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, 2000
Commission File Number: 000-30578
-----------
MAGNA ENTERTAINMENT CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware, United States of America 98-0208374
- ------------------------------------------- ----------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2001 Wilshire Boulevard, Suite 400, Santa Monica, California, USA 90403
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(310) 829-9907
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 14,147,035 shares of Class A Subordinate Voting Stock
outstanding as of November 1, 2000. In addition, as of November 1, 2000, 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 7,852,543
Exchangeable Shares remain unexchanged.
1
MAGNA ENTERTAINMENT CORP.
FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements 4 to 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 to 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
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
- --------
Exhibit 27.1 Financial Data Schedule
Reports on Form 8-K
- --------------------
Date Item Reported
- ---- -------------
July 14, 2000 Press release announcing the resignation of Mr. Jerry
Campbell as President and Chief Executive Officer of the
Registrant and the appointment of Mr. Mark Feldman in
his stead. Mr. Campbell continued as Vice-Chairman of
the Registrant.
August 14, 2000 Press release announcing unaudited financial results for
the three month period ended June 30, 2000
August 30, 2000 Press release announcing the signing of a definitive
agreement to acquire Bay Meadows Operating Company,
L.L.C. in San Mateo, California subject to regulatory
approvals.
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 hereunto duly authorized.
MAGNA ENTERTAINMENT CORP.
(Registrant)
Date: November 14, 2000 by: /s/ Graham J. Orr
----------------------------------------
Graham J. Orr, Executive Vice-President
and Chief Financial Officer
3
Item 1. Financial Statements
--------------------
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------
[Unaudited]
[United States dollars in thousands,
except per share figures]
- ---------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------
Revenue
Racetrack
Wagering, net of purses 9,882 1,890 96,852 40,156
Non-wagering 8,092 2,866 38,424 18,798
Real estate
Sale of real estate 16,766 - 25,035 -
Rental and other 4,850 5,663 13,849 12,167
- ---------------------------------------------------------------------------------------------------------
39,590 10,419 174,160 71,121
- ---------------------------------------------------------------------------------------------------------
Costs and expenses
Racetrack
Operating costs 21,077 8,711 97,021 42,299
General and administrative 3,942 1,855 11,019 3,778
Real estate
Cost of real estate sold 13,070 - 18,984 -
Operating costs 4,490 5,111 11,650 11,197
General and administrative 253 873 721 1,299
Predevelopment and other costs 821 215 3,262 215
Depreciation and amortization 4,792 1,642 14,744 4,676
Interest expense 584 550 1,950 1,259
Interest income (755) (935) (2,156) (995)
- ---------------------------------------------------------------------------------------------------------
48,274 18,022 157,195 63,728
- ---------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (8,684) (7,603) 16,965 7,393
Income tax (benefit) provision (3,574) (2,513) 7,343 4,393
- ---------------------------------------------------------------------------------------------------------
Net (loss) income (5,110) (5,090) 9,622 3,000
Other comprehensive loss (income):
Foreign currency translation 7,413 (3,414) 13,742 3,908
adjustment
- ---------------------------------------------------------------------------------------------------------
Comprehensive loss (12,523) (1,676) (4,120) (908)
=========================================================================================================
(Loss) earnings per share of
Class A Subordinate Voting
Stock, Class B Stock or
Exchangeable Share: $(0.06) $(0.06) $0.12 $0.04
Basic $(0.06) $(0.06) $0.12 $0.04
Diluted
=========================================================================================================
Average number of shares of Class
A Subordinate Voting Stock,
Class B Stock and Exchangeable
Shares[in thousands]: 80,466 78,535 80,407 78,535
Basic 80,466 78,535 80,411 78,535
Diluted
=========================================================================================================
See accompanying condensed notes to the consolidated financial statements.
