SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2001
Commission File Number: 000-30578
---------
MAGNA ENTERTAINMENT CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 98-0208374
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
337 Magna Drive, Aurora, Ontario L4G 7K1
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(Address of principal executive offices, including zip code)
(905) 726-2462
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
The Registrant had 18,340,293 shares of Class A Subordinate Voting Stock
outstanding as of July 31, 2001. In addition, as of July 31, 2001, there were
14,823,187 Exchangeable Shares of the Registrant's subsidiary, MEC Holdings
(Canada) Inc., issued and outstanding, each of which is exchangeable for one
share of the Registrant's Class A Subordinate Voting Stock, of which 6,909,009
Exchangeable Shares remain unexchanged.
MAGNA ENTERTAINMENT CORP.
FORM 10-Q - QUARTER ENDED JUNE 30, 2001
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Position 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
None.
Reports on Form 8-K
- --------------------
Date Items Reported and Financial Statements Filed
- ---- ---------------------------------------------
April 5, 2001 The completion of the previously announced
(filed: April 16, 2001) acquisition from Ladbroke Racing Corp. ("LRC")
and Ladbroke Racing Wyoming, Inc. of the stock of
the companies which own LRC's account wagering
operations, The Meadows harness track near
Pittsburgh, four off-track betting facilities in
the Pittsburgh area and an 18.3% interest in The
Racing Network.
April 5, 2001 The following financial statements were filed:
(filed: June 19, 2001)
(a) audited consolidated financial statements and
other financial information of Ladbroke
Racing Pennsylvania, Inc. and its
subsidiaries for the years ended December 31,
2000, December 31, 1999 and December 31,
1998;
(b) audited financial statements of Sport
Broadcasting, Inc. for the years ended
December 31, 2000, December 31, 1999 and
December 31, 1998; and
(c) unaudited pro-forma consolidated financial
statements of Magna Entertainment Corp. for
the year ended December 31, 2000.
May 2, 2001 Financial results for the three month period ended
(filed: May 4, 2001) March 31, 2001.
SIGNATURES
Pursuant to the requirements 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.
MAGNA ENTERTAINMENT CORP.
(Registrant)
by: /s/ Graham J. Orr
--------------------------------------
Graham J. Orr, Executive Vice-President
and Chief Financial Officer
by: /s/ Gary M. Cohn
--------------------------------------
Gary M. Cohn, Vice-President, Special
Projects and Secretary
Date: August 14, 2001
3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
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[Unaudited]
[U.S. dollars in thousands,
except per share figures]
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
(restated, (restated,
see note 1) see note 1)
Revenue
Racetrack
Gross wagering $ 84,163 $ 76,402 $276,489 $241,212
Non-wagering 14,867 12,374 37,456 30,332
Real estate
Sale of real estate 9,994 8,269 36,145 8,269
Rental and other 4,168 5,299 7,628 8,999
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113,192 102,344 357,718 288,812
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Costs and expenses
Racetrack
Purses, awards and other 51,476 48,516 173,708 154,242
Operating costs 35,285 29,435 86,261 75,944
General and administrative 7,268 3,759 15,230 7,077
Real estate
Cost of real estate sold 5,000 5,914 19,093 5,914
Operating costs 2,728 4,178 5,416 7,160
General and administrative 302 240 547 468
Predevelopment and other costs 114 1,170 1,822 2,441
Depreciation and amortization 6,630 4,685 11,984 9,952
Interest expense (income), net 678 (44) 2,078 (35)
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109,481 97,853 316,139 263,163
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Income before income taxes 3,711 4,491 41,579 25,649
Income tax provision 1,474 1,739 16,874 10,917
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Net income 2,237 2,752 24,705 14,732
Other comprehensive loss:
Foreign currency translation adjustment 102 1,479 8,956 6,329
- --------------------------------------------------------------------------------------------------------------
Comprehensive income $ 2,135 $ 1,273 $ 15,749 $ 8,403
==============================================================================================================
Earnings per share of Class A Subordinate Voting
Stock, Class B Stock or Exchangeable Shares:
Basic $ 0.03 $ 0.03 $ 0.30 $ 0.18
Diluted $ 0.03 $ 0.03 $ 0.30 $ 0.18
==============================================================================================================
Average number of shares of Class A Subordinate
Voting Stock, Class B Stock and Exchangeable
Shares outstanding during the period [in thousands]:
Basic 83,566 80,466 82,027 80,377
Diluted 83,788 80,466 82,249 80,377
==============================================================================================================
