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: September 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 (I.R.S. Employer
of incorporation or organization) 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)
N/A
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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 22,852,504 shares of Class A Subordinate Voting Stock
outstanding as of September 30, 2001. In addition, as of September 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
2,403,465 Exchangeable Shares remain unexchanged.
1
MAGNA ENTERTAINMENT CORP.
FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Position 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION 19
SIGNATURES 19
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
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[Unaudited]
[U.S. dollars in thousands, except per share
figures]
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Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
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(restated, (restated,
see note 1) see note 1)
Revenue
Racetrack
Gross wagering $ 45,085 $ 19,877 $ 321,574 $ 261,089
Non-wagering 13,394 8,720 50,850 39,052
Real estate
Sale of real estate 1,091 16,766 37,236 25,035
Rental and other 6,262 4,850 13,890 13,849
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65,832 50,213 423,550 339,025
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Costs and expenses
Racetrack
Purses, awards and other 24,509 10,623 198,217 164,865
Operating costs 31,686 21,077 117,947 97,021
General and administrative 6,172 3,942 21,402 11,019
Real estate
Cost of real estate sold 1,054 13,070 20,147 18,984
Operating costs 4,466 4,490 9,882 11,650
General and administrative 282 253 829 721
Predevelopment and other costs 488 821 2,310 3,262
Depreciation and amortization 7,376 4,792 19,360 14,744
Interest expense (income), net 282 (171) 2,360 (206)
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76,315 58,897 392,454 322,060
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Income (loss) before income taxes (10,483) (8,684) 31,096 16,965
Income tax provision (benefit) (4,256) (3,574) 12,618 7,343
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Net income (loss) (6,227) (5,110) 18,478 9,622
Other comprehensive (loss) income
Foreign currency translation adjustment 2,974 (7,413) (5,982) (13,742)
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Comprehensive income (loss) $ (3,253) $ (12,523) $ 12,496 $ (4,120)
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Earnings (loss) per share of Class A
Subordinate Voting Stock, Class B Stock
or Exchangeable Shares:
Basic $ (0.07) $ (0.06) $ 0.23 $ 0.12
Diluted $ (0.07) $ (0.06) $ 0.22 $ 0.12
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Average number of shares of Class A
Subordinate Voting Stock, Class B Stock
and Exchangeable Shares
outstanding during the period [in
thousands]:
Basic
Diluted 83,719 80,466 82,107 80,407
83,977 80,466 82,439 80,411
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3
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 Nine months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
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Cash provided from (used for):
OPERATING ACTIVITIES
Net income (loss) $ (6,227) $ (5,110) $ 18,478 $ 9,622
Items not involving current cash flows 6,857 (660) (4,476) 6,642
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630 (5,770) 14,002 16,264
Changes in non-cash items related to
operations (3,956) (3,056) 6,357 (28,931)
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(3,326) (8,826) 20,359 (12,667)
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INVESTMENT ACTIVITIES
Acquisition of business, net of cash -- -- (21,035) --
Real estate property and
fixed asset additions (9,111) (5,539) (25,494) (14,306)
Proceeds on disposal of real estate 3,888 16,766 36,793 25,035
Other asset (additions) disposals (530) -- (366) 1,749
Proceeds on real estate sold to Magna -- (397) -- 5,750
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(5,753) 10,830 (10,102) 18,228
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FINANCING ACTIVITIES
Decrease in bank indebtedness -- (4,703) (7,609) (6,759)
(Repayment of) increase in
long-term debt (1,090) 125 7,571 (6,642)
Contributed capital -- -- -- 1,352
Issuance of share capital 33 -- 476 --
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(1,057) (4,578) 438 (12,049)
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Effect of exchange rate changes on cash
And cash equivalents 1,811 (527) 186 (582)
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Net increase (decrease) in cash and cash
equivalents during the period (8,325) (3,101) 10,881 (7,070)
Cash and cash equivalents, beginning of
period 51,182 46,691 31,976 50,660
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Cash and cash equivalents, end of period $ 42,857 $ 43,590 $ 42,857 $ 43,590
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4