4
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------
[Unaudited]
[United States dollars in thousands]
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided from (used for):
OPERATING ACTIVITIES
Net income (5,110) (5,090) 9,622 3,000
Items not involving current cash flows (660) 1,669 6,642 5,393
- ---------------------------------------------------------------------------------------------------------------------------
(5,770) (3,421) 16,264 8,393
Changes in non-cash working capital (3,056) 3,293 (29,007) (7,149)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for)
Operating Activities (8,826) (128) (12,743) 1,244
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of business - (81,204) (1,770) (87,579)
Real estate property and fixed asset additions (5,539) (27,442) (14,306) (34,600)
Proceeds on sale of real estate 16,766 - 25,035 -
Proceeds (cost) on real estate sold to Magna - - 6,147 -
Other assets disposals (additions) (397) - 1,352 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for)
Investing Activities 10,830 (108,646) 16,458 (122,179)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness (4,703) (442) (6,759) (2,489)
Increase of (repayment of) long-term debt 125 (3,094) (6,642) (3,198)
Issue of Class A Subordinate Stock - - 1,846 -
Contributed capital, net of tax - - 1,352 -
Decrease in note payable to Magna - (135,968) - (111,622)
Net contribution by Magna - 256,414 - 244,294
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for)
Financing Activities (4,578) 116,910 (10,203) 126,985
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (527) (2) (582) (9)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents during the period (3,101) 8,134 (7,070) 6,041
Cash and cash equivalents, beginning of
period 46,691 15,410 50,660 17,503
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 43,590 23,544 43,590 23,544
===========================================================================================================================
See accompanying condensed notes to the consolidated financial statements.
5
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------
[Unaudited]
[United States dollars in thousands]
- ----------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents 43,590 50,660
Restricted cash 6,600 7,752
Accounts receivable 26,118 25,887
Prepaid expenses and other 3,926 3,931
- ----------------------------------------------------------------------------------------------------------------------
80,234 88,230
- ----------------------------------------------------------------------------------------------------------------------
Real estate properties and fixed assets, net 538,171 564,789
- ----------------------------------------------------------------------------------------------------------------------
Other assets, net 96,529 100,967
- ----------------------------------------------------------------------------------------------------------------------
Deferred income taxes 6,176 6,367
- ----------------------------------------------------------------------------------------------------------------------
721,110 760,353
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Bank indebtedness 93 7,259
Accounts payable and other liabilities 38,675 66,151
Income taxes payable 9,031 7,554
Long-term debt due within one year 12,833 19,119
----------------------------------------------------------------------------------------------------------------------
60,632 100,083
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt 23,664 19,506
- ----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 412 494
- ----------------------------------------------------------------------------------------------------------------------
Deferred income taxes 90,237 93,183
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Capital stock issued and outstanding -
Class A Subordinated Voting Stock 100,299 11,500
Exchangeable Shares 58,408 110,000
Class B Stock 394,094 429,455
Contributed surplus 1,352 -
Retained earnings (deficit) 7,191 (2,431)
Accumulated comprehensive loss (15,179) (1,437)
- ----------------------------------------------------------------------------------------------------------------------
546,165 547,087
- ----------------------------------------------------------------------------------------------------------------------
721,110 760,353
======================================================================================================================
See accompanying condensed notes to the consolidated financial statements.
6
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 and nine month periods ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. 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, 1999.
Because of the seasonal nature of the Company's business, revenues and operating
results for any interim quarter are not indicative of the revenues and operating
results for the year and are not necessarily comparable with results for the
corresponding period of the previous 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
in the first and second quarters of each year.
Stock-based compensation
- -------------------------
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" ("Statement 123") which provides companies an alternative to
accounting for stock-based compensation as prescribed under APB Opinion No. 25
("APB 25"). Statement 123 encourages, but does not require companies to
recognize expense for stock-based awards based on their fair value at date of
grant. Statement 123 allows companies to continue to follow existing accounting
rules (intrinsic value method under APB 25) provided that pro-forma disclosures
are made of what net income and earnings per share would have been had the new
fair value method been used. The Company has elected to adopt the disclosure
requirements of Statement 123 but will continue to account for stock-based
compensation under APB 25.
2. Business Acquisition
On February 29, 2000 the Company acquired the assets and assumed approximately
$9.3 million of liabilities of Great Lakes Downs, Inc., a racetrack in Muskegon,
Michigan for a purchase price of $1.8 million. The purchase price was paid by
issuance of 267,416 shares of Class A Subordinate Voting Stock.
