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: March 31, 2001
Commission File Number: 000-30578
---------
MAGNA ENTERTAINMENT CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 98-0208374
- -------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
337 Magna Drive, Aurora, Ontario L4G 7K1
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(905) 726-2462
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
2001 Wilshire Boulevard, Suite 400, Santa Monica, California 90403
- --------------------------------------------------------------------------------
(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 17,975,341 shares of Class A Subordinate Voting Stock
outstanding as of April 30, 2001. In addition, as of April 30, 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 7,273,961
Exchangeable Shares remain unexchanged.
1
MAGNA ENTERTAINMENT CORP.
FORM 10-Q - QUARTER ENDED MARCH 31, 2001
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements 5 to 11
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Position 12 to 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
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 Item Reported
- ---- -------------
January 10, 2001 Press release announcing the appointment of Jim McAlpine
as President and Chief Executive Officer of the
Registrant.
February 9, 2001 Press release announcing that the Registrant expects
earnings for the three month period ended December 31,
2000 to be lower than its previous estimate.
February 19, 2001 Press release announcing financial results for the three
month period and fiscal year ended December 31, 2000.
March 27, 2001 Form 8-K/A providing the following financial statements
of Bay Meadows Operating Company, LLC and Bay Meadows
Catering, which were acquired by the Registrant on
November 17, 2000:
(a) Combined Balance Sheets as of November 17, 2000,
December 31, 1999 and December 31, 1998;
(b) Combined Statements of Income for the periods from
January 1, 2000 through November 17, 2000, from
February 1, 1999 through December 31, 1999, from
January 1, 1999 through January 31, 1999 and for
the year ended December 31, 1998.
(c) Combined Statements of Equity for the periods from
January 1, 2000 through November 17, 2000, from
February 1, 1999 through December 31, 1999, from
January 1, 1999 through January 31, 1999 and for
the year ended December 31, 1998.
(d) Combined Statements of Cash Flows for the periods
from January 1, 2000 through November 17, 2000,
from February 1, 1999 through December 31, 1999,
from January 1, 1999 through January 31, 1999 and
for the year ended December 31, 1998.
3
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/ Gary M. Cohn
---------------------------------------
Gary M. Cohn, Vice-President, Special
Projects and Secretary
by: /s/ Douglas R. Tatters
---------------------------------------
Douglas R. Tatters, Vice-President and
Controller
Date: May 14, 2001
4
Item 1. Financial Statements
- ----------------------------
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------
[Unaudited]
[U.S. dollars in thousands,
except per share figures]
- --------------------------------------------------------------- ------------------------------ ----------
Three months ended
March 31, March 31,
2001 2000
- ---------------------------------------------------------------------------------------------------------
(restated,
see note 1)
Revenue
Racetrack
Gross wagering 192,326 164,810
Non-wagering 22,589 17,958
Real estate
Sale of real estate 26,151 -
Rental and other 3,460 3,700
- ---------------------------------------------------------------------------------------------------------
244,526 186,468
- ---------------------------------------------------------------------------------------------------------
Costs and expenses
Racetrack
Purses, awards and other 122,232 105,726
Operating costs 50,976 46,509
General and administrative 7,962 3,318
Real estate
Cost of real estate sold 14,093 -
Operating costs 2,688 2,971
General and administrative 245 239
Predevelopment and other costs 1,708 1,271
Depreciation and amortization 5,354 5,267
Interest expense 2,197 738
Interest income (797) (729)
- ---------------------------------------------------------------------------------------------------------
206,658 165,310
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 37,868 21,158
Income tax provision 15,400 9,178
- ---------------------------------------------------------------------------------------------------------
Net income 22,468 11,980
Other comprehensive loss:
Foreign currency translation adjustment 8,854 4,850
- ---------------------------------------------------------------------------------------------------------
Comprehensive income 13,614 7,130
=========================================================================================================
Earnings per share of Class A Subordinate Voting Stock, Class B Stock or
Exchangeable Share:
Basic $0.28 $0.15
Diluted $0.28 $0.15
=========================================================================================================
Average number of shares of Class A Subordinate Voting Stock, Class B Stock and
Exchangeable Shares outstanding during the period [in thousands]:
Basic 80,472 80,289
Diluted 80,472 80,289
=========================================================================================================
See accompanying condensed notes to the consolidated financial statements.