(see accompanying notes to the consolidated financial statements)
4
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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[Unaudited]
[U.S. dollars in thousands]
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Three months ended Six months ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
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Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 2,237 $ 2,752 $ 24,705 $ 14,732
Items not involving current cash flows (1,826) 2,304 (11,333) 7,302
- ----------------------------------------------------------------------------------------------------------------------------
411 5,056 13,372 22,034
Changes in non-cash items related to operations 1,599 (2,671) 10,313 (25,875)
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2,010 2,385 23,685 (3,841)
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INVESTMENT ACTIVITIES
Acquisition of business, net of cash (21,035) - (21,035) -
Real estate property and fixed asset additions (12,179) (6,381) (16,383) (8,767)
Proceeds on disposal of real estate 26,127 8,269 32,905 8,269
Other asset disposals 289 1,049 164 1,749
Proceeds on real estate sold to Magna - 6,147 - 6,147
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(6,798) 9,084 (4,349) 7,398
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FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness - 1,498 (7,609) (2,056)
(Repayment of) increase in long-term debt (1,215) (2,857) 8,661 (6,767)
Contributed capital - 1,352 - 1,352
Issuance of share capital 403 - 443 -
- ----------------------------------------------------------------------------------------------------------------------------
(812) (7) 1,495 (7,471)
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Effect of exchange rate changes on cash
and cash equivalents (747) 14 (1,625) (55)
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents during the period (6,347) 11,476 19,206 (3,969)
Cash and cash equivalents, beginning of period 57,529 35,215 31,976 50,660
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 51,182 $46,691 $ 51,182 $ 46,691
============================================================================================================================
(see accompanying notes to the consolidated financial statements)
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------
[Unaudited]
[U.S. dollars in thousands]
- ------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2001 2000
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ASSETS
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Current assets:
Cash and cash equivalents $ 51,182 $ 31,976
Restricted cash 7,189 13,461
Accounts receivable 31,618 33,399
Prepaid expenses and other 10,195 7,984
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100,184 86,820
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Real estate properties and fixed assets, net 568,649 568,265
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Other assets, net 175,619 117,561
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Future tax assets 6,943 8,393
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$ 851,395 $ 781,039
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness $ - $ 7,609
Accounts payable and other liabilities 57,732 64,847
Income taxes payable 16,231 1,111
Long-term debt due within one year 23,053 12,754
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97,016 86,321
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Long-term debt 74,034 63,343
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Other long-term liabilities 300 234
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Future tax liabilities 108,815 89,353
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Shareholders' equity:
Capital stock issued and outstanding -
Class A Subordinate Voting Stock 119,635 100,770
Exchangeable Shares 52,765 57,937
Class B Stock 394,094 394,094
Contributed surplus 1,352 1,352
Retained earnings (deficit) 22,715 (1,990)
Accumulated comprehensive loss (19,331) (10,375)
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571,230 541,788
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$ 851,395 $ 781,039
========================================================================================================================
(see accompanying notes to the consolidated financial statements)
6
MAGNA ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of significant accounting policies
Basis of presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from estimates. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2000.
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. The accompanying consolidated statement of
operations and comprehensive income for the six months ended June 30, 2001
reflect a disproportionate share of annual net earnings as the Company normally
earns a substantial portion of its net earnings in the first quarter of each
year.
