsidiary, MEC Holdings (Canada) Inc., each of which is exchangeable on a one- for-one basis for shares of our Class A Subordinate Voting Stock, are listed and posted for trading on the TSE under the trading symbol "MEH". Prior to February 23, 2000, there was no market for the shares of our Class A Subordinate Voting Stock or for the Exchangeable Shares. Shares of our Class A Subordinate Voting Stock commenced trading on a "when issued" basis on February 23, 2000 on NASDAQ and the TSE and commenced regular trading on March 13, 2000. The Exchangeable Shares commenced trading on a "when-issued" basis on the TSE on February 23, 2000 and commenced regular trading on March 13, 2000. As of March 26, 2001, there were approximately 430 holders of record of our Class A Subordinate Voting Stock. 27 The following table sets forth the high and low closing sale prices, as reported by NASDAQ and the TSE, for our Class A Subordinate Voting Stock during the periods indicated in 2000: ---------------------------------------------- NASDAQ TSE ---------------------------------------------- 2000 High Low High Low ---------------- ---- ---- ----- ----- ---------------------------------------------- ($US) ($Cdn) ---------------------------------------------- 1/st/ Quarter* 6.12 3.00 8.75 3.50 ---------------------------------------------- 2/nd/ Quarter 7.75 2.81 11.45 4.00 ---------------------------------------------- 3/rd/ Quarter 7.50 5.75 11.65 8.50 ---------------------------------------------- 4/th/ Quarter 6.70 4.25 10.00 6.40 ---------------------------------------------- (* Trading began on a "when issued" basis on NASDAQ and the TSE on February 23, 2000.) Dividends and Dividend Policy Holders of shares of our Class A Subordinate Voting Stock, our Class B Stock and the Exchangeable Shares are entitled to receive their proportionate shares of dividends as may be declared by our board of directors, subject to the prior rights attaching to any other stock ranking in priority to our Class A Subordinate Voting Stock, our Class B Stock and the Exchangeable Shares. Subject to applicable law, we intend to pay dividends starting with the fiscal year commencing January 1, 2004 in respect of the quarter commencing on that date and each succeeding quarter on our Class A Subordinate Voting Stock and our Class B Stock. We will declare future dividends on our Class A Subordinate Voting Stock and our Class B Stock in accordance with our restated certificate of incorporation and our Corporate Constitution. We were incorporated on March 4, 1999 and have not declared any dividends to date. 28 Item 6. Selected Financial Data The following table sets forth our selected consolidated financial data as at the dates and for the periods indicated. The selected consolidated financial data for the years ended December 31, 2000 and 1999, the five months ended December 31, 1998 and for the years ended July 31, 1998 and 1997 should be read in conjunction with our consolidated financial statements. The selected financial and operating information should also be read in conjunction with "Item 7. - Management's Discussion and Analysis of Results of Operations and Financial Position" included in this Report. Income Statement Data (1) Five Months Year Ended Year Ended Ended December 31, December 31, December 31, Years Ended July 31, ---------------------------------------- 2000 1999 1998 (5) 1998 1997 1996 -------------------------------------------------------------------------------------- (In thousands of U.S. Dollars, except per share amounts) Revenue Racetrack (2) $355,249 $164,946 $ 8,745 $ - $ - $ - Real estate 58,314 21,914 6,597 20,486 15,276 2,460 ------------------------------------------------------------------------------------ Total revenue 413,563 186,860 15,342 20,486 15,276 2,460 Costs and Expenses Racetrack costs and Expenses 336,772 154,809 8,418 - - - Real estate costs and Expenses (2) 50,717 21,820 8,462 25,864 13,879 4,613 Depreciation and Amortization 20,061 7,924 1,649 1,852 1,824 330 Interest expense (income), net 215 (920) 1,221 1,380 955 (59) Other 4,245 454 - - - - ------------------------------------------------------------------------------------ Income (loss) before income taxes 1,553 2,773 (4,408) (8,610) (1,382) (2,424) ==================================================================================== Net income (loss) $ 441 $ (62) $ (4,231) $(8,610) $(1,382) $(2,424) ==================================================================================== Income (loss) per share for Class A Subordinate Voting, Class B Stock or Exchangeable Share: Basic and diluted (3) $ 0.01 $ 0.00 $ (0.05) $ (0.11) $ (0.02) $ (0.03) ==================================================================================== Average number of Shares of Class A Subordinate Voting, Class B Stock and Exchangeable Shares outstanding during the period (in thousands): Basic (3) 80,422 78,686 78,535 78,535 78,535 78,535 Diluted 80,424 78,686 78,535 78,535 78,535 78,535 ==================================================================================== Balance Sheet Data (1) December 31, July 31, 2000 1999 1998 1998 1997 1996 -------------------------------------------------------------------- (In thousands of U.S. Dollars) Cash and cash equivalents $ 31,976 $ 50,660 $ 12,442 $ 295 $ 220 $ 133 Total assets 781,039 760,353 364,142 184,802 113,175 76,219 Total debt (4) 83,706 45,884 32,335 19,495 18,938 22,614 Magna's net investment/shareholders' Equity 541,788 547,087 302,502 158,275 87,917 49,985 Notes: (1) We prepare our financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), which differ in some respects from accounting principles generally accepted in Canada ("Canadian GAAP"). For a discussion of the principal differences between U.S. GAAP and Canadian GAAP, see Note 16 in the consolidated financial statements. (2) Effective October 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements and guidance provided by EITF 99-19 Recording Revenue Gross as a Principal versus Net as an Agent. Previously, the Company recorded its wagering revenue net of "purses, stakes and awards" and "pari-mutuel wagering taxes". Under the new accounting method adopted during the fourth quarter of 2000, the Company now recognizes revenue gross of "purses, stakes and awards" and "pari- mutuel wagering taxes". The costs relating to these amounts are shown as "Purses, awards and other" in the Company's consolidated financial statements. In accordance with SAB 101 guidance, the current year quarterly unaudited income statements and the prior year income statements have been retroactively reclassified for all periods presented to comply with the new accounting method. (3) Assumes the exchange of Exchangeable Shares of MEC Holdings (Canada) Inc., each of which is exchangeable on a one-for-one basis for shares of our Class A Subordinate Voting Stock. (4) Total debt includes bank indebtedness and long-term debt (including long- term debt due within one year). (5) Prior to MEC becoming a separate public company, MEC and its parent company, Magna, changed their fiscal year ends from July 31 to December 31, effective December 31, 1998. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Position The following discussion of our results of operations and financial position should be read in conjunction with the consolidated financial statements included in "Item 8 - Financial Statements and Supplementary Data" in this Report. Overview MEC acquires, develops and operates horse racetracks and related pari- mutuel wagering operations. As a complement to our horse racing business, we are exploring the development of electronic media wagering operations, including telephone account, interactive television and Internet-based wagering, as well as real estate projects on the land surrounding some of our racetracks, possibly in conjunction with business partners and subject to regulatory requirements. In addition, we own a real estate portfolio which includes a gated residential project under development together with a championship golf course and related recreational facilities in Europe, another championship golf course scheduled to open this spring in Aurora, Ontario and other real estate. We intend to continue to gradually sell the balance of our non-racing excess real estate portfolio in order to provide capital to be used in our business. Accordingly, we will take steps including servicing our land and obtaining zoning and other approvals to enhance the value of the properties and increase the revenues from sale. Racetrack operations We acquired Santa Anita Park located in Arcadia, California, approximately 14 miles northeast of Los Angeles, one of the premier thoroughbred racetracks in North America, in December 1998. Santa Anita Park operates through the prime winter racing season, commencing December 26 and running until mid to late April each year. In addition, we lease Santa Anita Park to Oak Tree Racing Association which hosts The Oak Tree Meet from the end of September through early November of each year. Santa Anita Park was the site of the Breeder's Cup in both 1986 and 1993. On September 1, 1999, we acquired Gulfstream Park, also one of the premier thoroughbred racetracks and pari-mutuel wagering facilities in North America and the host site of the Breeders' Cup on three occasions, most recently in November 1999. Gulfstream Park is located in the cities of Hallandale and Aventura, Florida, between Miami and Fort Lauderdale and operates between early January and mid-March of each year. We have applied to extend our racing dates to mid- April for the 2002 race meet. On November 12, 1999, we acquired the Thistledown and Remington Park racetracks in North Randall, Ohio and Oklahoma City, Oklahoma, respectively. Thistledown has one of the longest racing seasons of all North American thoroughbred racetracks, consisting of 187 racing days between April and December of each year. Remington Park, which operates at a leased facility, offers two thoroughbred horse meets, the first in January and February and the second between August and November, and a 40-day Quarter Horse meet from mid- April to mid-June of each year. On December 10, 1999, we acquired the Golden Gate Fields racetrack in Albany and Berkeley, California, approximately 8 miles from downtown Oakland and approximately 11 miles from San Francisco. Golden Gate Fields' 2000 racing season consisted of two meets, one of which ran from late March to mid-June and the other of which ran from mid-November to late December 2000. Commencing with its 2001 racing season, the first meet has changed to run from late December 2000 through to April 1, 2001 and the second meet has changed to run from early November to mid-December 2001. These changes were made in order to improve our racing programs and maximize operational synergies between Golden Gate Fields and our other Northern California racetrack operation, Bay Meadows Racecourse. On February 29, 2000, we acquired the assets and assumed certain liabilities of Great Lakes Downs racetrack in Muskegon, Michigan. Great Lakes Downs began operations in January 1999 and operates live racing days beginning in April and ending in early November of each year. On November 17, 2000 we completed the acquisition of Bay Meadows Operating Company, LLC. The terms of the transaction allow the Company to conduct racing at the existing Bay Meadows facility until the later of (i) December 31, 2002 and (ii) the end of any racing meet then in progress but not later then March 31, 2003. Bay Meadows Racecourse is located in the city of San Mateo, California, approximately 21 miles south of San Francisco and 31 miles from Golden Gate Fields. The Bay Meadows 2001 racing season will consist of two meets, the first meet running from early April to mid-June and the second meet running from late August to early November. We are currently exploring a number of different sites on which we could operate these race days subsequent to 2002. As a result of the seasonal nature of our racetrack business, racetrack revenues and operating results for any quarter will not be indicative of the revenues and operating results for the year. Our live racing schedule also dictates that we will earn a substantial portion of our net earnings from racetrack operations in the first quarter of each year, which is when The Santa Anita Meet and the annual meet at Gulfstream Park occur, and commencing in fiscal 2001, when the first Golden Gate Fields meet will occur. Our primary source of racetrack revenues are commissions earned from pari- mutuel wagering. Pari-mutuel wagering on horse racing is pooled betting in which individuals bet against each other on the outcome of a horse race. We have no interest in the order of finish in any given race and therefore have no risk in the outcome. A percentage of the pooled wagers is retained by us, a portion paid to the regulatory or taxing authorities and a portion is paid to horsemen in the form of purses. The balance of the pooled wagers is paid to bettors as winnings. Our share of pari-mutuel wagering revenues is based on pre-determined percentages of various categories of the pooled wagers at our racetracks. The maximum pre-determined percentages are approved by state regulators. Pari-mutuel wagering on horse racing occurs on the live races being conducted at racetracks as well as on televised racing signals or simulcasts received or imported by the simulcast wagering facilities located at such racetracks or off-track betting ("OTB") facilities and through home account wagering. Our racetracks have simulcast wagering facilities to complement our live horse racing which enables our patrons to wager on horse races being held at other racetracks. We also generate non-wagering revenues consisting primarily of food and beverage sales, program sales, admissions, parking revenues and income from the rental of facilities to other racing operators. Real estate operations Our real estate portfolio includes undeveloped land, as well as land in various stages of development and excess land in the United States, Canada and Austria. We are currently developing a gated residential community, known as Fontana, situated amidst the Fontana Sports golf course and related recreational facilities owned and operated by us. This residential development consists of approximately 75 acres and is located in Oberwaltersdorf, Austria, approximately 15 miles south of Vienna. Fontana is being developed in two phases into a luxury residential community consisting of 116 apartment units and 150 single-family homes. The first phase was substantially completed in prior years and we expect the second and final phase of Fontana to be completed by 2006. We have changed our marketing concept for our second phase to exclude construction activity and focus only on the sale of residential lots. We also own approximately 1,050 acres of land in Ebreichsdorf, Austria, located approximately 15 miles south of Vienna, which includes a golf course under a long term lease to a third party. The balance of the land is largely undeveloped, although we are currently grading and performing other preliminary work as we seek zoning and other approvals in order to