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
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[Unaudited]
[U.S. dollars in thousands]
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September 30, December 31,
2001 2000
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ASSETS
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Current assets:
Cash and cash equivalents $ 42,857 $ 31,976
Restricted cash 8,715 13,461
Accounts receivable 25,156 33,399
Prepaid expenses and other 10,313 7,984
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87,041 86,820
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Real estate properties and fixed assets, net 574,943 568,265
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Other assets, net 173,506 117,561
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Future tax assets 6,018 8,393
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$ 841,508 $ 781,039
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness $ -- $ 7,609
Accounts payable and other liabilities 53,218 64,847
Income taxes payable 13,749 1,111
Long-term debt due within one year 23,691 12,754
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90,661 86,321
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Long-term debt 73,447 63,343
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Other long-term liabilities 1,786 234
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Future tax liabilities 107,604 89,353
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Shareholders' equity:
Capital stock issued and outstanding -
Class A Subordinate Voting Stock 154,594 100,770
Exchangeable Shares 17,839 57,937
Class B Stock 394,094 394,094
Contributed surplus 1,352 1,352
Retained earnings (deficit) 16,488 (1,990)
Accumulated comprehensive loss (16,357) (10,375)
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568,010 541,788
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$ 841,508 $ 781,039
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5
MAGNA ENTERTAINMENT CORP.
NOTES TO THE 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, which
consist of normal and recurring adjustments, necessary for fair presentation
have been included. Operating results for the three and nine month periods ended
September 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 (loss) for the nine months ended September
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 (loss). In accordance with SAB
101 guidance, all prior period income statements have been retroactively
reclassified to comply with the new accounting method.
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, of $47.5 million, net of cash acquired
of $7.0 million and transaction costs. 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 and four off-track betting facilities.
6
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 nine months For the nine months
ended September 30, 2001 ended September 30, 2000
------------------------ ------------------------
Revenues $ 443,462 $ 393,394
Expenses 411,669 372,252
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Income before income taxes 31,793 21,142
========== =========
Net income 18,651 11,698
========== =========
Net income per share
(basic and diluted) $ 0.22 $ 0.14
========== =========
3. Capital Stock
Changes in Class A Subordinate Voting Stock, Exchangeable Shares and Class B
Stock for the nine months ended September 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):
7
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
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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) -- --
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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) -- --
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Issued and outstanding at
June 30, 2001 18,139 119,635 7,110 52,765 58,466 394,094
Issued on exercise of stock
options 7 33 -- -- -- --
Conversion of Exchangeable
Shares to Class A
Subordinate Voting Stock 4,707 34,926 (4,707) (34,926) -- --
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Issued and outstanding
at September 30, 2001 22,853 $154,594 2,403 $ 17,839 58,466 $394,094
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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 September
30, 2001, 6,667 shares were issued under the Plan. During the nine months ended
September 30, 2001, 78,094 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 nine months ended September 30, 2001, 1,250,000 stock options were
granted, 15,000 stock options were exercised and 603,333 stock options were
revoked. At September 30, 2001, there were 4,453,333 options outstanding that
were all granted during 2000 and 2001. The exercise price of the stock options
outstanding at September 30, 2001 ranged from $3.91 to $7.00 with an average
exercise price of $5.99.
There were 2,299,618 options exercisable at September 30, 2001 with an average
exercise price of $6.23.