7
The purchase price has been allocated to the assets and liabilities as follows
(in thousands):
Non-cash working capital $(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. Debt
In March 2000 the Company completed the renegotiation of two credit facilities-
a new $63 million three year term loan facility and the renewal of the $10
million revolving line of credit. Both credit facilities bear interest at rates
ranging between Prime and LIBOR plus 2.2% per annum. At September 30, 2000, the
Company had no borrowings outstanding on these two facilities.
4. Capital Stock
Changes in Class A Subordinate Voting Stock, Class B Stock and Exchangeable
Shares for the nine months ended September 30, 2000 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, 1999 1,663 11,500 14,823 110,000 63,712 429,455
Issued on acquisition of
Great Lakes Downs on
February 29, 2000 268 1,846 -- -- -- --
Conversion of Class B
Stock to Class A
Shares 5,246 35,361 -- -- (5,246) (35,361)
Conversion of Exchangeable
Shares to Class A
Shares 6,952 51,592 (6,952) (51,592) -- --
- --------------------------------------------------------------------------------------------------------------------
Issued and outstanding
at September 30, 2000 14,129 100,299 7,871 58,408 58,466 394,094
- --------------------------------------------------------------------------------------------------------------------
The Company has a Long-Term Incentive Plan ("the Plan"). Under the Plan the
Company has granted non-qualifying options to certain directors and incentive
stock options to certain senior executives to purchase shares of the Company's
Class A Subordinate Voting Stock at a price no less than the fair market value
of the Class A Subordinate Voting Stock at the date of grant. The non-
qualifying options vest over a three-year period. The incentive stock options
vest based on terms approved by the Company's Board of Directors.
At September 30, 2000, there were 3,373,333 options outstanding that were all
granted during 2000. 666,667 of the stock options granted in 2000 were revoked
in the three months ended September 30, 2000. None of the stock options granted
in 2000 were exercised during the nine month period ended September 30, 2000.
The exercise price of the stock options outstanding at September 30, 2000 ranged
from $4.875 to $6.90 with a weighted average exercise price of $6.34.
8
There were 1,303,000 options exercisable at September 30, 2000 with an average
exercise price of $6.46.
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 nine-month period ended September 30, 2000.
5. 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 September 30,
2000 1999
- -----------------------------------------------------------------------------------------------
Net Loss $(5,110) $(5,090)
- -----------------------------------------------------------------------------------------------
Basic & Diluted Weighted Average Shares Outstanding:
Class A Subordinate Voting Stock 13,102 --
Class B Stock 58,466 63,712
Exchangeable Shares 8,898 14,823
- -----------------------------------------------------------------------------------------------
80,466 78,535
- -----------------------------------------------------------------------------------------------
Basic Loss Per Share $ (0.06) $ (0.06)
- -----------------------------------------------------------------------------------------------
Diluted Loss Per Share $ (0.06) $ (0.06)
- -----------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2000 1999
- -----------------------------------------------------------------------------------------------
Net Income $ 9,622 $ 3,000
- -----------------------------------------------------------------------------------------------
Basic Weighted Average Shares Outstanding:
Class A Subordinate Voting Stock 9,011 --
Class B Stock 59,806 63,712
Exchangeable Shares 11,590 14,823
- -----------------------------------------------------------------------------------------------
80,407 78,535
- -----------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.12 $ 0.04
- -----------------------------------------------------------------------------------------------
Diluted Weighted Average Shares Outstanding:
Class A Subordinate Voting Stock 9,015 --
Class B Stock 59,806 63,712
Exchangeable Shares 11,590 14,823
- -----------------------------------------------------------------------------------------------
80,411 78,535
- -----------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 0.12 $ 0.04
- -----------------------------------------------------------------------------------------------
9
6. Segment Information
In July 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"), which establishes standards for the way that public business enterprises
report information about operating segments. This statement is effective for
financial statements for periods beginning after December 15, 1997. The Company
has adopted this standard.