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
consolidated statement of operations and comprehensive income. In accordance
with SAB 101 guidance, all prior period income statements have been
retroactively reclassified to comply with the new accounting method.
7
2. Business Acquisition
On April 5, 2001, the Company completed the acquisition of Ladbroke Racing
Pennsylvania Inc. and Sport Broadcasting, Inc. (collectively the "Ladbroke
Companies") for a total purchase price, including cash acquired of $7.0 million
and transaction costs, of $54.5 million. The total purchase price was satisfied
by cash payments of $28 million, the issuance of two promissory notes totalling
$13.25 million which bear interest at 6% with the first note in the amount of
$6,625,000 maturing on the first anniversary of the closing date and the second
note in the amount of $6,625,000 maturing on the second anniversary of the
closing date and by the issuance of 3,178,297 shares of Class A Subordinate
Voting Stock. The Ladbroke Companies include account wagering operations, The
Meadows harness track, four off-track betting facilities and an 18.3% interest
in The Racing Network.
The purchase price, which may be adjusted further, has been allocated to the
assets and liabilities acquired as follows (in thousands):
Non-cash working capital $ (6,514)
Real estate properties and fixed assets 19,947
Other assets 61,550
Deferred income taxes (27,448)
--------
Net assets acquired and total
purchase price, net of cash acquired $ 47,535
========
The purchase consideration for this acquisition is as follows:
Cash $ 21,035
Issuance of shares of Class A Subordinate Voting Stock 13,250
Issuance of two promissory notes 13,250
--------
$ 47,535
========
Pro-Forma Impact
If the acquisition of the Ladbroke Companies had occurred on January 1, 2000,
the Company's unaudited pro-forma results would have been:
For the six months For the six months
ended June 30, 2001 ended June 30, 2000
Revenues $379,592 $330,676
Expenses 335,485 301,698
-------- --------
Income before income taxes 44,107 28,978
======== ========
Net income 25,718 15,968
======== ========
Net income per share
(basic and diluted) $ 0.31 $ 0.19
======== ========
8
3. Capital Stock
Changes in Class A Subordinate Voting Stock, Class B Stock and Exchangeable
Shares for the six months ended June 30, 2001 are shown in the following table
(number of shares and stated value in the following table have been rounded to
the nearest thousand):
Class A Subordinate Exchangeable
Voting Stock Shares Class B Stock
--------------------------- ----------------------------- ----------------------------
Number Stated Number Stated Number Stated
of Shares Value of Shares Value of Shares Value
- -------------------------------------------------------------------------------------------------------------------------------
$ $ $
Issued and outstanding at
December 31, 2000 14,192 100,770 7,807 57,937 58,466 394,094
Issued on exercise of stock
options 9 40 - - - -
Conversion of Exchangeable
Shares to Class A
Subordinate Voting Stock 71 527 (71) (527) - -
- -------------------------------------------------------------------------------------------------------------------------------
Issued and outstanding at
March 31, 2001 14,272 101,337 7,736 57,410 58,466 394,094
Issued on acquisition of the
Ladbroke Companies on
April 5, 2001 3,178 13,250 - - - -
Issued under the Plan 63 403 - - - -
Conversion of Exchangeable
Shares to Class A
Subordinate Voting Stock 626 4,645 (626) (4,645) - -
- -------------------------------------------------------------------------------------------------------------------------------
Issued and outstanding at
June 30, 2001 18,139 119,635 7,110 52,765 58,466 394,094
- -------------------------------------------------------------------------------------------------------------------------------
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 the three months ended June 30,
2001, 63,094 shares were issued under the Plan.
The Company grants 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 six years from the date of grant at rates of
1/7th to 1/3rd per year and expire on or before the tenth anniversary of the
date of grant, subject to earlier cancellation in the events specified in the
stock option agreements entered into by the Company with each recipient of
options.