8
4. Earnings (Loss) 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 Nine months ended
September 30, September 30,
2001 2000 2001 2000
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Net income (loss) $ (6,227) $ (5,110) $ 18,478 $ 9,622
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Basic Diluted Basic & Basic Diluted Basic Diluted
Diluted
Weighted Average
Shares Outstanding:
Class A Subordinate Voting
Stock 20,496 20,754 13,102 17,001 17,333 9,011 9,015
Class B Stock 58,466 58,466 58,466 58,466 58,466 59,806 59,806
Exchangeable Shares 4,757 4,757 8,898 6,640 6,640 11,590 11,590
- ---------------------------------------------------------------------------------------------------------------------------------
83,719 83,977 80,466 82,107 82,439 80,407 80,411
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share $ (0.07) $ (0.07) ($0.06) $ 0.23 $ 0.22 $ 0.12 $ 0.12
=================================================================================================================================
5. Segment Information
The Company's reportable segments reflect how the Company is organized and
managed by senior 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 September 30, 2001
Racetrack Real Estate
Operations Operations Total
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Revenue $ 58,479 $ 7,353 $ 65,832
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Income (loss) before income taxes $ (11,942) $ 1,459 $ (10,483)
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Real estate properties and fixed asset additions, net $ 5,868 $ 3,243 $ 9,111
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9
Three months ended September 30, 2000
Racetrack Real Estate
Operations Operations Total
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Revenue $ 28,597 $ 21,616 $ 50,213
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Income (loss) before income taxes $ (11,890) $ 3,206 $ (8,684)
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Real estate properties and fixed asset additions, net $ 3,963 $ 1,576 $ 5,539
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Nine months ended September 30, 2001
Racetrack Real Estate
Operations Operations Total
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Revenue $ 372,424 $ 51,126 $ 423,550
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Income before income taxes $ 11,728 $ 19,368 $ 31,096
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Real estate properties and fixed asset additions, net $ 17,706 $ 7,788 $ 25,494
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Nine months ended September 30, 2000
Racetrack Real Estate
Operations Operations Total
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Revenue $ 300,141 $ 38,884 $ 339,025
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Income before income taxes $ 11,626 $ 5,339 $ 16,965
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Real estate properties and fixed asset additions, net $ 9,776 $ 4,530 $ 14,306
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6. Subsequent Events
a) On October 26, 2001, the Company filed an amendment to its registration
statement offering 20 million shares of Class A Subordinate Voting
Stock for sale in the United States and in Canada.
b) On October 26, 2001, the Company completed the acquisition of MKC
Acquisition Co., operating as Multnomah Greyhound Park, in Portland,
Oregon. On closing, the Company paid approximately $4 million in cash
and issued 330,962 shares of Class A Subordinate Voting Stock.
c) On October 31, 2001, the Company sold two non-core real estate
properties located in Milton, Ontario to Magna International Inc. for
total proceeds of approximately $12.5 million. The gain on the sale of
the properties of approximately $6.0 million, net of tax, is derived
from a related party transaction and will therefore be reported as a
contribution to equity.
10
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") is the leading owner and operator of
thoroughbred racetracks in the United States based on revenue, and a leading
supplier via simulcasting of live racing content to the growing inter-track,
off-track and account wagering markets. We currently operate nine racetracks, as
well as the simulcast wagering venues at these tracks. In addition, we operate
off-track betting facilities ("OTBs") in Pennsylvania, and an account wagering
business known as "Call-A-Bet", which permits customers to place wagers by
telephone on horse races at approximately 65 racetracks in the United States. 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
to our racetracks, we own a significant 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 in the United States, Canada and Austria. While we are exploring the
development of some of our real estate, we intend to continue to sell our
non-core real estate in order to generate additional capital to grow and enhance
our racing business.
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 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, Gulfstream and Golden Gate, run live race meets
principally during this period. We expect the seasonality of our business to
gradually diminish as our acquisition and account wagering initiatives evolve.
Real estate operations
The Company generated revenues on the sale of non-core real estate property of
$1.1 million during the three months ended September 30, 2001, resulting in a
gain of $0.04 million. The Company generated revenues and gains of $16.8 million
and $3.7 million, respectively, on the sale of non-core real estate properties
in the three months ended September 30, 2000.