enhance the value on sale or for other possible uses, including as part of MEC's racing operations. In 2000, we acquired approximately 480 acres of land in Palm Beach County, Florida, which we are currently developing into a horse boarding and training center. Our real estate portfolio also includes two golf courses, Fontana Sports which is in operation and located in Oberwaltersdorf, Austria, and a second golf course which is being completed in Aurora, Canada, approximately 30 miles north of Toronto, and expected to open in May 2001. We are currently finalizing our marketing plan for the sale of memberships in the Aurora golf course. The clubhouse is under construction and is expected to be completed in the late summer or early fall of 2001. Both of our golf courses are subject to rights of first refusal in favor of Magna. In addition, our real estate portfolio includes approximately 160 acres of mixed-use land adjacent to the Aurora golf course. Included in properties under and held for development is excess land adjacent to three of our premier racetracks, Santa Anita Park, Gulfstream Park and Golden Gate Fields, totaling approximately 200 acres. We are currently considering a variety of options with respect to this excess land including themed entertainment and retail based developments which could be developed in conjunction with business partners who would be expected to provide the necessary financing, as the Company does not intend to devote its capital to non-racing real estate development. We intend to continue to gradually sell the balance of our excess non- racing real estate portfolio, excluding the land adjacent to our racetracks, in order to provide capital to be used in our business; accordingly we are currently servicing, improving and seeking zoning and other approvals for some of these properties in order to enhance their value on sale. Results of Operations Year Ended December 31, 2000 Compared to 1999 Racetrack Operations Effective October 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" and guidance provided by EITF 99- 19 "Recording Revenue Gross as a Principal versus Net as an Agent". Previously, the Company recorded its wagering revenue net of "purses, stakes and awards" and "pari-mutuel wagering taxes". Under the new accounting method adopted during the fourth quarter of 2000, the Company now recognizes revenue gross of "purses, stakes and awards" and "pari-mutuel wagering taxes". The costs relating to these amounts are shown as "Purses, awards and other" in the Company's consolidated financial statements. In accordance with SAB 101 guidance, the current year quarterly unaudited income statements and the prior year income statements have been retroactively reclassified for all periods presented to comply with the new accounting method. This change in method of accounting will enable the Company's financial performance to be compared more readily to other companies in our industry. Revenues from our racetrack operations were $355.2 million in 2000 compared to $164.9 million in 1999, an increase of $190.3 million or 115%. The increase in revenues is primarily the result of the additional racetracks acquired in 2000 and in late 1999. Revenues for 2000 reflect the full year live racing and simulcast operations for all of the Company's racetracks except for Great Lakes Downs and Bay Meadows, which were acquired on February 29, 2000 and November 17, 2000, respectively. Revenues for 1999 reflect the full year operations of Santa Anita Park and the operations of Gulfstream Park from September 1, 1999, the date of acquisition, Thistledown and Remington Park from November 12, 1999, their date of acquisition, and Golden Gate Fields from December 10, 1999, the date of acquisition. Gross wagering revenues for our racetracks increased 125% to $301.2 million in 2000 compared to $133.9 million in 1999. We derive our gross wagering revenues at our racetracks from the following primary sources: (a) Live race days . wagers made by patrons at our racetracks on races held at our racetracks; . wagers made by patrons at our racetracks on imported simulcast signals for races held at other racetracks in-state and out-of-state; and . wagers made by patrons at off-track wagering facilities on exported signals from races held at our racetracks. (b) Non-live race days . wagers placed by patrons at our racetracks and OTB sites on imported simulcast signals from other racetracks in-state and out-of-state. Non-wagering revenues in 2000 were $54.0 million compared to $31.0 million in 1999 an increase of 74%. Non-wagering revenues primarily comprise food and beverage sales, program sales, parking revenues, admissions and income from the rental of facilities to other racing operators. The increase in non- wagering revenues is lower than the increase in gross wagering revenues because a portion of the gross wagering revenues is earned from simulcast export activities which do not provide our racetracks with patrons that would generate these non-wagering revenues. Purses, awards and other increased from $85.5 million in 1999 to $190.0 million in 2000. As a percentage of gross wagering revenue, purses, awards and other decreased from 63.9% in 1999 to 63.1% in 2000. Operating costs increased from $63.3 million in 1999 to $128.6 million in 2000. As a percentage of gross wagering and non-wagering revenues, operating costs decreased from 38.4% in 1999 to 36.2% in 2000. The reduction in operating costs as a percentage of revenues is primarily the result of cost savings and other synergies realized on the consolidation of racetrack operations during the year. Racetrack general and administrative expenses increased to $18.1 million in 2000 compared to $6.0 million in 1999. The increase is primarily due to the additional racetracks acquired in late 1999 and 2000 and the significant costs incurred to restructure our corporate office and other one time costs of approximately $7.5 million in 2000. Real estate operations Revenues from our real estate operations were $58.3 million in 2000 compared to $21.9 million in 1999. Total real estate revenues less the cost of real estate sold, operating costs and general and administrative expenses increased to $7.6 million in 2000 from $0.1 million in 1999. This increase is primarily attributable to an increase in the number of non-core real estate properties disposed of in 2000 compared to 1999. The increase in activity is a reflection of management's previously stated intent to gradually sell the balance of our excess non-racing real estate portfolio, which is not viewed as being strategic for the enhancement of our premier racetracks, in order to provide capital to be used to support our business. Depreciation and amortization Depreciation and amortization increased by $12.2 million to $20.1 million for 2000 compared to $7.9 million in 1999. This increase reflects a full year depreciation and amortization charge related to Gulfstream Park, Thistledown, Remington Park and Golden Gate Fields acquired in the second half of 1999 and a partial year depreciation and amortization charge related to Great Lakes Downs and Bay Meadows acquired in 2000. Interest income and expense Our net interest expense for 2000 was $0.2 million compared to net interest income of ($0.9) million for 1999. The higher net interest expense is attributable to the increase in long-term debt in 2000 primarily related to the financing of the Bay Meadows acquisition and racing related real estate property additions. Income tax provision We recorded an income tax provision of $1.1 million on income before income taxes of $1.6 million for 2000 compared to an income tax provision of $2.8 million on income before income taxes of $2.8 million for 1999. Our effective income tax rate in 2000 compared to 1999 decreased primarily as a result of the lower level of operating losses in 2000 that were not tax benefited. Year Ended December 31, 1999 Compared to 1998 Prior to MEC becoming a separate public company, MEC and its parent company, Magna, changed their fiscal year ends from July 31 to December 31, effective December 31, 1998. As a consequence of the change in year end, the Company reported a five month period ended December 31, 1998 in the consolidated financial statements. Throughout this part of Management's Discussion and Analysis of Results of Operations and Financial Position ("M,D&A") all amounts for the year ended December 31, 1999 are compared to the unaudited results for the year ended December 31, 1998. Our comparative consolidated operating results for the years ended December 31, 1999 and 1998 have been restated to reflect the change in the method of accounting for revenue recognition discussed earlier in this M,D&A. (United States dollars in thousands) Years ended December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------- (Unaudited) Revenue Racetrack Wagering 133,924 7,306 Non-wagering 31,022 1,439 Real estate Sale of real estate 2,544 - Rental and other 19,370 21,239 - -------------------------------------------------------------------------------------------------------------- 186,860 29,984 - -------------------------------------------------------------------------------------------------------------- Costs and expenses Racetrack Purses, awards and other 85,520 4,793 Operating costs 63,302 3,461 General and administrative 5,987 164 Real estate Real estate sold 1,916 - Operating costs 18,071 25,348 General and administrative 1,833 2,004 Depreciation and amortization 7,924 2,762 Interest expense 1,666 2,106 Interest income (2,586) (31) Other expenses 454 - - -------------------------------------------------------------------------------------------------------------- 184,087 40,607 - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 2,773 (10,623) Income tax provision (benefit) 2,835 (177) - -------------------------------------------------------------------------------------------------------------- Net loss (62) (10,446) ============================================================================================================== Racetrack operations Revenues from our racetrack operations were $164.9 million for 1999. Santa Anita Park contributed revenues of $147.9 million and the remaining racetracks that were acquired in late 1999 contributed $17.0 million. Santa Anita Park's full year 1999 operations are reflected in our consolidated results. The other racetracks' operations are only reflected in our consolidated results from the date of acquisition. We earned no revenues from our racetrack operations at Gulfstream Park, Thistledown and Remington Park, and Golden Gate Fields in the comparable 1998 period as they were acquired in September 1999, November, 1999 and December 1999, respectively. Our total revenues from racetrack operations in the comparable 1998 period of $8.7 million were attributable to Santa Anita Park which was acquired on December 10, 1998 and included only a few race days in 1998. In 1999, our gross wagering revenues for our racetracks were $133.9 million and non-wagering revenues were $31.0 million. Santa Anita Park earned $27.8 million and the other racetracks earned $3.2 million of our non-wagering revenues for 1999. The major components of non-wagering revenues were admission related revenues of $13.7 million (comprising primarily admissions, parking and program sales) and food and beverage sales of $9.9 million, collectively representing 76% of total non-wagering revenues. Racetrack costs and expenses, before depreciation and interest, were $154.8 million for 1999. Santa Anita Park incurred costs and expenses of $134.5 million with the remaining racetracks incurring $20.3 million. Santa Anita Park's share of costs for purses, awards and other was $76.6 million, with the remaining racetracks incurring $8.9 million. The major components of our operating costs and general and administrative expenses were payroll costs of $38.8 million and marketing and advertising costs of $6.2 million. The costs and expenses of Gulfstream Park, Thistledown, Remington Park and Golden Gate Fields were minimal during 1999 since these racetracks' costs are only reflected in our consolidated results from their respective dates of acquisition, all of which were in late 1999. In addition, these racetracks had few live race days in 1999 subsequent to their acquisition date. Real estate operations Revenues from our real estate operations were $21.9 million for 1999 compared to $21.2 million for 1998. Revenues from real estate operations for 1999 were comprised of $2.5 million for the sale of real estate and $19.4 million for rental and other. There were no revenues from the sale of real estate for 1998. Rental and other revenues decreased $1.9 million for 1999 compared to 1998. The decrease in rental and other revenue is primarily attributable to a reduction in house building activity at the Fontana residential development, which was nearing completion of the first phase of a two phase development plan. Partially offsetting the decrease in revenues was increased membership and other usage revenue at Fontana Sports, including $2.3 million related to Magna's access fee agreement with Fontana Sports which commenced March 1, 1999 and will provide $2.7 million annually until March 1, 2004. We also generated increased rental revenues on some properties acquired during the comparative period. Revenues from our remaining real estate operations were substantially unchanged. Real estate costs and expenses, before depreciation and interest, were $21.8 million for 1999 compared to $27.4 million for 1998. The reduction is attributable to the decrease in housing activity at the Fontana residential development. In addition, we incurred costs in 1998 related to the potential development of a theme park on approximately 1,050 acres of our land in Ebreichsdorf near Vienna, Austria which was acquired by us during the year ended July 31, 1997. Costs included consultants' fees associated with feasibility studies, alternative theme park designs, market analysis, presentation brochures, site models and alternative site investigations. In May 1999, we announced that we were unable to obtain the various permits and approvals that would have been required to potentially develop this property as a theme park. Costs and expenses of our remaining real estate operations were substantially unchanged. Depreciation and amortization Depreciation and amortization expense increased by $5.1 million to $7.9 million for 1999 compared to $2.8 million in 1998. The increase is substantially attributable to our acquisition of Santa Anita Park on December 10, 1998, San Luis Rey Downs, a southern California-based horse boarding and training center, on May 1, 1999, Gulfstream Park on September 1, 1999, Thistledown and Remington Park on November 12, 1999 and Golden Gate Fields on December 10, 1999 and recording a full year of depreciation on properties acquired in calendar 1998. Interest income and expense Our net interest income for 1999 was ($0.9) million compared to net interest expense of $2.1 million for 1998. The higher net interest income was primarily a result of interest income on higher cash balances in the year. The increase in cash balances is