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
"Principles of Consolidation" in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
The following summary presents key information by operating segment (in
thousands):
Three months ended September 30, 2000
Racetrack Real Estate
Operations Operations Total
- -------------------------------------------------------------------------------
Revenue $ 17,974 $ 21,616 $39,590
- -------------------------------------------------------------------------------
Income (loss) before income taxes $(11,890) $ 3,206 $(8,684)
- -------------------------------------------------------------------------------
Real estate properties and fixed asset
net additions (disposals) $ 5,708 $(13,255) $(7,547)
- -------------------------------------------------------------------------------
Three months ended September 30, 1999
Racetrack Real Estate
Operations Operations Total
- -------------------------------------------------------------------------------
Revenue $ 4,756 $ 5,663 $10,419
- -------------------------------------------------------------------------------
Loss before income taxes $(6,262) $(1,341) $(7,603)
- -------------------------------------------------------------------------------
Real estate properties and fixed asset
net additions (disposals) $23,950 $ 3,492 $27,442
- -------------------------------------------------------------------------------
Nine months ended September 30, 2000
Racetrack Real Estate
Operations Operations Total
- -------------------------------------------------------------------------------
Revenue $135,276 $ 38,884 $174,160
- -------------------------------------------------------------------------------
Income before income taxes $ 11,626 $ 5,339 $ 16,965
- -------------------------------------------------------------------------------
Real estate properties and fixed asset
net additions (disposals) $ 10,906 $(21,747) $(10,841)
- -------------------------------------------------------------------------------
10
Nine months ended September 30, 1999
Racetrack Real Estate
Operations Operations Total
- -------------------------------------------------------------------------------
Revenue $58,954 $12,167 $71,121
- -------------------------------------------------------------------------------
Income (loss) before income taxes $10,637 $(3,244) $ 7,393
- -------------------------------------------------------------------------------
Real estate properties and fixed asset
net additions (disposals) $27,725 $ 6,875 $34,600
- -------------------------------------------------------------------------------
7. Related Party Transactions
During the three months ended June 30, 2000, certain real estate properties were
sold to wholly owned subsidiaries of Magna International Inc ("Magna"). Proceeds
of $8.0 million were received on the sale of these properties. Due to the
related party nature of the transactions, the gain on sale, net of taxes, was
recorded as a contribution to equity.
8. Commitments and contingencies
One of the Company's subsidiaries has been named as a defendant in a class
action brought in a United States District Court by Gutwillig et al. The
plaintiffs in this action claim unspecified compensatory and punitive damages,
for resolution and disgorgement of profits, all in relation to forced labor
performed by the plaintiffs for such subsidiary and certain other Austrian and
German corporate defendants at their facilities in Europe during World War II.
As a result of the Reorganization, the Company acquired shares of such
subsidiary. Under Austrian law, such subsidiary would be jointly and severally
liable for the damages awarded in respect of this class action claim. An
Austrian subsidiary of Magna has agreed to indemnify such subsidiary for any
damages or expenses associated with this claim.
A subsidiary of Magna has agreed to indemnify the Company in respect of
environmental remediation costs and expenses relating to existing conditions in
certain of the Company's Austrian real estate properties.
9. New Accounting Standards
In June 1998, June 1999 and June 2000, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of SFAS No. 133," and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of SFAS no. 133." These statements outline the accounting treatment
for all derivative activity. The Company is required to and will adopt SFAS No.
133 in the first quarter of fiscal 2001 and does not expect adoption to have a
significant effect on its consolidated results of operations or financial
position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101")
which addressed certain revenue recognition policies, including gross versus net
income statement presentation. In June 2000, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements" which effectively delays the implementation
date of SAB 101 until no later than the fourth quarter of 2000. The Company has
11
previously reported revenue net of pari-mutuel wagering taxes, horsemen stakes,
purses and awards. The Company will adopt SAB 101 during the fourth quarter of
2000 with an effective date of January 1, 2000 and restate its quarterly
financial information to show revenue gross for these type of items. The
adoption of SAB 101 will have no effect on the Company's net income.
10. Subsequent Events
On August 30, 2000, the Company announced that it had executed a definitive
agreement to acquire Bay Meadows Operating Company, L.L.C. ("Bay Meadows") in
San Mateo, California for $24.1 million in cash and that it had also received
approval from the California Horse Racing Board for the acquisition. The terms
of the transaction allow the Company to conduct racing at the existing Bay
Meadows facility in San Mateo for two years after completion of the acquisition.