Results of Operations
Nine months ended September 30, 2001 compared to nine months ended September 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
11
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 $372.4 million for the nine months
ended September 30, 2001 compared to $300.1 million in the nine months ended
September 30, 2000, an increase of $72.3 million or 24.1%. In the nine months
ended September 30, 2001, all but one of our nine racetrack operations were open
for some live racing. Operations commenced in Oregon in the third quarter of
2001 with our lease of the Portland Meadows facility. Wagering activities have
commenced at Portland Meadows during the fourth quarter of 2001. Racetrack
revenues were included from our MEC Pennsylvania acquisition from April 5, 2001,
the date of acquisition. In the nine month period ended September 30, 2000, only
six of our racetrack operations were included in our results as Bay Meadows was
acquired in the fourth quarter of 2000, MEC Pennsylvania was acquired in the
second quarter of 2001, and Portland Meadows commenced operations this quarter.
The following is a schedule of our actual live race days by racetrack by quarter
and awarded live race days for the fourth quarter of 2001 with comparatives for
2000.
12
LIVE RACE DAYS
Q3 Q2 Q1 Q3 Q4 Q4 TOTAL TOTAL
-- -- -- YTD AWARDED -- ----- -----
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 24 N/A 56 N/A -- N/A 80 N/A 27 N/A 107 N/A
Gulfstream -- -- -- -- 63 63 63 63 -- -- 63 63
--- --- --- --- --- --- --- --- --- --- --- ---
24 -- 69 72 195 144 288 216 68 40 356 256
--- --- --- --- --- --- --- --- --- --- --- ---
Other Racetracks
Thistledown 65 66 61 64 -- 10 126 140 60 47 186 187
Remington 27 33 37 41 22 22 86 96 32 40 118 136
Great Lakes 65 66 39 38 -- -- 104 104 22 28 126 132
The Meadows 64 N/A 56 N/A N/A N/A 120 N/A 50 N/A 170 N/A
Portland Meadows N/A N/A N/A N/A N/A N/A N/A N/A 31 N/A 31 N/A
--- --- --- --- --- --- --- --- --- --- --- ---
221 165 193 143 22 32 436 340 195 115 631 455
--- --- --- --- --- --- --- --- --- --- --- ---
TOTAL 245 165 262 215 217 176 724 556 263 155 987 711
=== === === === === === === === === === === ===
(1) Includes actual live race days for the nine months ended September 30,
2001 and awarded live race days for the three months commencing October
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.
13
In the nine months ended September 30, 2001, we operated our four largest
racetracks for an additional 72 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, partially offset by four fewer live race days
at both Santa Anita and Golden Gate. Our other racetracks operated an additional
96 live race days in the nine month period ended September 30, 2001 compared to
the prior year period, primarily due to The Meadows acquisition, partially
offset by decreases in race days at Thistledown and Remington.
Live race days are a significant factor in the operating and financial
performance of our racing business. Another significant factor is the level of
wagering per customer on our racing content on-track, at inter-track simulcast
locations and at OTB facilities. 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, inter-track simulcast locations and OTB
facilities; activity through our Call-A-Bet system; the average field size per
race; our ability to attract the industry's top horses and trainers; weather;
and changes in the economy.
In the nine months ended September 30, 2001, gross wagering revenues for our
racetracks increased 23.2% to $321.6 million compared to $261.1 million for the
comparable 2000 period primarily relating to the increase in live race days due
to our acquisitions. Non-wagering revenues in the nine months ended September
30, 2001 increased 30.2% to $50.9 million compared to $39.1 million in the nine
months ended September 30, 2000. Non-wagering revenues are primarily comprised
of 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 $198.2 million for the nine months ended
September 30, 2001 from $164.9 million for the comparable 2000 period. Operating
costs increased to $117.9 million for the nine months ended September 30, 2001
from $97.0 million in the comparable 2000 period. As a percentage of total
racetrack revenues, operating costs decreased from 32.3% in the nine months
ended September 30, 2000 to 31.7% in the nine months ended September 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. Racetrack general and administrative
expenses were $21.4 million in the nine months ended September 30, 2001 compared
to $11.0 million in the nine months ended September 30, 2000. The increase in
general and administrative expenses for the nine months ended September 30, 2001
is primarily related to the acquisition of Bay Meadows and MEC Pennsylvania and
the higher costs of the corporate head office, which were significantly lower
during the formative stage of the Company in the nine months ended September 30,
2000.