attributable to Magna's equity investment in the Company in the third quarter of 1999. Income tax provision We recorded an income tax provision of $2.8 million on income before income taxes of $2.8 million for 1999 compared to an income tax benefit of $0.2 million on a loss before income taxes of $10.6 million for 1998. Our income tax provision relates primarily to the income of our racetrack operations which was calculated based on a consolidated tax sharing arrangement. The tax benefit of our losses from other operations has not been recognized for accounting purposes. Financial Position, Liquidity and Capital Resources Until December 31, 1999, we financed our operations primarily through contributions by our majority shareholder, Magna. Magna has made a commitment to its shareholders that, during the period to May 31, 2006, it will not without the prior consent of the holders of a majority of Magna's Class A Subordinate Voting Shares: (i) make additional debt or equity investments in, or otherwise give financial assistance to, us or any of our subsidiaries; or (ii) invest in any non-automotive related businesses or assets other than through its investment in us. Given the above-described commitment by Magna to its shareholders, during the period subsequent to December 31, 1999 and prior to May 31, 2006, MEC will be required to fund its own operations. Operating activities Cash provided from (used in) operating activities was ($16.1) million, $15.2 million, ($6.3) million and ($7.9) million for the years ended December 31, 2000 and 1999, the five month period ended December 31, 1998, and the year ended July 31, 1998, respectively. Cash used in operating activities in 2000 is primarily the result of an increased investment in non-cash working capital to support the additional number of facilities being operated in 2000 partially offset by increases in net income and other non-cash expenses. Cash provided by operating activities in 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 $36.6 million, $215.4 million, $136.7 million and $72.6 million for the years ended December 31, 2000 and 1999, the five month period ended December 31, 1998 and the year ended July 31, 1998, respectively. During 2000, $24.1 million was used to acquire Bay Meadows and $54.0 million was spent on real estate property and other fixed asset additions. Expenditures on real estate property included the purchase of property in Palm Beach County, Florida, which the Company is currently developing into a horse boarding and training center, several upgrades to racetrack facilities, normal ongoing maintenance items and continued spending in connection with the Aurora, Ontario golf course project. Cash used in investing activities in 2000 was partially offset by proceeds on the disposal of real estate of $33.4 million. Acquisition cash expenditures in 1999 totaled $160.8 million and included $81.2 million to acquire Gulfstream Park, $14.2 million to acquire Thistledown and Remington Park, $59.0 million to acquire Golden Gate Fields and $6.4 million to acquire the operations and real estate assets of San Luis Rey Downs. Also during 1999, $47.4 million was invested in real estate property additions, which included spending on a capital renovation program at Santa Anita Park and the development of the Aurora, Ontario 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 invested in real estate property additions that included land and related development spending in connection with the Aurora, Ontario golf course project. During the year ended July 31, 1998, $72.5 million was invested in real estate property additions primarily in Austria and Canada. Financing activities Cash provided by financing activities was $34.3 million, $238.5 million, $155.2 million and $80.6 million for the years ended December 31, 2000 and 1999, the five month period ended December 31, 1998 and the year ended July 31, 1998, respectively. The cash provided by financing activities for 2000 relates substantially to the issuance of long-term debt of $48.0 million primarily related to the financing of the Bay Meadows acquisition and real estate property additions, partially offset by the repayment of other long-term debt of $15.9 million. Included in these repayments was $6.8 million of debt assumed on the acquisition of Gulfstream Park and the repayment of a portion of the promissory note issued on the acquisition of Golden Gate Fields. Prior to 2000, 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. Working Capital, Cash and Other Resources Our investment in non-cash working capital was ($11.1) million at December 31, 2000 compared to ($36.1) million at December 31, 1999. The increased investment in non-cash working capital has been primarily related to the increased number of facilities being operated in the year. At December 31, 2000, we had cash and cash equivalents of $32.0 million and total shareholders' equity of $541.8 million. In 1999, we 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. At December 31, 2000, $7.6 million of the revolving operating line and $48.0 million of the term loan facility were drawn, leaving $17.4 million of available unutilized facilities. Other borrowing facilities include a bank term line of credit for 240 million Austrian Schillings ($17.6 million) which at December 31, 2000 had $9.4 million of unutilized borrowing capacity. We are currently in discussions with our bankers to obtain increased borrowing facilities. Our investment in real estate properties at December 31, 2000 totals $539.6 million. Included in this amount are properties available for sale with carrying values of $49.4 million and properties under and held for development with carrying values totaling $149.4 million, components of which could be made available for sale. For the year ended December 31, 2000 we spent $54.0 million on real estate property and fixed asset additions. We currently anticipate these capital expenditures to be approximately $50.0 million during the year ending December 31, 2001. These capital expenditures relate to both normal ongoing capital improvements and other strategic facility enhancements. On December 21, 2000, we entered an agreement with Ladbroke Racing Corp. and one of its subsidiaries to acquire their account wagering operations, The Meadows harness track, four OTB facilities and an interest in the The Racing Network for a purchase price of $53.0 million. Under the terms of the agreement, one-half of the purchase price will be paid in cash, one-quarter is payable in Class A Subordinate Voting Stock of MEC and one-quarter is payable by way of an MEC promissory note maturing over two years from the date of closing. Subject to receipt of regulatory approval, the transaction is expected to close in early April 2001. We believe that our current cash resources, together with cash flow from operations from our racetrack and real estate operations, cash available under the credit facilities described above and additional facilities contemplated 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. 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 the issuance of shares, our shareholders may experience dilution. 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. 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 further 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 under the MEC brand name. In addition, through our pending Ladbroke acquisition and other initiatives, we intend to expand our involvement in telephone account, interactive television and Internet-based wagering, possibly in conjunction with strategic partners and subject to regulatory approval. Finally, we expect that our role as a horse racing industry consolidator and our branding strategy will open up attractive 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 sell some of our excess non-racing real estate properties as market conditions permit and are taking steps to maximize the revenues derived from these properties on future sale. We believe the prime location of the real estate enhances our ability to sell, however, there can be no assurance that we will be successful in our efforts to sell these properties. 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 EURIBOR. Based on interest rates at December 31, 2000, a 1% increase or decrease in interest rates on our line of credit and other variable rate borrowings, would not materially affect annual future earnings and cash flows. Based on borrowing rates currently available to us, the carrying amount of our debt approximates its fair value. Accounting Developments 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 ending 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 will adopt SFAS 133 effective January 1, 2001 and does not anticipate that it will have any material impact on its consolidated financial statements. Forward-looking Statements This previous discussion contains statements which, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. The words "estimate", "anticipate", "believe", "expect", and similar expressions are intended to identify forward-looking statements. Such forward-looking information involves important risks and uncertainties that could materially alter results in the future from those expressed in any forward-looking statements made by, or on behalf of, MEC. These risks, assumptions and uncertainties include, but are not limited to, significant change in laws or regulations governing our industry, competition from operators of other racetracks and from other forms of gaming, including Internet and on-line wagering, a significant decrease in the number of live race days allocated to our racetracks, 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, our ability to integrate recent racetrack acquisitions and changes in the economy. Persons reading this M,D&A are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Item 8. Financial Statements and Supplementary Data CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Magna Entertainment Corp. 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, 2000 and 1999, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity and cash flows for the years ended December 31, 2000 and 1999, the five-month period ended December 31, 1998 and the year ended July 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and Schedule 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for the years ended December 31, 2000 and 1999, the five-month period ended December 31, 1998 and the year ended July 31, 1998 in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial 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 February 2, 2001 Magna Entertainment Corp. Consolidated Balance Sheets [U.S. dollars in thousands] - -------------------------------------------------------------------------------------------------------------------------- December 31, Note ------------ 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 31,976 $ 50,660 Restricted cash 13,461 7,752 Accounts receivable 33,399 25,887 Prepaid expenses and other 7,984 3,931 - -------------------------------------------------------------------------------------------------------------------------- 86,820 88,230 - -------------------------------------------------------------------------------------------------------------------------- Real estate properties, net 3 539,629 544,899 - -------------------------------------------------------------------------------------------------------------------------- Fixed assets, net 4 28,636 19,890 - -------------------------------------------------------------------------------------------------------------------------- Other assets, net 5 117,561 100,967 - -------------------------------------------------------------------------------------------------------------------------- Future tax assets 6 8,393 6,367 - -------------------------------------------------------------------------------------------------------------------------- $ 781,039 $ 760,353 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------------------------- Current liabilities: Bank indebtedness $ 7,609 $ 7,259 Accounts payable 37,400 34,479 Accrued salaries and wages 7,614 4,442 Refundable deposits 2,033 1,968 Other accrued liabilities 14,140 20,980 Income taxes payable 6 1,111 7,554 Long-term debt due within one year 7 12,754 19,119 Deferred revenue 3,660 4,282 - -------------------------------------------------------------------------------------------------------------------------- 86,321 100,083 - -------------------------------------------------------------------------------------------------------------------------- Long-term debt 7 63,343 19,506 - -------------------------------------------------------------------------------------------------------------------------- Other long-term liabilities 14 234 494 - -------------------------------------------------------------------------------------------------------------------------- Future tax liabilities 6 89,353 93,183 - -------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies 12, 13 Shareholders' equity: Class A Subordinate Voting Stock 8 100,770 11,500 Exchangeable Shares 8 57,937 110,000 Class B Stock 8 394,094 429,455 Contributed surplus 1,352 -- Accumulated deficit (1,990) (2,431) Accumulated comprehensive loss 9 (10,375) (1,437) - -------------------------------------------------------------------------------------------------------------------------- 541,788 547,087 - -------------------------------------------------------------------------------------------------------------------------- $ 781,039 $ 760,353 - -------------------------------------------------------------------------------------------------------------------------- See accompanying notes Magna Entertainment Corp. /s/ J. Terrence Lanni /s/ Jim McAlpine Director Director 2 Consolidated Statements of Operations and Comprehensive Income (Loss) [U.S. dollars in thousands, except per share figures] - -------------------------------------------------------------------------------------------------------------------------- Five-month Year Years ended period ended ended December 31, December 31, July 31, -------------------------- Note 2000 1999 1998 1998 - -------------------------------------------------------------------------------------------------------------------------- Revenue 11, 12, 15 Racetrack Gross wagering 1 $ 301,288 $ 133,924 $ 7,306 $ -- Non-wagering 53,961 31,022 1,439 -- Real estate Sale of real estate 37,630 2,544 -- -- Rental and other 20,684 19,370 6,597 20,486 - -------------------------------------------------------------------------------------------------------------------------- 413,563 186,860 15,342 20,486 - -------------------------------------------------------------------------------------------------------------------------- Costs and expenses Racetrack Purses, awards and other 190,043 85,520 4,793 -- Operating costs 128,612 63,302 3,461 -- General and administrative 18,117 5,987 164 -- Real estate Real estate sold 30,656 1,916 -- -- Operating costs 18,928 18,071 7,293 24,778 General and administrative 1,133 1,833 1,169 1,086 Depreciation and amortization 20,061 7,924 1,649 1,852 Predevelopment and other costs 4,245 454 -- -- Interest expense 7 3,263 1,666 1,236 1,399 Interest income 7 (3,048) (2,586) (15) (19) - -------------------------------------------------------------------------------------------------------------------------- 412,010 184,087 19,750 29,096 - -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 11 1,553 2,773 (4,408) (8,610) Income tax provision (benefit) 6 1,112 2,835 (177) -- - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) 441 (62) (4,231) (8,610) Other comprehensive income (loss) Foreign currency translation adjustment (8,938) (7,493) 4,824 (1,951) - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $ (8,497) $ (7,555) $ 593 $ (10,561) - -------------------------------------------------------------------------------------------------------------------------- Income (loss) per share for Class A Subordinate Voting Stock, Class B Stock or Exchangeable Share: Basic 8 $ 0.01 $ 0.00 $ (0.05) $ (0.11) Diluted 8 $ 0.01 $ 0.00 $ (0.05) $ (0.11) - -------------------------------------------------------------------------------------------------------------------------- Average number of shares of Class A Subordinate Voting Stock, Class B Stock and Exchangeable Shares outstanding during the period [in thousands]: Basic 8 80,422 78,686 78,535 78,535 Diluted 8 80,424 78,686 78,535 78,535 - -------------------------------------------------------------------------------------------------------------------------- See accompanying notes Magna Entertainment Corp. Consolidated Statements of Changes in Shareholders' Equity 3 [U.S. dollars in thousands] Class A Subordinate Exchange- Magna's Net Voting able Class B Contributed Investment Stock Shares Stock Surplus - ----------------------------------------------------------------------------------------------------------------------------- Magna's net investment at July 31, 1997 $ 87,917 $ $ $ $ Net loss (8,610) Net contribution by Magna International Inc. 80,919 Other comprehensive loss (1,951) - ----------------------------------------------------------------------------------------------------------------------------- Magna's net investment at July 31, 1998 158,275 Net loss (4,231) Net contribution by Magna International Inc. 