This transaction is expected to close in mid November 2000.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS:
Information set forth in this discussion and analysis contain various "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe
harbor" provisions for forward-looking statements. All forward-looking
statements made in this Quarterly Report on Form 10-Q are made pursuant to the
Act. The reader is cautioned that these statements represent our judgment
concerning the future and are subject to risks and uncertainties that could
cause our actual operating results and financial condition to differ materially.
Forward-looking statements are typically identified by the use of terms such as
"may," "will," "expect," "anticipate," "estimate," and similar words, although
some forward-looking statements are expressed differently. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable we can give no assurance that such expectations will prove to be
correct. Important factors that could cause actual results to differ materially
from our expectations include, but are not limited to: the impact of competition
from operators of other racetracks and from other forms of gaming (including
from Internet and on-line wagering); a substantial change in law or regulations
affecting our gaming activities; a substantial change in allocation of live
racing days; our continued ability to effectively compete for the country's top
horses and trainers necessary to field high-quality horse racing; 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 a price we want; the impact of inclement weather; and our ability to
integrate recent racetrack acquisitions.
Overview
We operate horse racetracks and wagering operations and media sports wagering
operations, and are currently developing telephone account, interactive
television and Internet-based wagering operations, as well as leisure and
retail-based real estate projects on the land surrounding some of our
racetracks. We also own a real estate portfolio that includes a gated
residential community currently under development, two golf courses and related
recreational facilities, and other real estate. We are considering a number of
options with respect to the two golf courses, including direct operation or
leasing to third party operators, as well as sale and leaseback transactions or
outright sale. We intend gradually to sell the balance of our real estate
portfolio in order to provide capital to be used in our business.
Racetrack operations
Because of the seasonal nature of our racetrack business, revenues and operating
results for any interim quarter will not be indicative of the revenues and
operating results for the year. Our live racing schedule also dictates that we
will earn a substantial portion of our net earnings in the first quarter of each
year, which is when The Santa Anita Park meet and the annual meet at Gulfstream
Park occur. Historically our second quarter of each year has the second largest
net earnings of each year, when the larger of the two annual meets at Golden
Gate Fields occurs.
13
Real estate operations
Following the initiation of a disposition plan for the Company's excess
properties, net proceeds of $25.0 million were received during the second and
third quarters. In addition a further $8.0 million was received in the second
quarter on real estate sold to a related party. For financial statement
purposes, the gain on real estate sales from the related party are reported, net
of tax, as a contribution to equity. In total, the Company's real estate sales
generated $7.9 million in excess of the historical cost of the properties sold.
Furthermore, the Company has entered into sales agreements for properties that
will provide anticipated proceeds of approximately $11.0 million in the fourth
quarter.
Results of Operations
Nine months ended September 30, 2000 Compared to Nine Months ended September 30,
1999
Racetrack operations
Revenues from our racetrack operations were $135.3 million for the nine months
ended September 30, 2000. The revenues were primarily earned from Santa Anita
Park, Gulfstream Park and Golden Gate Fields, with Golden Gate Fields running
their meet during the first quarter, Santa Anita Park running their meet from
January 1, 2000 to the latter half of April and Golden Gate Fields running their
meet through most of the second quarter. As Santa Anita Park was the only track
owned until Gulfstream Park was purchased September 1, 1999, our total revenues
from racetrack operations in the comparable 1999 period were from Santa Anita
Park and totaled $59.0 million.
In the nine months ended September 30, 2000, our share of total pari-mutuel
wagering revenues for our racetracks was $96.9 million and non-wagering revenues
were $38.4 million. The major components of our non-wagering revenues for the
nine months ended September 30, 2000 were admission related revenues of $15.7
million (comprising primarily admissions, parking, and program sales) and food
and beverage sales of $12.0 million, collectively 72% of total non-wagering
revenues.
Racetrack costs and expenses, before depreciation and interest, were $108.0
million for the nine months ended September 30, 2000. The major component of our
costs and expenses, before depreciation and interest, was payroll costs ($58.5
million) representing approximately 54% of our total costs.