During the six months ended June 30, 2001, 1,020,000 stock options were granted,
8,333 stock options were exercised and 100,000 stock options were revoked. At
June 30, 2001, there were 4,733,333 options outstanding that were all granted
during 2000 and 2001. The exercise price of the stock options outstanding at
June 30, 2001 ranged from $3.91 to $7.00 with an average exercise price of
$4.96.
9
There were 1,437,000 options exercisable at June 30, 2001 with an average
exercise price of $6.41.
The Company has adopted the disclosure requirement provision of SFAS No. 123 in
accounting for stock based compensation issued to employees. The fair value of
the Company's options was estimated utilizing prescribed valuation models and
assumptions as of each grant date. Based on the results of such estimates,
management determined that there was no material effect on net income or
earnings per share for the six month period ended June 30, 2001.
4. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share amounts):
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,237 $ 2,752 $24,705 $14,732
- ---------------------------------------------------------------------------------------------------------------------------
Basic Diluted Basic & Basic Diluted Basic &
Diluted Diluted
Weighted Average
Shares Outstanding:
Class A Subordinate Voting Stock 17,676 17,898 10,518 15,964 16,186 6,943
Class B Stock 58,466 58,466 58,466 58,466 58,466 60,484
Exchangeable Shares 7,424 7,424 11,482 7,597 7,597 12,950
- ---------------------------------------------------------------------------------------------------------------------------
83,566 83,788 80,466 82,027 82,249 80,377
- ---------------------------------------------------------------------------------------------------------------------------
Earnings Per Share $ 0.03 $ 0.03 $ 0.03 $ 0.30 $ 0.30 $ 0.18
- ---------------------------------------------------------------------------------------------------------------------------
5. Segment Information
The Company's reportable segments reflect the Company's significant operating
activities that are evaluated separately by management. The Company has two
reportable segments: racetrack operations and real estate and other operations.
The accounting policies of the segments are the same as those described in the
"Significant Accounting Policies" section in the Company's annual report on Form
10-K for the year ended December 31, 2000.
10
The following summary presents key information by operating segment (in
thousands):
Three months ended June 30, 2001
Real Estate
Racetrack & Other
Operations Operations Total
- -----------------------------------------------------------------------------------------------------------------
Revenue $ 99,030 $ 14,162 $ 113,192
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ (2,205) $ 5,916 $ 3,711
- -----------------------------------------------------------------------------------------------------------------
Real estate properties and fixed asset
additions, net $ 8,082 $ 4,097 $ 12,179
- -----------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2000
Real Estate
Racetrack & Other
Operations Operations Total
- -----------------------------------------------------------------------------------------------------------------
Revenue $ 88,776 $ 13,568 $ 102,344
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes $ 2,000 $ 2,491 $ 4,491
- -----------------------------------------------------------------------------------------------------------------
Real estate properties and fixed asset
additions (disposals), net $ 3,634 $ (9,314) $ (5,680)
- -----------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2001
Real Estate
Racetrack & Other
Operations Operations Total
- -----------------------------------------------------------------------------------------------------------------
Revenue $ 313,945 $ 43,773 $ 357,718
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes $ 23,670 $ 17,909 $ 41,579
- -----------------------------------------------------------------------------------------------------------------
Real estate properties and fixed asset
additions, net $ 9,002 $ 7,381 $ 16,383
- -----------------------------------------------------------------------------------------------------------------
11
Six months ended June 30, 2000
Real Estate
Racetrack & Other
Operations Operations Total
- -----------------------------------------------------------------------------------------------------------------
Revenue $ 271,544 $ 17,268 $ 288,812
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes $ 23,499 $ 2,150 $ 25,649
- -----------------------------------------------------------------------------------------------------------------
Real estate properties and fixed asset
additions (disposals), net $ 5,198 $ (8,492) $ (3,294)
- -----------------------------------------------------------------------------------------------------------------
6. Subsequent Events
On July 5, 2001, the Company announced that it had signed agreements to operate
Portland Meadows Thoroughbred Racetrack and to acquire the operations of
Multnomah Greyhound Park, both of which are located in Portland, Oregon. Both
agreements are subject to various regulatory and other approvals.