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 International Inc. (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 International Inc. 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 future 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 Other comprehensive loss 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 Activity for the year ended December 31, 2000: Net income Net cash contribution by Magna International Inc. 1,352 Other comprehensive loss Conversion of Class B stock to Class A Subordinate Voting Stock 35,361 (35,361) Issue of Class A Subordinate Voting Stock for an acquisition 1,846 Conversion of Exchangeable Shares to Class A Subordinate Voting Stock 52,063 (52,063) - ----------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2000 $ -- $ 100,770 $ 57,937 $ 394,094 $ 1,352 - ----------------------------------------------------------------------------------------------------------------------------- Other Accumulated Accumulated Comprehen- Deficit sive loss - --------------------------------------------------------------------------------------- Magna's net investment at July 31, 1997 $ $ Net loss Net contribution by Magna International Inc. Other comprehensive loss - --------------------------------------------------------------------------------------- Magna's net investment at July 31, 1998 Net loss Net contribution by Magna International Inc. Other comprehensive gain - --------------------------------------------------------------------------------------- Magna's net investment at December 31, 1998 Activity for the three-months ended March 31, 1999: Net income Net distribution to Magna International Inc. Other comprehensive loss - --------------------------------------------------------------------------------------- Magna's net investment at March 31, 1999, the date at which the net investment was fixed Activity for the seven-month period ended on the date of the Reorganization, November 5, 1999: Net loss Cash contribution by Magna International Inc. Other comprehensive loss - --------------------------------------------------------------------------------------- Magna's net investment at November 5, 1999 prior to the Reorganization Completion of the Reorganization as described in the principles of consolidation and resulting allocation to capital stock and net future tax liabilities of $3,818 - --------------------------------------------------------------------------------------- Magna's net investment at November 5, 1999 after completion of the Reorganization 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 Issue of shares of Class A Subordinate Voting Stock on acquisitions - --------------------------------------------------------------------------------------- Balances at December 31, 1999 (2,431) (1,437) Activity for the year ended December 31, 2000: Net income 441 Net cash contribution by Magna International Inc. Other comprehensive loss (8,938) Conversion of Class B stock to Class A Subordinate Voting Stock Issue of Class A Subordinate Voting Stock for an acquisition Conversion of Exchangeable Shares to Class A Subordinate Voting Stock - --------------------------------------------------------------------------------------- Balances at December 31, 2000 $ (1,990) $ (10,375) - --------------------------------------------------------------------------------------- See accompanying notes 4 Magna Entertainment Corp. Consolidated Statements of Cash Flows [U.S. dollars in thousands] - -------------------------------------------------------------------------------------------------------------------------- Five-month Year Years ended period ended ended December 31, December 31, July 31, -------------------------- Note 2000 1999 1998 1998 - -------------------------------------------------------------------------------------------------------------------------- Cash provided from (used for) OPERATING ACTIVITIES: Net income (loss) $ 441 $ (62) $ (4,231) $ (8,610) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 20,021 7,924 1,649 1,852 Future income taxes 6 (5,761) (1,295) (177) -- Gain on disposal of real estate property (6,975) (628) -- -- - ------------------------------------------------------------------------------------------------------------------------- 7,726 5,939 (2,759) (6,758) - ------------------------------------------------------------------------------------------------------------------------- Changes in non-cash working capital Restricted cash (5,709) (2,691) (5,061) -- Accounts receivable (4,139) (8,607) (7,285) (262) Prepaid expenses and other 1,563 (2,952) (2,123) (1,261) Accounts payable (5,179) 4,438 8,526 786 Accrued salaries and wages 3,172 1,653 84 61 Refundable deposits 65 250 207 654 Other accrued liabilities (6,840) 11,931 681 266 Income taxes payable (6,146) 6,042 -- -- Deferred revenue (622) (777) 1,381 (1,354) - ------------------------------------------------------------------------------------------------------------------------- (23,835) 9,287 (3,590) (1,110) - ------------------------------------------------------------------------------------------------------------------------- (16,109) 15,226 (6,349) (7,868) - ------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash 2 (24,117) (160,812) (118,617) -- Real estate property additions (46,493) (47,430) (17,944) (72,460) Fixed asset additions (7,535) (9,017) (124) (183) Increase (decrease) in other assets 8,141 (683) -- -- Proceeds on real estate sold to Magna 6,147 -- -- -- Proceeds on disposal of real estate 27,250 2,544 -- -- - ------------------------------------------------------------------------------------------------------------------------- (36,607) (215,398) (136,685) (72,643) - ------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Increase (decrease) in bank indebtedness 759 (2,722) 11,602 (4,280) Issuance of long-term debt 48,000 -- 48 6,553 Repayment of long-term debt (15,853) (3,278) (114) (2,608) Contributed capital 12 1,352 -- -- -- Net contribution by Magna International Inc. -- 244,458 143,634 80,919 - ------------------------------------------------------------------------------------------------------------------------- 34,258 238,458 155,170 80,584 - ------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (226) (68) 11 2 - ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period (18,684) 38,218 12,147 75 Cash and cash equivalents, beginning of period 50,660 12,442 295 220 - ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 31,976 $ 50,660 $ 12,442 $ 295 ========================================================================================================================= See accompanying notes 5 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 principles 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) 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"). The consolidated financial statements prior to November 5, 1999 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 Park 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 operates the Gulfstream Park racetrack, which is located on approximately 255 acres of land in the cities of Hallandale and Aventura, Florida. . 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 operates the Golden Gate Fields racetrack, which 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 operate the Thistledown 3 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 Remington Park racetracks, which are located on approximately 120 acres of land in the city of North Randall, Ohio and 370 acres of land in the city of Oklahoma City, Oklahoma, respectively. The Remington Park property is leased under an agreement 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, which operates a horse boarding and training center located in San Diego, California, owns approximately 202 acres of real estate. Real Estate Operations . All the outstanding capital stock of Fontana Beteiligungs AG (formerly Magna Vierte Beteiligungs AG) ("FVB"). 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 FVB except for two real estate properties and an equivalent amount of debt financing due to Magna. The two real estate properties not transferred to FVB 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 FVB include a golf course and adjacent residential development in Oberwaltersdorf, Austria. . All the outstanding capital stock of MEC Projektentwicklungs AG (formerly Magna Projektentwicklungs AG) which owns all of the outstanding capital stock of MEC Grundstucksentwicklungs GmbH (formerly 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. . 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 Magna Golf Club (formerly the Aurora Downs golf course). 4 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 consolidated statements of operations and comprehensive income (loss) include the following: (a) 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 FVB; (b) the historic revenues and expenses of MGE; (c) 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 Magna Golf Club, the Aurora lands and the vacant land portfolio and other non-automotive properties transferred to the Company; and (d) the historic revenues and expenses of all acquisitions from their date of purchase (see Note 2). Prior to the Reorganization, the administrative costs associated with managing the Aurora lands, the vacant land portfolio and other non-automotive properties were borne by Magna'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 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's historic administrative costs has been included in these consolidated financial statements based on management's best estimate of the cost of the services provided. Prior to the Reorganization, 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, SLRD, FVB, and MGE. No interest has been charged on Magna's net investment in the Magna Golf Club, 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 U.S. legal entities 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 prior to the completion of the Reorganization on 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), prior to the Reorganization, may not necessarily be indicative of the revenues and expenses that would have resulted had the Company historically operated as a stand-alone entity. 5 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) 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 horse owners. 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 periodically whether there are indicators of impairment. If such indicators are present, the Company assesses the recoverability by determining whether the carrying value of such assets can be recovered through projected undiscounted cash flows. If the sum of expected future cash flows, undiscounted and without interest charges, is less than net book value, the excess of the net book value over the estimated fair value, based upon using discounted future cash flows, 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. 6 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) 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. 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 and Goodwill Racing licenses and goodwill 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 and goodwill. 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. Effective October 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" and guidance provided by EITF 99-19 "Recording Revenue Gross as a Principal versus Net as an Agent". Previously the Company recorded its wagering revenue net of "purses, stakes and awards" and "pari-mutuel wagering taxes". Under the new accounting method adopted during the fourth quarter of 2000, the Company now recognizes revenue gross of "purses, stakes and awards" and "pari-mutuel wagering taxes". The costs relating to these amounts are shown as "Purses, awards and other" in the accompanying income statement. In accordance with SAB 101 guidance, the current year quarterly unaudited income statements and the prior year 7 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) income statements have been retroactively reclassified for all periods presented to comply with the new accounting method. Revenues from the sale of residential development inventory are recognized in two phases. First, revenue related to sale of land is recognized when the title to the land passes to the purchaser. The remaining revenue is recognized when the unit is constructed by the independent contractor and 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 The Company's racetrack business 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 years ended December 31, 2000 and 1999 and the five month period ended December 31, 1998 were $7.5 million, $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 were 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 comprehensive income (loss) in equity starting November 6, 1999. The appropriate amounts of exchange gains or losses included in accumulated 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 8 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) 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, future 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. Stock-based Compensation In October 1995, the Financial Accounting Standards Board issued Statement No. 123 "Accounting for Stock-Based Compensation" which provides companies an alternative to accounting for stock-based compensation as prescribed under APB Opinion No. 25 ("APB 25"). Statement No. 123 encourages, but does not require companies to recognize expense for stock-based awards based on their fair value at date of grant. Statement No. 123 allows companies to continue to follow existing accounting rules (intrinsic value method under APB 25) provided that pro-forma disclosures are made of what net income and earnings per share would have been had the new fair value method been used. We have elected to adopt the disclosure requirements of Statement No. 123 but will account for stock-based compensation under APB 25. Earnings per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the assumed conversion of all dilutive securities using the treasury stock method. 