5
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------
[Unaudited]
[U.S. dollars in thousands]
- -------------------------------------------------------------------------------------------
Three months ended
March 31, March 31,
2001 2000
- -------------------------------------------------------------------------------------------
Cash provided from (used for):
OPERATING ACTIVITIES
Net income 22,468 11,980
Items not involving current cash flows (9,507) 4,998
- -------------------------------------------------------------------------------------------
12,961 16,978
Changes in non-cash items related to operations 8,714 (23,204)
- -------------------------------------------------------------------------------------------
21,675 (6,226)
- -------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Real estate property and fixed asset additions (4,204) (2,386)
Proceeds on sale of real estate 6,778 -
Other asset (additions) disposals (125) 700
- -------------------------------------------------------------------------------------------
2,449 (1,686)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in bank indebtedness (7,609) (3,554)
Increase of (repayment of) long-term debt 9,876 (3,910)
Issue of Class A Subordinate Voting Stock 40 -
- -------------------------------------------------------------------------------------------
2,307 (7,464)
- -------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (878) (69)
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents during the period 25,553 (15,445)
Cash and cash equivalents, beginning of period 31,976 50,660
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 57,529 35,215
===========================================================================================
See accompanying condensed notes to the consolidated financial statements.
6
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------
[Unaudited]
[U.S. dollars in thousands]
- ------------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000
- ------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents 57,529 31,976
Restricted cash 27,538 13,461
Accounts receivable 62,030 33,399
Prepaid expenses and other 9,124 7,984
- ------------------------------------------------------------------------------------------------
156,221 86,820
- ------------------------------------------------------------------------------------------------
Real estate properties and fixed assets, net 546,720 568,265
- ------------------------------------------------------------------------------------------------
Other assets, net 115,962 117,561
- ------------------------------------------------------------------------------------------------
Future tax assets 8,600 8,393
- ------------------------------------------------------------------------------------------------
827,503 781,039
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
Current liabilities:
Bank indebtedness - 7,609
Accounts payable and other liabilities 83,418 64,847
Income taxes payable 16,434 1,111
Long-term debt due within one year 12,538 12,754
- ------------------------------------------------------------------------------------------------
112,390 86,321
- ------------------------------------------------------------------------------------------------
Long-term debt 72,795 63,343
- ------------------------------------------------------------------------------------------------
Other long-term liabilities 257 234
- ------------------------------------------------------------------------------------------------
Future tax liabilities 86,619 89,353
- ------------------------------------------------------------------------------------------------
Shareholders' equity:
Capital stock issued and outstanding -
Class A Subordinated Voting Stock 101,337 100,770
Exchangeable Shares 57,410 57,937
Class B Stock 394,094 394,094
Contributed surplus 1,352 1,352
Retained earnings (deficit) 20,478 (1,990)
Accumulated comprehensive loss (19,229) (10,375)
- ------------------------------------------------------------------------------------------------
555,442 541,788
- ------------------------------------------------------------------------------------------------
827,503 781,039
================================================================================================
See accompanying condensed notes to the consolidated financial statements.
7
MAGNA ENTERTAINMENT CORP.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of significant accounting policies
Basis of presentation
- ---------------------
The accompanying unaudited condensed 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 month period ended March 31, 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 condensed consolidated
financial statements reflect a disproportionate share of annual net earnings as
the Company normally earns a substantial portion of its net earnings from
racetrack operations 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 income
statement. In accordance with SAB 101 guidance, all prior period income
statements have been retroactively reclassified to comply with the new
accounting method.
8
2. Business Acquisition
On February 29, 2000 the Company completed the acquisition of 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. The Great Lakes Downs racetrack is located on approximately 85
acres of land in the city of Muskegon, Michigan.
The purchase price has been allocated to the assets and liabilities as follows
(in thousands):
Non-cash working capital deficit $ (3,370)
Real estate properties and fixed assets 10,087
Other assets 1,340
Debt (6,287)
--------
Net assets acquired and total
purchase price, net of cash acquired $ 1,770
=========
3. Capital Stock
Changes in Class A Subordinate Voting Stock, Class B Stock and Exchangeable
Shares for the three months ended March 31, 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 of Stated Number of Stated Number of Stated
shares value shares value 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 on
January 24, 2001 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
- -----------------------------------------------------------------------------------------------------------------------------------
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.
9
During 2000, the Company 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 1/5th to 1/3rd 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.
During the three months ended March 31, 2001, 8,333 stock options were exercised
and 75,000 stock options were revoked. At March 31, 2001, there were 3,738,333
options outstanding that were all granted during 2000. The exercise price of the
stock options outstanding at March 31, 2001 ranged from $4.875 to $7.00 with a
weighted average exercise price of $6.32.