Real estate operations
Revenues from real estate operations were $51.1 million in the nine months ended
September 30, 2001 compared to $38.9 million in the nine months ended September
30, 2000. Earnings before interest, taxes, depreciation and amortization
("EBITDA") from real estate activities increased to $20.3 million in the nine
months ended September 30, 2001 from $7.5 million in the nine months ended
September 30, 2000. These increases are primarily attributable to the sale of
non-core real estate properties in the nine month period ended September 30,
2001. In the nine-month period ended September 30, 2001, we had gains on the
sale of non-core real estate properties of $17.1 million compared to gains of
$6.1 million in the same period in 2000. The increase in activity is in line
with management's 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 $2.3 million for the nine months ended
September 30, 2001 compared to $3.3 million in the nine months ended September
30, 2000. These costs include consultants' fees associated with technology
development, feasibility studies, construction designs, market analysis, site
models and alternative site investigations.
14
Depreciation and amortization
Depreciation and amortization increased by $4.6 million to $19.4 million for the
nine months ended September 30, 2001 compared to the same period in 2000. The
increase in depreciation and amortization is primarily attributable to the Bay
Meadows and MEC Pennsylvania acquisitions and increased depreciation on recent
fixed asset additions.
Interest income and expense
Our net interest expense for the nine months ended September 30, 2001 increased
$2.6 million compared to the nine months ended September 30, 2000. The higher
net interest expense is attributable to the increase in long-term debt in the
fourth quarter of 2000 and the second quarter of 2001 primarily related to the
financing of the Bay Meadows and MEC Pennsylvania acquisitions and racing
related real estate property additions.
Income tax provision
We recorded an income tax provision of $12.6 million on income before income
taxes of $31.1 million for the nine months ended September 30, 2001 compared to
an income tax provision of $7.3 million on income before income taxes of $17.0
million for the nine months ended September 30, 2000. Our effective income tax
rate for the nine months ended September 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, for which we did not recognize the tax benefit in
that period.
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Racetrack operations
Revenues from our racetrack operations were $58.5 million for the three months
ended September 30, 2001 compared to $28.6 million in the 2000 comparable
period, an increase of $29.9 million or 104.5%. Racetrack revenues increased as
a result of the acquisition of Bay Meadows and MEC Pennsylvania, partially
offset by the impact of temporary racetrack closures in response to the tragic
events of September 11 and a decrease in economic activity in the United States.
Purses, awards and other in the three months ended September 30, 2001 were $24.5
million compared to $10.6 million in the comparable period in 2000. Operating
costs increased from $21.1 million in the three months ended September 30, 2000
to $31.7 million in the comparable 2001 period primarily as a result of the Bay
Meadows and MEC Pennsylvania acquisitions.
Racetrack general and administrative expenses were $6.2 million in the three
months ended September 30, 2001 compared to $3.9 million in the three months
ended September 30, 2000, an increase of $2.3 million. The increase is primarily
attributable to the acquisitions of Bay Meadows and MEC Pennsylvania and the
increase in corporate head office costs.
Real estate operations
Revenues from real estate operations decreased $14.3 million to $7.4 million in
the three months ended September 30, 2001 compared to the prior year comparable
period. EBITDA from real estate operations decreased to $1.6 million in the
three months ended September 30, 2001 compared to $3.8 million in the three
months ended September 30, 2000. The decrease is attributable to the $3.7
million gain on the sale of non-core real estate properties in the three months
ended September 30, 2000 as compared to a nominal gain in the three months ended
September 30, 2001, partially offset by increased house and lot sales at our
Fontana residential development and contribution from the recently opened Magna
Golf Club.
15
Predevelopment and other costs
Predevelopment and other costs decreased $0.3 million to $0.5 million for the
three months ended September 30, 2001, compared to the three months ended
September 30, 2000, as a result of lower activity on certain development
projects in the current quarter.
Depreciation and amortization
Depreciation and amortization increased by $2.6 million to $7.4 million for the
three months ended September 30, 2001, primarily as a result of depreciation and
amortization related to our acquisition of Bay Meadows and MEC Pennsylvania and
increased depreciation on recent fixed asset additions.