12
Item 2. 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 this report.
Overview
Magna Entertainment Corp. ("MEC") acquires, develops and operates horse
racetracks and related pari-mutuel wagering operations, including off-track
betting facilities ("OTB's"). As a complement to our horse racing business, we
operate an account wagering business known as "Call-A-Bet" and are exploring the
further development of electronic media wagering operations, including
interactive television and Internet-based wagering, possibly in conjunction with
business partners. To support certain of our horse racetracks, we own a horse
training center situated approximately 45 miles north of San Diego, California,
and we are currently developing a second horse training center in Palm Beach
County, Florida. We are also exploring the development of real estate on the
land surrounding certain 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 community under development, a golf course and related
recreational facilities in Europe, a golf course in Aurora, Ontario and other
real estate. We intend to continue to sell the balance of our non-core real
estate portfolio and use the capital to grow and enhance 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
which should increase the revenues generated from their sale.
Racetrack operations
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 present live racing schedule also dictates
that we will earn a substantial portion of our earnings from racetrack
operations in the first quarter of each year because three of the Company's
largest racetracks, Santa Anita Park, Gulfstream Park and Golden Gate Fields,
run live race meets principally during this period.
Real estate operations
The Company generated revenues on the sale of real estate properties of $10.0
million during the three months ended June 30, 2001. These real estate property
sales resulted in a gain before interest, taxes, depreciation and amortization
("EBITDA") of $5.0 million. The Company generated revenues and EBITDA of $8.2
million and $2.4 million, respectively, on the sale of real estate properties in
the three months ended June 30, 2000.
13
Results of Operations
Six months ended June 30, 2001 compared to six months ended June 30, 2000
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, all prior period
income statements have been retroactively reclassified to comply with the new
accounting method. This change in method of accounting conforms our financial
reporting with our industry peers, which enables more objective comparisons of
financial performance.
Revenues from our racetrack operations were $313.9 million for the six months
ended June 30, 2001 compared to $271.5 million in the six months ended June 30,
2000, an increase of $42.4 million or 15.6%. In the six months ended June 30,
2001, all of our eight racetrack operations were open for some live racing.
Racetrack revenues were included from our Ladbroke Pennsylvania acquisition from
April 5, 2001, the date of acquisition. In the six month period ended June 30,
2000, only six of our racetrack operations were included in our results as Bay
Meadows was acquired on November 17, 2000 and Ladbroke Pennsylvania was acquired
in 2001. The following is a schedule of our actual live race days by racetrack
for the first and second quarters and awarded live race days for the third and
fourth quarter of 2001 with comparatives for 2000.
14
LIVE RACE DAYS
- --------------
Q2
Q2 Q1 YTD AWARDED Q3 Q3 AWARDED Q4 Q4 TOTAL TOTAL
---- ---- -----
Largest Racetracks 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001/(1)/ 2000
- ------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- --------- ----
Santa Anita (2) 12 17 66 65 78 82 - - 5 5 83 87
Golden Gate 1 55 66 16 67 71 - - 36 35 103 106
Bay Meadows 56 N/A - N/A 56 N/A 24 N/A 27 N/A 107 N/A
Gulfstream - - 63 63 63 63 - - - - 63 63
--- --- --- --- --- --- --- --- --- --- --- ---
69 72 195 144 264 216 24 - 68 40 356 256
--- --- --- --- --- --- --- --- --- --- --- ---
Other Racetracks
- ----------------
Thistledown 61 64 - 10 61 74 66 66 60 47 187 187
Remington 37 41 22 22 59 63 27 33 32 40 118 136
Great Lakes 39 38 - - 39 38 66 66 22 28 127 132
Ladbroke Pennsylvania 56 N/A N/A N/A 56 N/A 66 N/A 50 N/A 172 N/A
--- --- --- --- --- --- --- --- --- --- --- ---
(The Meadows) 193 143 22 32 215 175 225 165 164 115 604 455
--- --- --- --- --- --- --- --- --- --- --- ---
TOTAL 262 215 217 176 479 391 249 165 232 155 960 711
=== === === === === === === === === === === ===
(1) Includes total actual live race days for the six months ended June 30, 2001
and awarded live race days for the six months commencing July 1, 2001 and
ending December 31, 2001.