There were 1,429,333 options exercisable at March 31, 2001 with an average
exercise price of $6.42.
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 three-month period ended March 31, 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 March 31,
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $22,468 $11,980
- -----------------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Weighted Average Shares Outstanding:
Class A Subordinate Voting Stock 14,234 3,369
Class B Stock 58,466 62,501
Exchangeable Shares 7,772 14,419
- -----------------------------------------------------------------------------------------------------------------------------------
80,472 80,289
- -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $0.28 $0.15
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $0.28 $0.15
- -----------------------------------------------------------------------------------------------------------------------------------
10
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 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.
The following summary presents key information by operating segment (in
thousands):
Three months ended March 31, 2001
Racetrack Real Estate
Operations Operations Total
- ----------------------------------------------------------------------------------------------------------
Revenue $ 214,915 $ 29,611 $ 244,526
- ----------------------------------------------------------------------------------------------------------
Income before income taxes $ 25,875 $ 11,993 $ 37,868
- ----------------------------------------------------------------------------------------------------------
Real estate properties and fixed asset
net additions (disposals) $ 1,820 $ (11,709) $ (9,889)
- ----------------------------------------------------------------------------------------------------------
Three months ended March 31, 2000
Racetrack Real Estate
Operations Operations Total
- ----------------------------------------------------------------------------------------------------------
Revenue $ 182,768 $ 3,700 $ 186,468
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 21,499 $ (341) $ 21,158
- ----------------------------------------------------------------------------------------------------------
Real estate properties and fixed asset
net additions $ 1,564 $ 822 $ 2,386
- ----------------------------------------------------------------------------------------------------------
6. Subsequent Event
On April 5, 2001, the Company completed the previously announced agreement with
Ladbroke Racing Corp. and one of its subsidiaries (collectively "LRC") to
acquire LRC's account wagering operations, The Meadows harness track, four
off-track betting facilities and an 18.3% interest in The Racing Network. In
accordance with the terms of the agreement, one-half of the $53 million purchase
price was paid in cash, one-quarter was satisfied by the issuance of 3,178,297
shares of Class A Subordinate Voting Stock of the Company and one-quarter was
satisfied through the issuance of a promissory note which is payable in two
equal installments on the first and second anniversaries of closing, and bears
interest at 6% per annum.
11
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 condensed financial
statements included in this report.
Overview
Magna Entertainment Corp. ("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 further development of electronic
media wagering operations, including expanded 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 in May 2001 in
Aurora, Ontario and other real estate. We intend to continue to gradually sell
the balance of our non-core 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
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 net earnings from racetrack
operations in the first quarter of each year because three of the Company's
premier racetracks, Santa Anita Park, Gulfstream Park and Golden Gate Fields,
principally run live race meets during this period.
Real estate operations
Following the previously announced plan to sell the balance of our non-core real
estate portfolio, the Company generated revenues on the sale of real estate
properties of $26.2 million during the three months ended March 31, 2001. These
real estate property sales resulted in a gain before interest, taxes,
depreciation and amortization ("EBITDA") of $12.1 million. There were no sales
of real estate in the three months ended March 31, 2000.
12
Results of Operations
Three months ended March 31, 2001 compared to three months ended March 31, 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 enables the Company's financial performance to be compared more
readily to other companies in our industry.
Revenues from our racetrack operations were $214.9 million for the three months
ended March 31, 2001 compared to $182.8 million in the three months ended March
31, 2000, an increase of $32.1 million or 18%. The revenues in the three months
ended March 31, 2001 were primarily generated from Santa Anita Park, Gulfstream
Park and Golden Gate Fields. Our total revenues from racetrack operations in the
comparable 2000 period were primarily generated from Santa Anita Park and
Gulfstream Park. In the three month period ended March 31, 2001, Golden Gate
Fields had 66 live racing days compared to 16 live racing days in the comparable
2000 quarter.
In the three months ended March 31, 2001, gross wagering revenues for our
racetracks increased 17% to $192.3 million compared to $164.8 million for the
comparable 2000 period. Non-wagering revenues in the three months ended March
31, 2001 were $22.6 million compared to $18.0 million in the three months ended
March 31, 2000, an increase of 26%. Non-wagering revenues primarily comprise
food and beverage sales, program sales, parking revenues and admissions income.
Contributing to the increase in non-wagering revenues is the new arrangement at
Gulfstream Park whereby we no longer contract out food and beverage operations.
Commencing with Gulfstream's race meet in the three months ended March 31, 2001,
we now operate all food and beverage facilities internally.