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. 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 ending 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 will adopt SFAS 133 effective January 1, 2001, and the adoption will have no material impact on its consolidated financial statements. Reclassification 9 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 amounts have been reclassified in the 1999 and 1998 consolidated financial statements to conform with current presentation. 2. BUSINESS ACQUISITIONS The following acquisitions were accounted for using the purchase method: [a] Acquisitions in the year ended December 31, 2000 Great Lakes Downs On February 29, 2000 the Company completed the acquisition of Great Lakes Downs, Inc. ("Great Lakes Downs") for a total purchase price, including estimated transaction costs, of $1.8 million (net of cash acquired of $0.08 million). The total purchase price of $1.8 million was paid by the issuance of 267,416 shares of Class A Subordinate Voting Stock. Great Lakes Downs, Inc. operates the Great Lakes Downs racetrack, which is located on approximately 85 acres of land in the city of Muskegon, Michigan. Bay Meadows On November 17, 2000 the Company completed the acquisition of Bay Meadows Operating Co., LLC and Bay Meadows Catering (collectively "Bay Meadows") for a total purchase price, including estimated transaction costs, of $24.1 million, (net of cash acquired of $0.09 million) payable in cash. Bay Meadows Operating Co., LLC operates the Bay Meadows racetrack, which is located in the city of San Mateo, California. The property on which the Bay Meadows racetrack is located is leased under an agreement that expires on the later of December 31, 2002 or the final date of any horse racing meet in progress on December 31, 2002, but in no event later than March 31, 2003. The purchase price, which may be adjusted further, has been allocated to the assets and liabilities acquired as follows: 10 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) Great Lakes Bay Downs Meadows Total --------------------------------------------------------------------------------------------------------------------- Non-cash working capital (deficit) $ (3,370) $ 701 $ (2,669) Real estate properties 7,688 - 7,688 Fixed assets 2,399 1,587 3,986 Other assets 1,340 21,829 23,169 Debt due within one year (447) - (447) Long-term debt (5,840) - (5,840) --------------------------------------------------------------------------------------------------------------------- Net assets acquired and total purchase price, net of cash acquired $ 1,770 $ 24,117 $ 25,887 ===================================================================================================================== The purchase consideration for these acquisitions is as follows: Cash $ 24,117 Issuance of shares of Class A Subordinate Voting Stock 1,770 --------------------------------------------------------------------------------------------------------------------- $ 25,887 ===================================================================================================================== [b] 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 operates the Gulfstream Park racetrack, which 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 operates the Golden Gate Fields racetrack, which is located on approximately 181 acres in the cities of Albany and Berkeley, California. Thistledown and Remington Park On November 12, 1999, the Company completed the acquisitions of 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 operate the Thistledown and Remington Park racetracks, which are located on approximately 120 acres of land in the city of North Randall, Ohio and 370 acres of land in the city of Oklahoma City, Oklahoma, respectively. The 11 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) 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 which operates a horse boarding and training center located in San Diego, California, owns approximately 202 acres of real estate. 12 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 purchase price has been allocated to the assets and liabilities acquired as follows: Thistledown Gulfstream Golden Gate / Remington SLRD Total --------------------------------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------------------------------- $ 189,642 ===================================================================================================================== [c] Acquisition in the five-month period ended December 31, 1998 Santa Anita Park In December 1998, the Company completed the acquisition of the Santa Anita Park racetrack operations and approximately 305 acres of related real estate for $17.6 million and $101.0 million, respectively, for total consideration of $118.6 million payable in cash. The purchase price has been allocated to the assets and liabilities acquired as follows: --------------------------------------------------------------------------------------------------------------------- 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 ===================================================================================================================== 13 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) [d] Pro-forma Impact If the acquisitions completed during the years ended December 31, 2000 and 1999 had occurred on January 1, 1999, the Company's unaudited pro forma revenue net of purses, awards and other, would have been $253.4 million and $207.5 million for the years ended December 31, 2000 and 1999, respectively, and pro forma net income would have been $5.3 million and $8.2 million for the years ended December 31, 2000 and 1999, respectively. The Company's actual revenues net of purses, awards and other were $223.5 million and $101.3 million for the years ended December 31, 2000 and 1999, respectively. 14 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) 3. REAL ESTATE PROPERTIES Real estate properties consist of: December 31, --------------------------------- 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Residential development inventory $ 14,233 $ 17,460 - -------------------------------------------------------------------------------------------------------------------------- Revenue producing properties Cost Land and improvements 161,695 147,620 Buildings 167,862 135,373 Construction in progress 15,019 9,420 - -------------------------------------------------------------------------------------------------------------------------- 344,576 292,413 Accumulated depreciation Buildings (17,923) (6,878) - -------------------------------------------------------------------------------------------------------------------------- Revenue producing properties, net 326,653 285,535 - -------------------------------------------------------------------------------------------------------------------------- Properties under and held for development Cost Land and improvements 148,197 154,402 Buildings - 141 Construction in progress 1,195 7,168 - -------------------------------------------------------------------------------------------------------------------------- Properties under and held for development 149,392 161,711 - -------------------------------------------------------------------------------------------------------------------------- Properties available for sale Cost Land and improvements 32,176 53,271 Buildings 19,758 27,847 Furniture and fixtures - 1,362 - -------------------------------------------------------------------------------------------------------------------------- 51,934 82,480 Accumulated depreciation Buildings (2,583) (1,570) Furniture and fixtures - (717) - -------------------------------------------------------------------------------------------------------------------------- Properties available for sale, net 49,351 80,193 - -------------------------------------------------------------------------------------------------------------------------- $ 539,629 $ 544,899 ========================================================================================================================== 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, 2000 was operating income of $0.8 million, pertaining to properties available for sale (for the year ended December 31, 1999 - $0.8 million; for the five-month period ended December 31, 1998 - $0.1 million; for the year ended July 31, 1998 - $0.1 million). 15 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) 4. FIXED ASSETS Fixed assets consist of: December 31, ---------------------------------- 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Cost Machinery and equipment $22,476 $ 19,100 Furniture and fixtures 11,427 3,489 - -------------------------------------------------------------------------------------------------------------------------- 33,903 22,589 Accumulated depreciation Machinery and equipment (3,983) (2,289) Furniture and fixtures (1,284) (410) - -------------------------------------------------------------------------------------------------------------------------- $ 28,636 $ 19,890 ========================================================================================================================== 5. OTHER ASSETS Other assets consist of: December 31, --------------------------------- 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Racing licenses Cost $ 114,058 $ 100,077 Accumulated amortization (6,199) (1,108) - -------------------------------------------------------------------------------------------------------------------------- 107,859 98,969 Mortgage receivable 6,492 - Prepaid leases 2,204 1,298 Goodwill, net 775 - Other 231 700 - -------------------------------------------------------------------------------------------------------------------------- $ 117,561 $ 100,967 ========================================================================================================================== 6. INCOME TAXES [a] Income taxes for SAC, LATC, Gulfstream, FVB (from January 1, 1999), MGE and other separate tax paying legal entities prior to November 5, 1999, were recorded based on their separate tax positions using the liability method of tax allocation. Income taxes with respect to the 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 these components 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 were included in Magna's net investment, prior to November 5, 1999. 16 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) [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: Five-month Year Years ended period ended ended December 31 December 31, July 31, -------------------- 2000 1999 1998 1998 -------------------------------------------------------------------------------------------------------------------------- Expected provision (benefit): Federal statutory income tax rate (35%) $ 544 $ 971 $ (1,543) $ (3,014) State income tax, net of federal benefit 84 234 -- -- Losses not benefited 203 1,512 1,366 3,014 Foreign rate differentials 242 96 -- -- Other 39 22 -- -- ---------------------------------------------------------------------------------------------------------------------- Income tax provision (benefit) $ 1,112 $ 2,835 $ (177) $ -- ====================================================================================================================== At December 31, 2000 and 1999, the Company had U.S. and European income tax loss carry-forwards totaling approximately $17.2 million and $13.4 million, respectively, that have not been recognized for accounting purposes. Of this $17.2 million in tax loss carry-forwards at December 31, 2000, $8.6 million will have no expiration date and the remainder will expire in the following years: Year: 2010 $ 1,100 2016 1,900 2017 500 2018 5,100 ---------------------------------------------------------------------------------------------------------------------- $ 8,600 ====================================================================================================================== There are annual limitations on the utilization of $5.7 million of the loss carry-forwards. [c] The details of income (loss) before income taxes by jurisdiction are as follows: Years ended Five-month Year December 31, period ended ended -------------------- December 31, July 31, 2000 1999 1998 1998 ---------------------------------------------------------------------------------------------------------------------- United States $ (605) $ 4,506 $ (540) $ (243) Foreign 2,158 (1,733) (3,868) (8,367) ---------------------------------------------------------------------------------------------------------------------- $ 1,553 $ 2,773 $ (4,408) $ (8,610) ====================================================================================================================== 17 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) [d] The details of the income tax provision (benefit) are as follows: Years ended Five-month Year December 31, period ended ended -------------------- December 31, July 31, 2000 1999 1998 1998 ---------------------------------------------------------------------------------------------------------------------- Current provision United States $ -- $ 2,178 $ -- $ -- Foreign 3,160 1,952 -- -- ---------------------------------------------------------------------------------------------------------------------- 3,160 4,130 -- -- ---------------------------------------------------------------------------------------------------------------------- Future provision United States (323) (345) (177) -- Foreign (1,725) (950) -- -- ---------------------------------------------------------------------------------------------------------------------- (2,048) (1,295) (177) -- ---------------------------------------------------------------------------------------------------------------------- $ 1,112 $ 2,835 $ (177) $ -- ---------------------------------------------------------------------------------------------------------------------- [e] Future income taxes have been provided on temporary differences, which consist of the following: Years ended Five-month