(2) Excludes The Oak Tree Meet, which is hosted by the Oak Tree Racing
Association at Santa Anita.
15
In the six months ended June 30, 2001, our four largest tracks operated an
additional 48 live race days compared to the prior year period. The increase in
live race days at our largest racetracks is attributable to the acquisition of
Bay Meadows. Our other racetracks operated an additional 40 live race days in
the six month period ended June 30, 2001 compared to the prior year period,
almost entirely due to the Ladbroke Pennsylvania (The Meadows) acquisition.
Live race days are a significant factor in the operating and financial
performance of our racing business. There are also many other factors that have
a significant impact on our racing revenues which include, but are not limited
to: attendance at our racetracks and at inter-track simulcast locations and
OTB's, the level of wagering per customer on-track, at inter-track simulcast
locations and OTB's, activity through our account wagering systems, the average
field size per race, our ability to attract the industry's top horses and
trainers and changes in the economy.
In the six months ended June 30, 2001, gross wagering revenues for our
racetracks increased 14.6% to $276.5 million compared to $241.2 million for the
comparable 2000 period primarily relating to the increase in live race days.
Non-wagering revenues in the six months ended June 30, 2001 increased 23.8% to
$37.5 million compared to $30.3 million in the six months ended June 30, 2000.
Non-wagering revenues primarily comprise food and beverage sales, program sales,
parking revenues and admissions income. Contributing to the increase in non-
wagering revenues were increases in revenues from parking, admissions and
program sales related to the increase in live race days and the 2001 addition of
food and beverage revenues from our Gulfstream facility, previously contracted
out to concession operators.
Purses, awards and other increased to $173.7 million for the six months ended
June 30, 2001 from $154.2 million for the comparable 2000 period. Operating
costs increased to $86.3 million for the six months ended June 30, 2001 from
$75.9 million in the comparable 2000 period. As a percentage of total racetrack
revenues, operating costs decreased from 28.0% in the six months ended June 30,
2000 to 27.5% in the six months ended June 30, 2001. 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
period, partially offset by additional operating costs related to the Bay
Meadows acquisition. Racetrack general and administrative expenses were $15.2
million in the six months ended June 30, 2001 compared to $7.1 million in the
six months ended June 30, 2000. The increase in general and administrative
expenses for the six months ended June 30, 2001 is primarily related to the
acquisition of Bay Meadows and Ladbroke Pennsylvania and the higher costs of the
corporate head office, which were minimal during the formation of the Company in
the six months ended June 30, 2000.
Real estate operations
Revenues from real estate operations were $43.8 million in the six months ended
June 30, 2001 compared to $17.3 million in the six months ended June 30, 2000.
EBITDA from real estate activities increased to $18.7 million in the six months
ended June 30, 2001 from $3.7 million in the six months ended June 30, 2000.
These increases are primarily attributable to the sale of non-core real estate
properties in the six month period ended June 30, 2001. In the six-month period
ended June 30, 2001, we had gains on the sale of real estate properties of $17.1
million compared to gains of $2.4 million in the same period in 2000. The
increase in activity is in line with management's previously stated intention to
provide capital for future growth by selling our non-core real estate portfolio.
Predevelopment and other costs
Predevelopment and other costs were $1.8 million for the six months ended June
30, 2001 compared to $2.4 million in the six months ended June 30, 2000. These
costs include consultants' fees associated with technology development,
feasibility studies, construction designs, market analysis, site models and
alternative site investigations.