Real estate operations
Net proceeds on sale of real estate were $25.0 million for the nine months ended
September 30, 2000. Total proceeds received of $33.1 million included the cost
of real estate sold to a related party of $6.1 and $1.9 million (less tax) which
was recorded as a capital contribution in the second quarter. Revenues from our
real estate rental and other operations were $13.8 million for the nine months
ended September 30, 2000 compared to $12.2 million for the nine months ended
September 30, 1999.
Real estate costs and expenses were $12.4 million for the nine months ended
September 30, 2000 and $12.5 million for the nine months ended September 30,
1999.
14
Predevelopment and other costs
Predevelopment and other costs were $3.3 million for the nine months ended
September 30, 2000. These costs include consultants' fees associated with
feasibility studies, construction designs, market analysis, site models and
alternative site investigations, and were incurred on our racetrack sites and
land sites in Europe.
Depreciation and amortization
Depreciation and amortization increased by $10.1 million to $14.7 million for
the nine months ended September 30, 2000, primarily as a result of depreciation
related to our acquisitions of Gulfstream Park on September 1, 1999, Thistledown
and Remington Park on November 12, 1999, Golden Gate Fields on December 10, 1999
and Great Lakes Downs on February 29, 2000.
Income tax provision
We recorded an income tax provision of $7.3 million on pre-tax income of $17.0
million for the nine months ended September 30, 2000 compared to an income tax
provision of $4.4 million on pre-tax income of $7.4 million for the nine months
ended September 30, 1999. Our income tax provision relates primarily to the
income of our racetrack operations which was calculated based on a consolidated
tax sharing arrangement.
Three months ended September 30, 2000 Compared to Three Months ended September
30, 1999
Racetrack operations
Revenues from our racetrack operations were $18.0 million for the three months
ended September 30, 2000. The revenues were primarily earned from Thistledown,
Remington Park, Santa Anita Park and Golden Gate Fields, with Santa Anita Park
and Golden Gate fields operating as an inter-track wagering sites. As Santa
Anita Park was the only track owned until the purchase of Gulfstream Park on
September 1, 1999, our total revenues from racetrack operations in the
comparable 1999 period were from Santa Anita Park and totaled $4.8 million.
In the three months ended September 30, 2000, our share of total pari-mutuel
wagering revenues for our racetracks was $9.9 million and non-wagering revenues
were $8.1 million. The major components of our non-wagering revenues for the
three months ended September 30, 2000 were admission related revenues of $2.6
million (comprising primarily admissions, parking, and program sales) and food
and beverage sales of $2.3 million, collectively 60% of total non-wagering
revenues.
Racetrack costs and expenses, before depreciation and interest, were $25.0
million for the three months ended September 30, 2000. The major component of
our costs and expenses, before depreciation and interest, was payroll costs
($14.8 million) representing approximately 59% of our total costs.
15
Real estate operations
Net proceeds on sale of real estate were $16.8 million for the three months
ended September 30, 2000. Revenues from our real estate rental and other
operations were $4.9 million for the three months ended September 30, 2000
compared to $5.7 million for the three months ended September 30, 1999.
Real estate costs and expenses were $4.7 million for the three months ended
September 30, 2000 and $6.0 million for the three months ended September 30,
1999.
Predevelopment and other costs
Predevelopment and other costs were $0.8 million for the three months ended
September 30, 2000. These costs include consultants' fees associated with
feasibility studies, construction designs, market analysis, site models and
alternative site investigations, and were incurred on our racetrack sites and
land sites in Europe.
Depreciation and amortization
Depreciation and amortization increased by $3.2 million to $4.8 million for the
three months ended September 30, 2000, primarily as a result of depreciation
related to our acquisitions of Gulfstream Park on September 1, 1999, Thistledown
and Remington Park on November 12, 1999, Golden Gate Fields on December 10, 1999
and Great Lakes Downs on February 29, 2000.
Income tax provision
We recorded an income tax benefit of $3.6 million on a pre-tax loss of $8.7
million for the three months ended September 30, 2000 compared to an income tax
benefit of $2.5 million on a pre-tax loss of $7.6 million for the three months
ended September 30, 1999. Our income tax provision relates primarily to the
income of our racetrack operations which was calculated based on a consolidated
tax sharing arrangement.