Year December 31, period ended ended -------------------- December 31, July 31, 2000 1999 1998 1998 ---------------------------------------------------------------------------------------------------------------------- Amortization of purchase accounting fair value increments, not allowed for tax purposes $ (2,174) $ (522) $ -- $ -- Tax gain in excess of book gain on disposal of real estate property (751) (640) -- -- Tax gain on revaluation of foreign real estate -- (310) -- -- Tax benefit of loss carry-forwards (557) (1,512) (451) (689) Utilization of loss carry-forwards 1,231 177 -- -- Increase in valuation allowance 203 1,512 274 689 ---------------------------------------------------------------------------------------------------------------------- $ (2,048) $ (1,295) $ (177) $ -- ---------------------------------------------------------------------------------------------------------------------- 18 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) [f] Future tax assets and liabilities at December 31, 2000 consist of the following temporary differences: December 31, --------------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Assets Real estate properties tax value in excess of book value $ 17,800 $ 18,178 Tax benefit of loss carryforwards Pre-acquisition 2,614 1,445 Post-acquisition 2,936 2,379 - --------------------------------------------------------------------------------------------------------------------------- 23,350 22,002 Valuation allowance Valuation allowance against tax benefit of loss carryforwards Pre-acquisition (1,445) (1,445) Post-acquisition (2,582) (2,379) Valuation allowance against tax benefit of real estate properties in excess of book value (10,930) (11,811) - --------------------------------------------------------------------------------------------------------------------------- Future tax assets $ 8,393 $ 6,367 =========================================================================================================================== Liabilities Real estate properties book basis in excess of tax basis $ 52,041 $ 51,429 Other assets book basis in excess of tax basis 34,690 41,321 Other 2,622 433 - --------------------------------------------------------------------------------------------------------------------------- Future tax liabilities $ 89,353 $ 93,183 =========================================================================================================================== [g] Income taxes paid in cash were $3.2 million for the year ended December 31, 2000 (for the year ended December 31, 1999 - $2.9 million). For the five-month period ended December 31, 1998 and the year ended July 31, 1998 there were no income taxes paid in cash. 7. DEBT AND COMMITMENTS [a] The Company's long-term debt consists of the following: December 31, --------------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- A three year term loan facility with permitted borrowings of $63 million, bearing interest at LIBOR [London Inter-bank Overnight Rate] plus 2.2% per annum (8.825% at December 31, 2000) with balance due on November 30, 2002, secured by a deed of trust against Santa Anita Park racetrack and related real estate. $ 48,000 $ -- Non-interest bearing promissory note (imputed interest of 8.675%), payable in three installments, $10.0 million of which matured in 2000, and $5.0 million which matures in each of 2001 and 2002. 8,833 17,330 19 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) Bank term line of credit with permitted borrowings of $17.6 million (Austrian Schillings 240 million), bearing interest at EURIBOR plus 0.625% per annum (5.5% at December 31, 2000), payable quarterly. The advance is repayable in annual installments of $2.9 million (Austrian Schillings 40 million) which began on July 31, 1997. The Company has provided two first mortgages on real estate properties, with carrying value of $8.2 million at December 31, 2000, as security for this facility. 8,192 8,776 Bank term line of credit, repaid with a final balloon payment in June 2000. -- 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 $27.2 million at December 31, 2000. 5,392 5,491 Mortgage note payable to a commercial bank, bearing interest at 8.95%. Quarterly principal and interest payments of $89,045, with balance due at December 23, 2001. Secured by real estate, furniture and equipment, inventory and accounts receivable. 3,685 -- Note payable to a commercial bank, bearing interest at prime plus 1% (10.5% at December 31, 2000). Quarterly principal and interest payments of $49,631, with balance due at December 23, 2001. Secured by real estate, furniture and equipment, inventory and accounts receivable. 1,192 -- Other loans to various subsidiaries from various banks, and city governments, including mortgage loans, equipment loans and a term loan, with interest rates ranging from 4% to 9%. 803 228 =========================================================================================================================== 76,097 38,625 Less due within one year 12,754 19,119 - --------------------------------------------------------------------------------------------------------------------------- $ 63,343 $ 19,506 =========================================================================================================================== The Company is in compliance with all of its debt agreements and related covenants. [b] Future principal repayments on long-term debt at December 31, 2000 are as follows: 2001 $ 12,754 2002 9,930 2003 48,231 2004 220 2005 194 Thereafter 4,768 - --------------------------------------------------------------------------------------------------------------------------- $ 76,097 =========================================================================================================================== 20 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) [c] Interest expense and interest income include: Years ended Five-month Year December 31, period ended ended -------------------- December 31, July 31, 2000 1999 1998 1998 - --------------------------------------------------------------------------------------------------------------------------- Interest cost, gross External debt $ 3,263 $ 1,308 $ 371 $ 1,021 Magna debt -- 701 1,055 986 - --------------------------------------------------------------------------------------------------------------------------- 3,263 2,009 1,426 2,007 Less: Interest capitalized -- 343 190 608 - --------------------------------------------------------------------------------------------------------------------------- Interest expense $ 3,263 $ 1,666 $ 1,236 $ 1,399 =========================================================================================================================== Interest income External $ (3,048) $ (271) $ (15) $ (19) Internal -- (2,315) -- -- - --------------------------------------------------------------------------------------------------------------------------- $ (3,048) $ (2,586) $ (15) $ (19) =========================================================================================================================== Interest capitalized relates to real estate properties under development. Interest paid in cash for the year ended December 31, 2000 was $2.5 million (for the year ended December 31, 1999 - $2.5 million; for the five-month period ended December 31, 1998 - $1.2 million; for the year ended July 31, 1998 - $1.9 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 shares are subdivided or consolidated, the other classes shall be similarly changed to preserve the relative position of each class. 21 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) [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 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, which 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. 22 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) [c] Changes in the Class A Subordinate Voting Stock, Class B Stock and Exchangeable Shares for the years ended December 31, 2000 and 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): 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 -------------------------------------------------------------------------------------------------------------------- Issued and outstanding at December 31, 1998 -- $ -- -- $ -- -- $ -- Issued on completion of 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 Conversion of Class B Stock to Class A Subordinate Voting Stock 5,246,085 35,361 (5,246,085) (35,361) Issued on acquisition of subsidiary 267,416 1,846 Conversion of Exchangeable Shares to Class A Subordinate Voting Stock 7,015,756 52,063 (7,015,756) (52,063) -------------------------------------------------------------------------------------------------------------------- Issued and outstanding at December 31, 2000 14,192,147 $ 100,770 7,807,431 $ 57,937 58,466,056 $ 394,094 ==================================================================================================================== [d] Basic and diluted earnings per share of Class A Subordinate Voting Stock, Exchangeable Shares or Class B Stock for the year ended December 31, 2000 have been calculated using 80,421,795 and 80,424,138 shares, respectively. Both amounts have used the weighted average number of shares outstanding during the year. Diluted earnings per share include the dilution effect of options to purchase 2,343 shares. Basic and diluted loss per share of Class A Subordinate Voting Stock, Exchangeable Shares or Class B Stock for the year ended December 31, 1999 have 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 23 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 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 Shares 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. The following is a summary of the elements used in calculating basic and diluted earnings per share ("EPS"): Five-month Year Years ended period ended ended December 31, December 31, July 31, 2000 1999 1998 1998 ---------------------------------------------------------------------------------------------------------------------- Net income $ 441 $ (62) $ (4,231) $ (8,610) ====================================================================================================================== Weighted average shares outstanding 80,422 78,686 78,535 78,535 Net effect of dilutive stock options 2 -- -- -- ---------------------------------------------------------------------------------------------------------------------- Diluted weighted average shares outstanding 80,424 78,686 78,535 78,535 ====================================================================================================================== EPS: Basic $ 0.01 $ (0.00) $ (0.05) $ (0.11) ====================================================================================================================== Diluted $ 0.01 $ (0.00) $ (0.05) $ (0.11) ====================================================================================================================== 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, 2000, the Company incurred unrealized currency translation losses of $8.9 million from the weakening of the Austrian Schilling and the Canadian dollar against the U.S. dollar (an unrealized loss of $7.5 million for the year ended December 31, 1999, an unrealized gain of $4.8 million for the five-month period ended December 31, 1998, and an unrealized loss of $2.0 million for the year ended July 31, 1998). 24 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) 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 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, is not materially different from its 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, are 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. 25 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) 11. SEGMENT INFORMATION Operating Segments The Company has two operating segments: racetrack and real estate operations. The following summary presents key information by operating segment. Year ended December 31, 2000 - -------------------------------------------------------------------------------------------------------------------------- Racetrack Real Estate Operations Operations Total - -------------------------------------------------------------------------------------------------------------------------- Revenue $ 355,249 $ 58,314 $ 413,563 ========================================================================================================================== Income (loss) before income taxes (3,863) 5,416 1,553 ========================================================================================================================== Real estate properties and fixed asset additions 46,128 7,298 53,426 ========================================================================================================================== Real estate properties, fixed and other assets, net 418,311 267,515 685,826 Current assets 86,820 Future tax assets 8,393 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 781,039 ========================================================================================================================== Year ended December 31, 1999 - -------------------------------------------------------------------------------------------------------------------------- Racetrack Real Estate Operations Operations Total - -------------------------------------------------------------------------------------------------------------------------- Revenue $ 164,946 $ 21,914 $ 186,860 ========================================================================================================================== 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 382,235 283,521 665,756 Current assets 88,230 Future tax assets 6,367 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 760,353 ========================================================================================================================== 26 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) Five-month period ended December 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- Racetrack Real Estate Operations Operations Total - -------------------------------------------------------------------------------------------------------------------------- Revenue $ 8,745 $ 6,597 $ 15,342 ========================================================================================================================== 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 75,267 259,644 334,911 Current assets 29,054 Future tax assets 177 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 364,142 ========================================================================================================================== Year ended July 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- Racetrack Real Estate Operations Operations Total - -------------------------------------------------------------------------------------------------------------------------- Revenue -- $ 20,486 $ 20,486 ========================================================================================================================== Loss before income taxes -- (8,610) (8,610) ========================================================================================================================== Real estate properties and fixed asset additions -- 72,643 72,643 ========================================================================================================================== Real estate properties, fixed and other assets, net -- 182,889 182,889 Current assets 1,913 Future tax assets -- - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 184,802 ========================================================================================================================== 27 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) Geographic Segments Revenue by geographic segment of the Company is as follows: Years ended Five-month Year December 31, period ended ended -------------------- December 31, July 31, 2000 1999 1998 1998 - -------------------------------------------------------------------------------------------------------------------------- United States $ 362,749 $ 167,262 $ 9,500 $ 1,698 Canada 24,545 - - - Europe 26,269 19,598 5,842 18,788 - -------------------------------------------------------------------------------------------------------------------------- $ 413,563 $ 186,860 $ 15,342 $ 20,486 ========================================================================================================================== Real estate properties, fixed and other assets, net of accumulated depreciation and amortization, by geographic segment are as follows: December 31, -------------------------------- 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- United States $ 539,047 $ 483,117 Canada 58,967 75,070 Europe 87,812 107,569 - -------------------------------------------------------------------------------------------------------------------------- $ 685,826 $ 665,756 ========================================================================================================================== 12. TRANSACTIONS WITH RELATED PARTIES [a] During the year ended December 31, 2000, the Company purchased 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 and a Director 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. The purchase agreement for the land was originally entered into by Magna during the five-month period ended December 31, 1998, following review and approval by the unrelated members of the Magna Board of Directors. The purchase was completed in October, 2000 after the satisfaction of certain conditions, including the registration of a Plan of Subdivision following the approval of the relevant government authorities. The rights to acquire this land and improvements, as well as golf course construction in progress funded by Magna, were 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, 2000 and 1999 for this project is $25.4 million and $19.8 million, respectively. [b] Properties under and held for development includes $18.2 million which represents the book value of the Aurora lands transferred to the Company by Magna under a conditional sale agreement. The conditional 28 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) 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 $18.2 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 $4.2 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 $4.2 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. [d] The Company had 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 option was exercised during 2000. [e] Effective March 1, 1999, the Company began charging Magna an access fee for its use of the golf course and related facilities in Oberwaltersdorf, Austria. The agreement, which expires on March 1, 2004, stipulates a yearly fee amounting to $2.7 million. During the years ended December 31, 2000 and 1999, $2.7 million and $2.3 million, respectively, have 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] During the year ended December 31, 2000 the Company sold to a company associated with members of the family of Mr. F. Stronach and Mr. A. Stronach approximately three acres of land in Aurora, Ontario for a sale price of approximately $0.2 million. [g] During the year ended December 31, 2000 the Company sold to Magna approximately 24.5 acres of land in Vaughan, Ontario for a sale price of approximately $5.8 million. The gain on the sale of the property of approximately $1.4 million is reported, net of tax, as a contribution to equity. [h] One of the Company's subsidiaries has been named as a defendant in four class actions brought in United States District Courts by various plaintiffs. The plaintiffs in these actions claim unspecified compensatory and punitive damages, for restitution and disgorgement of profits, all in relation to forced labor performed by the plaintiffs for such subsidiary and certain other Austrian and German corporate defendants at their facilities in Europe during World War II. As a result of the Reorganization, the Company acquired the shares of such subsidiary. Under Austrian law, such subsidiary would be jointly and severally liable for the damages awarded in respect of these class action claims. After consolidation of three of these cases in the United States District Court for the District of New Jersey together with over 50 other cases, the presiding judge entered voluntary dismissal orders with prejudice of these three cases and various other cases as a result of agreements reached with plaintiffs' attorneys and the Governments of the United States and the Federal Republic of Germany to dismiss all slave labor cases as a result of the creation of the German Remembrance Fund. The fourth action was not consolidated and awaits finalization of similar Austrian funds dealing with slave labor and property right claims. An Austrian subsidiary of Magna has agreed to indemnify such subsidiary for any damages or expenses associated with this case. 29 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) [i] 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] The Company has issued letters of credit to guarantee various construction projects related to activity of a subsidiary. These letters of credit amount to $5.3 million with expiration dates ranging from February 21, 2001 through December 8, 2001. [d] At December 31, 2000, the Company had commitments under operating leases requiring annual rental payments for the fiscal periods ending December 31 as follows: -------------------------------------------------------------------------- 2001 $ 2,793 2002 1,834 2003 896 2004 296 2005 177 Thereafter 1,063 -------------------------------------------------------------------------- $ 7,059 ========================================================================== For the year ended December 31, 2000, payments under operating leases amounted to approximately $3.0 million (for the year ended December 31, 1999 - $767 thousand; for the five-month period ended December 31, 1998 - $39 thousand; for the year ended July 31, 1998 - $44 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. 30 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) 14. EMPLOYEE BENEFIT AND STOCK OPTIONS Employee Defined Benefit Plans With the acquisition of the Santa Anita Park 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 of annuity contracts 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 Park 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 year ended July 31, 1998. 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 years ended December 31, 2000 and 1999 included the following components: Years ended December 31, 2000 1999 - ------------------------------------------------------------------------------ Components of net periodic pension cost: Service cost $ 196 $ 392 Interest cost on projected benefit obligation 588 573 Actual return on plan assets (922) (942) Net amortization and deferral 348 485 - ------------------------------------------------------------------------------ Net periodic pension cost $ 210 $ 508 ============================================================================== 31 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 provides a reconciliation of benefit obligations, plan assets and funded status of the plan. Years ended December 31, 2000 1999 - --------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of period $ 8,669 $ 8,668 Service cost 196 392 Interest cost 588 573 Benefits paid (537) (508) Actuarial losses 282 (456) - --------------------------------------------------------------------------------------- Benefit obligation at end of period 9,198 8,669 ======================================================================================= Change in plan assets: Fair value of plan assets at beginning of period 8,287 7,351 Actual return on plan assets 922 942 Company contributions 470 502 Benefits paid (537) (508) - --------------------------------------------------------------------------------------- Fair value of plan assets at end of period 9,142 8,287 ======================================================================================= Funded status of plan (underfunded) (56) (382) Unrecognized net gain (178) (112) - --------------------------------------------------------------------------------------- Net pension liability $ (234) $ (494) ======================================================================================= Assumptions used in determining the funded status of the retirement income plan are as follows: Years ended December 31, 2000 1999 - --------------------------------------------------------------------------------------- Weighted average discount rate 7.0% 7.0% 5.0% 5.0% Weighted average rate of increase in compensation levels 8.0% 8.0% Expected long-term rate of return 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 benefit plans on behalf of its employees who are union members. Company contributions to these plans were $3.8 million and $4.8 million, respectively, for the years 32 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 December 31, 2000 and 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. The Company offers various 401(k) plans (the "Plans") to provide retirement benefits for employees. All employees who meet certain eligibility requirements are able to participate in the Plans. Discretionary matching contributions are determined each year by the Company. The Company contributed to the Plans $273 thousand in the year ended December 31, 2000 and approximately $223 thousand in 1999 from the dates of acquisition through December 31, 1999. Long-Term Incentive Plan The Company has a Long-Term Incentive Plan (the "Plan") (adopted in 2000) which allows for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock and performance shares to directors, officers, employees, consultants, independent contractors and agents. A maximum of 8.0 million shares could be issued under the Plan, of which 6.5 million are available for issuance pursuant to stock options and tandem stock appreciation rights and 1.5 million are available for issuance pursuant to any other type of award under the Plan. During 2000, the Company has granted stock options to certain directors, officers and key employees to purchase shares of the Company's Class A Subordinate Voting Stock. The majority of the stock options give the grantee the right to purchase Class A Subordinate Voting Stock of the Company at a price no less than the fair market value of such stock at the date of grant. Generally, stock options under the Plan vest over a period of two to four years from the date of grant at rates of 1/5/th/ to 1/3/rd/ per year and expire on December 31, 2009 subject to earlier cancellation in the events specified in the stock option agreements entered into by the Company with each recipient of options. The exercise price of the options ranges from $4.875 to $7.00. Information with respect to shares under option as of December 31, 2000 is as follows: Shares Subject Weighted to Option Average Exercise Price - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 -- $ -- Granted 4,665,000 6.39 Exercised -- -- Forfeited (843,334) 6.73 Expired -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 3,821,666 6.31 ========================================================================================================================== 33 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) Information regarding stock options outstanding as of December 31, 2000 is as follows: Options Options Outstanding Exercisable - -------------------------------------------------------------------------------------------------------------------------- Number 3,821,666 1,451,000 Weighted average exercise price $ 6.31 $ 6.41 Weighted average remaining contractual life (years) 8.4 7.5 Pro forma information regarding net income and earnings per share is required by Financial Accounting Standard No, 123 "Accounting and Disclosure of Stock-Based Compensation" ("FAS No. 123") and has been determined as if the Company had accounted for its stock options under the fair value method under FAS No. 123. The average fair values of the stock option grants were $1.07. The fair value of stock option grants were estimated at the date of grant using the following assumptions: Risk Free Interest rates 5% to 5.5% Dividend yields 0% Volatility factors of expected market price of Class A Subordinate Voting Stock 0.001 Weighted average expected life (years) 4.14 The Black - Scholes option valuation model was developed for use in estimating the fair value of traded options that require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options due to the ten month trading period of the Company's common stock. The Company's FAS No. 123 pro forma net income and the related per share amounts for 2000 are as follows: Net income, as reported $ 441 Pro forma stock compensation expense (net of taxes) (213) - -------------------------------------------------------------------------------------------------------------------------- Pro forma net income $ 228 - -------------------------------------------------------------------------------------------------------------------------- Pro forma net income per share $ 0.00 - -------------------------------------------------------------------------------------------------------------------------- For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. 34 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) 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, 2000 is as follows: For the year ended December 31, 2000 March 31 June 30 September 30 December 31 Total - -------------------------------------------------------------------------------------------------------------------------- Revenue $ 186,468 $ 102,344 $ 50,213 $ 74,538 $ 413,563 Gross profit (loss) 31,262 14,290 953 (1,181) 45,324 Net income (loss) 11,980 2,752 (5,110) (9,181) 441 ========================================================================================================================== For the year ended December 31, 1999 March 31 June 30 September 30 December 31 Total ========================================================================================================================== Revenue $ 97,865 $ 34,712 $ 10,419 $ 43,864 $ 186,860 Gross profit (loss) 19,277 1,750 (3,402) 426 18,051 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 $ 12,788 $ 29,984 Gross profit (loss) (1,292) (1,300) (1,180) 154 (3,618) Net loss (2,300) (2,464) (2,876) (2,806) (10,446) - -------------------------------------------------------------------------------------------------------------------------- [b] Comparative Information (unaudited): Summarized comparative financial information for the five-month period ended December 31, 1997 is as follows: - -------------------------------------------------------------------------------------------------------------------------- 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) ========================================================================================================================== 35 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) 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 that under Canadian GAAP, there is no requirement to disclose comprehensive income (loss). 