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Depreciation and amortization
Depreciation and amortization increased by $2.0 million to $12.0 million for the
six months ended June 30, 2001 compared to the same period in 2000. The
increase in depreciation and amortization is primarily attributable to the Bay
Meadows and Ladbroke Pennsylvania acquisitions and the depreciation recorded on
fixed asset additions made in the last half of 2000 and the first half of 2001.
Interest income and expense
Our net interest expense for the six months ended June 30, 2001 increased $2.1
million compared to the six months ended June 30, 2000. The higher net interest
expense is attributable to the increase in long-term debt in the fourth quarter
of 2000 and the first quarter of 2001 primarily related to the financing of the
Bay Meadows and Ladbroke Pennsylvania acquisitions and racing related real
estate property additions.
Income tax provision
We recorded an income tax provision of $16.9 million on income before income
taxes of $41.6 million for the six months ended June 30, 2001 compared to an
income tax provision of $10.9 million on income before income taxes of $25.6
million for the six months ended June 30, 2000. Our effective income tax rate
for the six months ended June 30, 2001 decreased compared to the same period in
2000 primarily as a result of the higher level of operating losses in certain
subsidiaries in 2000 that were not tax benefited.
Three months ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Racetrack operations
Revenues from our racetrack operations were $99.0 million for the three months
ended June 30, 2001 compared to $88.8 million in the 2000 comparable period, an
increase of $10.2 million or 11.5%. Racetrack revenues increased primarily as a
result of the acquisition of Ladbroke Pennsylvania, partially offset by a
decline in revenues at Santa Anita as a result of five fewer live race days in
the three months ended June 30, 2001 compared to the 2000 period.
Purses, awards and other in the three months ended June 30, 2001 were $51.5
million compared to $48.5 million in the comparable period in 2000. Operating
costs increased from $29.4 million in the three months ended June 30, 2000 to
$35.3 million in the comparable 2001 period. As a percentage of total racetrack
revenue, operating costs increased from 33.2% in the three months ended June 30,
2000 to 35.6% in the three months ended June 30, 2001. The increase in
operating costs as a percentage of revenues is primarily the result of having
two Northern California racetracks during the three months ended June 30, 2001
compared to one in the prior year period. One racetrack operated as an inter-
track wagering site and earned no wagering revenue on live races during the
three months ended June 30, 2001 compared to the three months ended June 30,
2000 in which the one racetrack had live racing. In addition, in the three
months ended June 30, 2000, the Company benefited from a rental arrangement for
our Florida racetrack which did not continue in 2001.
Racetrack general and administrative expenses were $7.3 million in the three
months ended June 30, 2001 compared to $3.8 million in the three months ended
June 30, 2000, an increase of $3.5 million. The increase is primarily
attributable to the acquisitions of Bay Meadows and Ladbroke Pennsylvania and
the increase in corporate head office costs.
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Real estate operations
Revenues from real estate operations increased $0.6 million to $14.1 million in
the three months ended June 30, 2001 compared to the prior year comparable
period. Earnings from real estate operations increased to $6.1 million in the
three months ended June 30, 2001 compared to $3.2 million in the three months
ended June 30, 2000. The increase in earnings is attributable to the higher
gain on the sale of non-core real estate properties in the three months ended
June 30, 2001 compared to the prior period.
Predevelopment and other costs
Predevelopment and other costs decreased $1.0 million to $0.1 million for the
three months ended June 30, 2001, compared to the three months ended June 30,
2000 as a result of lower activity on certain development projects in the
current quarter.
Depreciation and amortization
Depreciation and amortization increased by $1.9 million to $6.6 million for the
three months ended June 30, 2001, primarily as a result of depreciation and
amortization related to our acquisition of Bay Meadows and Ladbroke Pennsylvania
and increased depreciation on fixed asset additions made in the second half of
2000 and the first half of 2001.