Interest income and expense
Our net interest expense has increased $0.5 million in the three months ended
September 30, 2001 compared to the three months ended September 30, 2000 which
is attributable to the increase in long-term debt, primarily related to the
financing of the Bay Meadows and MEC Pennsylvania acquisitions and racing
related real estate property additions.
Income tax provision
We recorded an income tax recovery of $4.3 million on a loss of $10.5 million
for the three months ended September 30, 2001 compared to a recovery of $3.6
million on a loss of $8.7 million for the three months ended September 30, 2000.
Our effective tax rate is relatively consistent in both periods.
Liquidity and Capital Resources
At September 30, 2001, we had cash and cash equivalents of $42.9 million and
total shareholders' equity of $568.0 million.
We are continuing our discussions with financial institutions to obtain
additional credit facilities. In addition, we are considering exercising our
option to extend the due date of our term loan facility, due November 30, 2002,
by two additional years. This option is subject to the bank obtaining a current
appraisal of the mortgaged property and being satisfied that the appraised value
of the property is at least 200% of the outstanding principal of the term loan.
During the nine months ended September 30, 2001, we invested $25.5 million on
real estate property and fixed asset additions. We anticipate capital
expenditures of approximately $50.0 million in aggregate during the year ending
December 31, 2001. The capital expenditures relate to maintenance capital
improvements to our racetracks of approximately $7.2 million with the remainder
consisting primarily of racetrack property enhancements, the completion of the
Magna Golf Club, 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 $20.4 million for the nine months ended
September 30, 2001. For the comparable 2000 period, cash used by operations was
$12.7 million, primarily due to the need to fund working capital deficiencies in
that period related to acquisitions completed in the latter part of 1999 and
early 2000. Those funding requirements had been taken into consideration in the
negotiation of the purchase price of those acquisitions.
16
Investing activities
Cash used in investing activities for the nine months ended September 30, 2001
was $10.1 million including investments of $25.9 million in real estate property
and fixed asset and other asset additions and $21.0 million on the acquisition
of MEC Pennsylvania, partially offset by $36.8 million of proceeds received on
the sale of non-core real estate. Net proceeds from investing activities for the
nine months ended September 30, 2000 were $18.2 million, including $32.5 million
of proceeds on the sale of non-core real estate and other assets, $5.8 million
of which related to sales to a related party, Magna International Inc.,
partially offset by $14.3 million invested in real estate property and fixed
asset additions.
Financing activities
Cash provided by financing activities was $0.4 million for the nine months ended
September 30, 2001. During this period, the Company received net proceeds on the
increase in long-term debt of $7.6 million and the issue of shares for $0.5
million, partially offset by a repayment of bank indebtedness of $7.6 million.
For the nine months ended September 30, 2000, cash used for financing activities
was $12.0 million. During the nine months ended September 30, 2000, there was a
decrease in bank indebtedness of $6.8 million and a repayment of long-term debt
of $6.6 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.
In the current quarter, 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 other intangible assets (SFAS 142) requires the
application of the non-amortization and impairment rules for existing goodwill
and other 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 Quarterly Report on Form 10-Q, including Management's Discussion and
Analysis of Results of Operations and Financial Position, 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 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 Quarterly Report on Form 10-Q are cautioned that such statements
are only predictions and that our actual operating results and financial
condition may differ materially. In evaluating such forward-looking statements,
readers should specifically consider the various factors which could cause our
actual operating results and financial
17
condition to differ materially from those indicated by such forward-looking
statements, including those contained in the "Risk Factors" section of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000
and our subsequent filings with the United States Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes since year-end.
18
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Date Items Reported and Financial Statements Filed
- ---- ---------------------------------------------
August 1, 2001 Financial results for the three month and six month
(filed: August 2, 2001) periods ended June 30, 2001.
August 2, 2001 Press release announcing that GMR-NY LLC has been
(filed: August 7, 2001) selected as the successful bidder to acquire the
New York City Off-Track Betting operation.
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: November 13, 2001
19