17. SUBSEQUENT EVENTS On December 21, 2000 the Company announced that it had entered into an agreement with Ladbroke Racing Corp. and one of its subsidiaries to acquire Ladbroke's account wagering operations, The Meadows harness track, four off-track betting facilities and an interest in The Racing Network. The purchase price of $53 million will be paid $26.5 million in cash, $13.25 million through the issuance of Class A Subordinate Voting Stock of the Company and $13.25 million through the issuance of a 6% promissory note, of which $6.625 million matures on the first anniversary of the date of the closing and $6.625 million matures on the second anniversary. Subject to the receipt of regulatory approvals, the acquisition is expected to close in early April 2001. 36 MAGNA ENTERTAINMENT CORP. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 [Amounts in thousands, U.S. dollars] Costs Capitalized Initial Costs to Company Subsequent to Acquisition Foreign Exchange Impact -------------------------------------------------------------------------- Building and Building and Description Encumbrance Land Improvements Land Improvements Land - -------------- ----------------------------------------------------------------- RACETRACK OPERATIONS Racing Facilities Santa Anita Park (Arcadia, California, U.S.A.) 48,000 25,072 43,277 1,808 45,297 - Gulfstream Park (Hallandale, Florida, U.S.A.) - 46,344 20,264 493 517 - Golden Gate Fields (Albany, California, U.S.A.) - 56,986 11,128 672 8,312 - Thistledown (North Randall, Ohio, U.S.A.) - 1,062 8,114 180 55 - Remington Park (Oklahoma City, Oklahoma, U.S.A.) - 1,851 5,302 5 4,079 - Great Lakes Downs (Muskegon, Michigan, U.S.A.) 4,877 3,997 3,691 - 974 - SLRD (San Diego, California, U.S.A.) - 3,845 2,500 399 165 - Land held for development Santa Anita Park (Arcadia, California, U.S.A.) - 52,500 - - 281 - Gulfstream Park (Hallandale, Florida, U.S.A.) - 14,201 - - - - Golden Gate Fields (Albany, California, U.S.A.) - 13,857 - - - - GPRA Training Centre (Boynton, Florida, U.S.A.) - 22,940 - 6 - - REAL ESTATE OPERATIONS Golf Course Facilities Niederoesterreich, Austria - 3,721 - 7,374 19,692 (1,376) Ontario, Canada - 11,008 - 11,858 1,392 223 Land Ontario, Canada - 12,912 - 7,082 - (1,808) Ontario, Canada - 986 - 91 - (49) Ontario, Canada - 377 - 3 - (34) Ontario, Canada - 861 - 72 - (79) Ontario, Canada - 1,189 - 783 - (178) Ontario, Canada - 2,559 - 188 - (233) Ontario, Canada - 1,669 - 240 - (173) Ontario, Canada - 14 - 22 - - Kentucky, U.S.A. - 2,847 - 68 - - Michigan, U.S.A. - 1,161 - 136 - - Michigan, U.S.A. - 2,782 - 113 - - Maryland, U.S.A. - 997 - 40 - - Florida, U.S.A. - 1,918 - 216 - - New York, U.S.A. - 725 - 1,779 - - Niederoesterreich, Austria - 7,099 - 703 - (1,713) Niederoesterreich, Austria - 21,449 - 3,996 - (5,529) Austria - 5,915 - 4 - (822) Steiermark, Austria - 2,149 - - - (298) Commercial/Industrial properties Colorado, U.S.A. - - 405 - - - Oberoesterreich, Austria - 3,376 8,193 (251) - (451) Residential properies Ontario, Canada - 70 112 5 19 (3) Colorado, U.S.A. - - 3,208 127 21 - Austria 5,392 7,628 7,731 10 46 (1,058) Other - 24 1 10 (1) (6) --------------------------------------------------------------- 58,269 336,091 13,926 38,232 80,849 (13,587) --------------------------------------------------------------- Gross Amount at which Carried at Close of Period -------------------------------------------------------------------- Building and Buildings and Accumulated Date of Description Improvements Land Improvements Total Depreciation Construction - -------------- ------------------------------------------------------ ------------- RACETRACK OPERATIONS Racing Facilities Santa Anita Park (Arcadia, California, U.S.A.) - 26,880 88,574 115,454 7,083 n/a Gulfstream Park (Hallandale, Florida, U.S.A.) - 46,837 20,781 67,618 3,010 n/a Golden Gate Fields (Albany, California, U.S.A.) - 57,658 19,440 77,098 1,605 n/a Thistledown (North Randall, Ohio, U.S.A.) - 1,242 8,169 9,411 1,514 n/a Remington Park (Oklahoma City, Oklahoma, U.S.A.) - 1,856 9,381 11,237 790 n/a Great Lakes Downs (Muskegon, Michigan, U.S.A.) - 3,997 4,665 8,662 384 n/a SLRD (San Diego, California, U.S.A.) - 4,244 2,665 6,909 134 n/a Land held for development Santa Anita Park (Arcadia, California, U.S.A.) - 52,500 281 52,781 - n/a Gulfstream Park (Hallandale, Florida, U.S.A.) - 14,201 - 14,201 - n/a Golden Gate Fields (Albany, California, U.S.A.) - 13,857 - 13,857 - n/a GPRA Training Centre (Boynton, Florida, U.S.A.) - 22,946 - 22,946 - n/a REAL ESTATE OPERATIONS Golf Course Facilities Niederoesterreich, Austria (7,182) 9,719 12,510 22,229 3,261 1996 Ontario, Canada (19) 23,089 1,373 24,462 - Ongoing Land Ontario, Canada - 18,186 - 18,186 - Ontario, Canada - 1,028 - 1,028 - n/a Ontario, Canada - 346 - 346 - n/a Ontario, Canada - 854 - 854 - n/a Ontario, Canada - 1,794 - 1,794 - n/a Ontario, Canada - 2,514 - 2,514 - n/a Ontario, Canada - 1,736 - 1,736 - n/a Ontario, Canada - 36 - 36 - n/a Kentucky, U.S.A. - 2,915 - 2,915 - n/a Michigan, U.S.A. - 1,297 - 1,297 - n/a Michigan, U.S.A. - 2,895 - 2,895 - n/a Maryland, U.S.A. - 1,037 - 1,037 - n/a Florida, U.S.A. - 2,134 - 2,134 - n/a New York, U.S.A. - 2,504 - 2,504 - n/a Niederoesterreich, Austria - 6,089 - 6,089 - n/a Niederoesterreich, Austria - 19,916 - 19,916 - n/a Austria - 5,097 - 5,097 - n/a Steiermark, Austria - 1,851 - 1,851 - n/a Commercial/Industrial properties Colorado, U.S.A. - - 405 405 141 n/a Oberoesterreich, Austria (1,137) 2,674 7,056 9,730 2,101 n/a Residential properies Ontario, Canada (5) 72 126 198 - n/a Colorado, U.S.A. - 127 3,229 3,356 - n/a Austria 1,266) 6,580 6,511 13,091 505 n/a Other - 28 - 28 (22) -------------------------------------------------- (9,609) 360,736 85,166 545,902 20,506 -------------------------------------------------- Life on which Depreciation in Lastest income Date statement is Description Acquired Computed - -------------- ---------- -------------- RACETRACK OPERATIONS Racing Facilities Santa Anita Park (Arcadia, California, U.S.A.) 1998 40 years Gulfstream Park (Hallandale, Florida, U.S.A.) 1999 40 years Golden Gate Fields (Albany, California, U.S.A.) 1999 40 years Thistledown (North Randall, Ohio, U.S.A.) 1999 40 years Remington Park (Oklahoma City, Oklahoma, U.S.A.) 1999 40 years Great Lakes Downs (Muskegon, Michigan, U.S.A.) 2000 40 years SLRD (San Diego, California, U.S.A.) 1999 40 years Land held for development Santa Anita Park (Arcadia, California, U.S.A.) 1998 n/a Gulfstream Park (Hallandale, Florida, U.S.A.) 1999 n/a Golden Gate Fields (Albany, California, U.S.A.) 1999 n/a GPRA Training Centre (Boynton, Florida, U.S.A.) 2000 n/a REAL ESTATE OPERATIONS Golf Course Facilities Niederoesterreich, Austria 1994 25 years Ontario, Canada 1998 n/a Land Ontario, Canada Ontario, Canada 1997 n/a Ontario, Canada 1985 n/a Ontario, Canada 1985 n/a Ontario, Canada 1985 n/a Ontario, Canada 1997 n/a Ontario, Canada 1987 n/a Ontario, Canada n/a Kentucky, U.S.A. 1997 n/a Michigan, U.S.A. 1996 n/a Michigan, U.S.A. 1996 n/a Maryland, U.S.A. 1994 n/a Florida, U.S.A. 1994 n/a New York, U.S.A. 1998 n/a Niederoesterreich, Austria 1994 n/a Niederoesterreich, Austria 1996 n/a Austria 1998 n/a Steiermark, Austria 1998 n/a Commercial/Industrial properties Colorado, U.S.A. 1992 n/a Oberoesterreich, Austria 1998 n/a Residential properies Ontario, Canada 1998 n/a Colorado, U.S.A. 1995 n/a Austria 1998 n/a Other 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 Pursuant to instruction G(3) of the General Instructions to Form 10-K, the information required herein is incorporated by reference from sections of the Company's Proxy Statement titled "Executive Officers and Directors," "Employment Agreements and Termination of Employment Agreements," "Long-Term Incentive Plan" and "Section 16(a) Beneficial Ownership Reporting Compliance," which Proxy Statement will be filed with the Securities and Exchange Commission. Item 11. Executive Compensation Pursuant to instruction G(3) of the General Instructions to Form 10-K, the information required herein is incorporated by reference from sections of the Company's Proxy Statement titled "Directors' Compensation" and "EXECUTIVE COMPENSATION," which Proxy Statement will be filed with the Securities and Exchange Commission. Item 12. Security Ownership of Certain Beneficial Owners and Management Pursuant to instruction G(3) of the General Instructions to Form 10-K, the information required herein is incorporated by reference from the section of the Company's Proxy Statement titled "SECURITY OWNERSHIP," which Proxy Statement will be filed with the Securities and Exchange Commission. Item 13. Certain Relationships and Related Transactions Pursuant to instruction G(3) of the General Instructions to Form 10-K, the information required herein is incorporated by reference from the section of the Company's Proxy Statement titled "Certain Relationships and Related Transactions," which Proxy Statement will be filed with the Securities and Exchange Commission. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements and Schedule 29 The following Consolidated Financial Statements of Magna Entertainment Corp. for the year ended December 31, 2000 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 Statements of Cash Flows Notes to Consolidated Financial Statements Schedule III - Real Estate and Accumulated Depreciation (b) Reports on Form 8-K Magna Entertainment Corp. filed a current report on Form 8-K dated November 10, 2000 reporting its financial results from the third quarter of fiscal 2000, the resignation of David Mitchell as Executive Vice-President and Chief Financial Officer and the appointment of Graham J. Orr as Executive Vice-President and Chief Financial Officer. Magna Entertainment Corp. filed a current report on Fom 8-K dated December 11, 2000 announcing the resignation of Mark Feldman as President and Chief Executive Officer and the appointment of Frank Stronach as President and Chief Executive Officer on an interim basis. Magna Entertainment Corp. filed a current report on Form 8-K dated December 21, 2000 announcing it had entered into an agreement to acquire from Ladbroke Racing Corp. its account wagering operations, The Meadows harness track, four off-track betting facilities located in Pennsylvania and an interest in The Racing Network. (c) Exhibits Please refer to the exhibit index below. 30 SIGNATURES Pursuant to the general requirements of Section 13 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 30, 2001 MAGNA ENTERTAINMENT CORP. By: /s/ Jim McAlpine ------------------------------------------- Jim McAlpine 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. Signature Title Date /s/ Jim McAlpine - ----------------------- Jim McAlpine President and Chief Executive Officer and March 30, 2001 Director /s/ Graham J. Orr - ----------------------- Graham J. Orr Executive Vice-President and Chief March 30, 2001 Financial Officer /s/ Doug Tatters - ----------------------- Doug Tatters Vice-President and Controller March 30, 2001 /s/ Jerry D. Campbell - ----------------------- Jerry D. Campbell Vice-Chairman and Director March 30, 2001 /s/ William G. Davis - ----------------------- William G. Davis Director March 30, 2001 /s/ Peter M. George - ----------------------- Peter M. George Director March 30, 2001 /s/ Joseph W. Harper - ----------------------- Joseph W. Harper Director March 30, 2001 /s/ J. Terrence Lanni - ----------------------- J. Terrence Lanni Director March 30, 2001 _______________________ Edward C. Lumley Director /s/ James Nicol - ----------------------- James Nicol Vice-Chairman and Director March 30, 2001 _______________________ Gino Roncelli Director /s/ Andrew Stronach - ----------------------- Andrew Stronach Vice-President, Corporate Development March 30, 2001 and Director /s/ Frank Stronach - ----------------------- Frank Stronach Chairman and Director March 30, 2001 _______________________ Ronald J. Volkman Director ________________________ John C. York II Director 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. Exhibit No. Description - ----------- ----------- 3.1 Restated Certificate of Incorporation (2) 3.2 General By-Law No. 2 (2) 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 Bank, National Association (1) 10.8 Revolving Credit Agreement dated as of January 1, 2001 between Los Angeles Turf Club, Incorporated and Wells Fargo Bank, National Association 10.9 Forbearance Agreement dated as of February 8, 2000 between Magna International Inc. and Magna Entertainment Corp. (1) 10.1 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 (3) 10.12 Employment Agreement with Jerry D. Campbell dated January 1, 2000 (3) 10.13 Employment Agreement with David A. Mitchell dated November 26, 1999 (1) 10.14 Employment Agreement with Lonny Powell dated July 1, 1999 (3) 10.15 Employment Agreement with Donald Amos dated August 3, 2000 10.16 Employment Agreement with Graham J. Orr dated October 5, 2000 33 10.17 Employment Agreement with Gary M. Cohn dated November 1, 2000 10.18 Employment Agreement with Frank DeMarco, Jr. dated April 1, 1998 10.19 Purchase Agreement dated as of August 25, 2000 between Magna Entertainment Corp., BMOC Acquisitions XIV, LLC and PaineWebber Real Estate Securities, Inc. (4) 10.20 Lease dated as of November 17, 2000 between Bay Meadows Operating Company LLC and PW Acquisitions IV, LLC 10.21 Amendment No. 1 to the Term Loan Credit Agreement dated as of November 15, 1999, between The Santa Anita Companies, Inc. and Wells Fargo Bank, National Association 10.22 Amendment No. 2 to the Term Loan Credit Agreement dated as of November 15, 1999, between The Santa Anita Companies, Inc. and Wells Fargo Bank, National Association 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP (1) Incorporated by reference to the corresponding exhibit number of the registrant's Registration Statement on Form S-1 originally filed on January 14, 2000 (File number 333-94791). (2) Incorporated by reference to the corresponding exhibit number of the registrant's Current Report on Form 8-K filed March 16, 2000. (3) Incorporated by reference to corresponding exhibit number of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. (4) Incorporated by reference to Exhibit 2 of the registrant's Current Report on Form 8-K filed November 17, 2001. 34