Interest income and expense
Our net interest expense has increased $0.7 million in the three months ended
June 30, 2001 compared to the three months ended June 30, 2000 which is
attributable to the increase in long-term debt, primarily related to the
financing of the Bay Meadows and Ladbroke Pennsylvania acquisitions and racing
related real estate property additions.
Liquidity and Capital Resources
At June 30, 2001, we had cash and cash equivalents of $51.2 million and total
shareholders' equity of $571.2 million.
For the six months ended June 30, 2001, we invested $16.4 million on real estate
property and fixed asset additions. We anticipate capital expenditures of
approximately $55.0 million for the year ending December 31, 2001. The capital
expenditures relate to maintenance capital improvements to the racetracks of
approximately $8.0 million and the remaining expenditures will be primarily for
racetrack property enhancements, the completion of the Aurora golf course,
infrastructure and predevelopment costs on certain of our properties and on
account wagering activities, including telephone, Internet and interactive
television initiatives.
Operating activities
Cash provided by operations was $23.7 million for the six months ended June 30,
2001. This was primarily a result of cash generated by the Santa Anita Park,
Gulfstream Park, Ladbroke Pennsylvania, Bay Meadows and Golden Gate Fields
racetracks which operated live race meets during this period. For the comparable
2000 period, cash used by operations was $3.8 million.
Investing activities
Cash used in investing activities was $4.3 million for the six months ended June
30, 2001 and cash provided by investing activities was $7.4 million for the six
months ended June 30, 2000. Net investing activities for the six months ended
June 30, 2001 were $4.3 million including investments of $16.4 million in real
estate property and fixed asset additions and $21.0 million on the acquisition
of Ladbroke Pennsylvania, partially offset by $32.9 million of proceeds received
on the sale of real estate. Net
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proceeds from investing activities for the six months ended June 30, 2000 were
$7.4 million, including $16.2 million of proceeds on the sale of non-core real
estate and other assets, $6.1 million of which related to sales to a related
party, Magna International Inc., partially offset by $8.8 million invested in
real estate and fixed asset additions.
Financing activities
Cash provided by financing activities was $1.5 million for the six months ended
June 30, 2001. During this period the Company had an increase in long-term debt
of $8.7 million and issued shares for $0.4 million partially offset by a
repayment of bank indebtedness of $7.6 million. For the six months ended June
30, 2000, cash used for financing activities was $7.5 million. During the six
months ended June 30, 2000, there was a decrease in bank indebtedness of $2.0
million and a repayment of long-term debt of $6.8 million partially offset by a
contribution of capital of $1.4 million.
Accounting Developments
Under Staff Accounting Bulletin 74, the Company is required to disclose certain
information relating to new accounting standards, which have not yet been
adopted.
Subsequent to June 30, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets. The Statement on business
combinations (SFAS 141) requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of accounting. In
addition, the Statement provides new criteria to determine when an acquired
intangible asset should be recognized separately from goodwill.
The Statement on goodwill and intangible assets (SFAS 142) requires the
application of the non-amortization and impairment rules for existing goodwill
and intangible assets which meet the criteria for indefinite life beginning with
fiscal years starting after December 15, 2001. In all cases, the Statement must
be adopted at the beginning of a fiscal year.
Although the Company is currently reviewing these Statements, we have not
determined the impact, if any, of these pronouncements on our consolidated
financial statements.
Forward-looking Statements
This previous discussion and analysis contains statements which, to the extent
that they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and/or 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, the Company. 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 ability to renew our existing agreements with the horse
owners at our racetracks on satisfactory terms, a significant increase in the
taxes and fees to which our business is subject, our continued ability to
complete expansion projects designed to generate new revenues and attract new
customers, our ability to sell some of our non-core real estate properties 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 Management's Discussion and Analysis of Results of Operations and
Financial Position are cautioned that such statements are only predictions and
that actual events or results may differ materially. In
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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 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes since year-end.
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