Purses, awards and other increased from $105.7 million for the three months
ended March 31, 2000 to $122.2 million for the comparable 2001 period. Operating
costs increased from $46.5 million for the three months ended March 31, 2000 to
$51.0 million in the comparable 2001 period. As a percentage of gross wagering
and non-wagering revenues, operating costs decreased from 25.4% in the three
months ended March 31, 2000 to 23.7% in the three months ended March 31, 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. Racetrack general and administrative
expenses increased to $8.0 million in the three months ended March 31, 2001
compared to $3.3 million in the three months ended March 31, 2000. The increase
in general and administrative expenses for the three months ended March 31, 2001
is primarily related to the costs of the corporate head office that were minimal
during the formation of the Company in the three months ended March 31, 2000.
Subsequent to the Company becoming a public company in March 2000, the Company
significantly added to and strengthened its staff and management team and added
other normal business expenses.
13
Real estate operations
Revenues from real estate operations were $29.6 million in the three months
ended March 31, 2001 compared to $3.7 million in the three months ended March
31, 2000. Total real estate revenues less the cost of real estate sold,
operating costs and general administrative expenses increased to $12.6 million
in the three months ended March 31, 2001 from $0.5 million in the three months
ended March 31, 2000. The increase is primarily attributable to the non-core
real estate properties disposed of in the three month period ended March 31,
2001. No properties were sold in the comparable period in 2000. The increase in
activity is a reflection of management's previously stated intention to provide
capital for future growth by selling the balance of our non-core real estate
portfolio.
Predevelopment and other costs
Predevelopment and other costs were $1.7 million for the three months ended
March 31, 2001 compared to $1.3 million in the three months ended March 31,
2000. These costs include consultants' fees associated with technology
development, feasibility studies, construction designs, market analysis, site
models and alternative site investigations for our racetrack and other land
sites.
Depreciation and amortization
Depreciation and amortization increased by $0.1 million to $5.4 million for the
three months ended March 31, 2001 compared to the same period in 2000.
Interest income and expense
Our net interest expense for the three months ended March 31, 2001 increased
$1.4 million compared to the three months ended March 31, 2000. The higher net
interest expense is attributable to the increase in long-term debt in late 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 $15.4 million on income before income
taxes of $37.9 million for the three months ended March 31, 2001 compared to an
income tax provision of $9.2 million on income before income taxes of $21.2
million for the three months ended March 31, 2000. Our effective income tax rate
for the three months ended March 31, 2001 compared to the same period in 2000
decreased primarily as a result of the lower level of operating losses in
certain subsidiaries in 2001 that were not tax benefited in 2000.
Liquidity and Capital Resources
At March 31, 2001, we had cash and cash equivalents of $57.5 million and total
shareholders' equity of $555.4 million.
For the three months ended March 31, 2001, we spent approximately $4.2 million
on capital expenditures. 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
$6.0 million and approximately $40.0 million on racetrack property enhancements.
The remaining expenditures will be for the completion of the Aurora
14
golf course, infrastructure and predevelopment costs of vacant lands and on
interactive television account wagering, Internet and broadcast initiatives.
Operating activities
Cash provided by operations was $21.7 million for the three months ended March
31, 2001. This was primarily a result of cash generated by the Santa Anita Park,
Gulfstream Park and Golden Gate Fields racetracks which operated live race meets
during this period. For the comparable 2000 period, cash used by operations was
$6.2 million.
Investing activities
Cash provided by investing activities was $2.4 million for the three months
ended March 31, 2001 and cash used for investing activities was $1.7 million for
the three months ended March 31, 2000. Total investing activities for the three
months ended March 31, 2001 included cash proceeds on disposition of real estate
of $6.8 million partially offset by real estate property and fixed asset
additions of $4.2 million. Total investing activities for the three months ended
March 31, 2000 included real estate property and fixed asset additions of $2.4
million.
Financing activities
Cash provided by financing activities was approximately $2.3 million for the
three months ended March 31, 2001. During the 2001 period the Company had an
increase in long-term debt of $9.9 million offset by a decrease in bank
indebtedness of $7.6 million. For the three months ended March 31, 2000, cash
used for financing activities was $7.5 million. During the 2000 period there was
a decrease in bank indebtedness of $3.6 million and a repayment of long-term
debt of $3.9 million.
Forward-looking Statements
The 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, 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 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 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
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, including
those identified in the "Risk Factors" section of the Company's annual report on
Form 10-K for the year ended December 31, 2000.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No material changes since year-end.
16