Liquidity and Capital Resources
At September 30, 2000, we had cash and cash equivalents of $43.6 million and
total shareholder's equity of $546.2 million.
In the first quarter we successfully completed the renegotiation of two credit
facilities for two of our subsidiaries, The Santa Anita Companies, Inc. and the
Los Angeles Turf Club, Inc. These credit facilities consist of a new $63.0
million three year term loan facility and the renewal of the $10.0 million
revolving operating line of credit, both of which would bear interest at rates
ranging between the U.S. Prime Rate and LIBOR plus 2.2% per annum. At September
30, 2000 the Company had no borrowings outstanding on these two facilities.
For the nine months ended September 30, 2000 we incurred capital expenditures of
approximately $14.3 million. We currently anticipate capital expenditures of
approximately $45.6 million during the year ending December 31, 2000. The
capital expenditures relate to normal ongoing capital improvements to the
racetracks of approximately $11.2 million, extraordinary capital improvements of
approximately $11.0 million required to Santa Anita Park and Golden Gate Fields
related to commitments made on acquisition and $5.2 million on new
16
racetrack related projects. In addition, approximately $9.0 million is
anticipated for the completion of the Aurora golf course and infrastructure and
holding costs of adjacent lands and approximately $4.2 million for
infrastructure and holding costs of other properties. Finally, $5.0 million will
be expended during the year on interactive television account wagering, Internet
and broadcast initiatives.
Operating activities
Cash used for operations was $12.7 million for the nine months ended September
30, 2000 and cash provided by operations was $1.2 million for the nine months
ended September 30, 1999. Cash used for operations in the nine months ended
September 30, 2000 is primarily a result of cash used in reducing our current
liabilities offset by cash generated by Golden Gate Fields, Gulfstream Park and
Santa Anita Park operations.
Investing activities
Cash provided by investing activities was $16.5 million for the nine months
ended September 30, 2000 and cash used for investing activities was $122.2
million for the nine months ended September 30, 1999. Total investing activities
for the nine months ended September 30, 2000 included proceeds on disposition of
real estate of $25.0 million and the cost of real estate sold to a related party
of $6.1 million, offset by fixed asset additions of $14.3 million. Total
investing activities for the nine months ended September 30, 1999 included $87.6
million for the purchase of Gulfstream Park and SLRD Thoroughbred Training
Center and fixed asset additions of $34.6 million.
Financing activities
Cash used for financing activities netted to approximately $10.2 million for the
nine months ended September 30, 2000. During this period the Company's bank
indebtedness decreased by $6.8 million and there were repayments of long-term
debt netting to $6.6 million. This was offset by a contribution of capital of
$1.4 million due to a gain realized on a sale of real estate to a related party
and an issue of stock of $1.8 million. For the nine months ended September 30,
1999, cash provided by financing activities was $127.0 million and was comprised
of a decrease in payables to Magna International Inc. of $111.6 million offset
by a contribution by Magna of $244.3 million and a decrease in bank indebtedness
and a repayment of long term debt of $2.5 million and $3.2 million,
respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No material changes since year-end.
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
27.1 Financial Data Schedule
17
[ARTICLE] 5
[NAME] MAGNA ENTERTAINMENT CORP.
[MULTIPLIER] 1
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] SEP-30-2000
[CASH] 43,590,000
[SECURITIES] 0
[RECEIVABLES] 26,118,000
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 80,234,000
[PP&E] 543,806,000
[DEPRECIATION] (5,635,000)
[TOTAL-ASSETS] 721,110,000
[CURRENT-LIABILITIES] 60,632,000
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 100,299,000
[OTHER-SE] 445,866,000
[TOTAL-LIABILITY-AND-EQUITY] 721,110,000
[SALES] 0
[TOTAL-REVENUES] 174,160,000
[CGS] 0
[TOTAL-COSTS] 139,395,000
[OTHER-EXPENSES] 18,006,000
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (206,000)
[INCOME-PRETAX] 16,965,000
[INCOME-TAX] 7,343,000
[INCOME-CONTINUING] 9,622,000
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 9,622,000
[EPS-BASIC] 0.12
[EPS-DILUTED] 0.12