SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) April 5, 2001
MAGNA ENTERTAINMENT CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
000-30578 98-0208374
- --------------------------------- -----------------------------------------
(Commission File Number (I.R.S. Employer Identification No.)
337 Magna Drive, Aurora, Ontario, Canada L4G 7K1
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(Address of Principal Executive Offices) (Zip Code)
(905) 726-2462
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(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
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(Former Name or Former Address, if changed Since Last Report)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2000 and 1999 with Report of Independent Auditors
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2000 and 1999
Contents
Report of Independent Auditors.............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................. 2
Consolidated Statements of Operations....................................... 4
Consolidated Statements of Changes in Stockholder's Equity.................. 5
Consolidated Statements of Cash Flows....................................... 6
Notes to Consolidated Financial Statements.................................. 7
[LETTERHEAD OF ERNST & YOUNG]
Report of Independent Auditors
Board of Directors
Ladbroke Racing Pennsylvania and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ladbroke Racing
Pennsylvania and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in stockholder's equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our report dated January 28, 2000, we expressed an opinion that except for
the effects of the departure from generally accepted accounting principles
related to applying the disclosure provisions of Financial Accounting Standards
Board Statement No. 109 (FASB No. 109), the 1999 financial statements were
presented fairly in conformity with generally accepted accounting principles. As
described in Note 7, the Company has provided the required disclosures under
FASB No. 109 to conform with accounting principles generally accepted in the
United States. Accordingly, our present opinion on the 1999 financial
statements, as presented herein, is unqualified rather than qualified.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ladbroke Racing
Pennsylvania and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
February 15, 2001
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
-1-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Balance Sheets
December 31
2000 1999
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,217,578 $ 2,368,484
Equity in pooled cash and cash equivalents 13,342,611 72,374,454
Short-term investments 241,156 229,213
Accounts and other receivables 5,199,293 2,638,956
Inventories 182,489 205,635
Prepaid expenses and other current assets 385,091 171,141
State income taxes receivable -- 213,219
---------------------------
Total current assets 21,568,218 78,201,102
Goodwill, net of accumulated amortization
of $2,864,998 in 2000 and $2,626,248 in 1999 6,684,998 6,923,748
Racetrack properties:
Land 1,900,613 1,900,613
Buildings 10,053,695 10,053,695
Leasehold improvements 13,650,349 16,398,164
Furniture, fixtures and equipment 10,499,470 10,393,676
---------------------------
36,104,127 38,746,148
Less accumulated depreciation and amortization (18,146,342) (18,753,067)
---------------------------
Net racetrack properties 17,957,785 19,993,081
---------------------------
Total assets $ 46,211,001 $105,117,931
===========================
-2-
December 31
2000 1999
---------------------------
Liabilities and stockholder's equity
Current liabilities:
Accounts payable and accrued expenses $ 10,700,206 $ 9,973,737
State income taxes payable 386,944 352,044
Due to affiliate, net 1,952,735 7,524,600
Notes and accrued interest payable to affiliates -- 27,326,523
Outstanding pari-mutuel tickets payable 704,872 711,987
---------------------------
Total current liabilities 13,744,757 45,888,891
Notes and accrued interest payable to affiliates -- 31,610,818
Deferred income taxes 472,531 488,884
Stockholder's equity:
Common stock--5,000 shares authorized, issued
and outstanding, $1 par value 5,000 5,000
Additional paid-in capital 11,193,748 11,193,748
Retained earnings 20,794,965 15,930,590
---------------------------
Total stockholder's equity 31,993,713 27,129,338
---------------------------
Total liabilities and stockholder's equity $ 46,211,001 $105,117,931
===========================
See accompanying notes.
-3-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
2000 1999
---------------------------
Revenues from operations:
Pari-mutuel commissions and breakage $64,281,881 $57,539,712
Admissions 91,031 102,737
Food and beverage 3,803,714 4,298,185
Parking 879 843
Program sales 819,289 940,037
Other operating income 1,637,884 2,220,736
---------------------------
Total operating revenues 70,634,678 65,102,250
Operating expenses:
Purse payments 14,244,032 13,564,519
Salaries and wages 11,385,958 11,533,047
Operating expenses 23,369,612 19,327,540
Advertising and publicity 1,530,165 1,123,648
Equipment rental and other contractual services 1,087,861 1,190,606
Establishment 4,246,737 4,545,418
Depreciation and amortization 2,221,343 2,278,784
Loss on the sale of OTB site 1,730,174 --
General and administrative 4,491,721 4,672,175
---------------------------
Total operating expenses 64,307,603 58,235,737
---------------------------
Income from operations 6,327,075 6,866,513
Other income (expense):
Interest, net 1,873,983 (1,675,116)
---------------------------
Income before income taxes 8,201,058 5,191,397
Income taxes:
Current:
Federal 2,627,874 1,559,500
State 725,162 348,457
---------------------------
Total current income taxes 3,353,036 1,907,957
Deferred:
Federal (13,900) (79,332)
State (2,453) (14,000)
---------------------------
Total deferred income taxes (16,353) (93,332)
---------------------------
Total income taxes 3,336,683 1,814,625
---------------------------
Net income $ 4,864,375 $ 3,376,772
===========================
See accompanying notes.
-4-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 2000 and 1999
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-----------------------------------------------------
Balance at December 31, 1998 $ 5,000 $11,193,748 $12,553,818 $23,752,566
Net income -- -- 3,376,772 3,376,772
-----------------------------------------------------
Balance at December 31, 1999 5,000 11,193,748 15,930,590 27,129,338
Net income -- -- 4,864,375 4,864,375
-----------------------------------------------------
Balance at December 31, 2000 $ 5,000 $11,193,748 $20,794,965 $31,993,713
=====================================================
See accompanying notes.
-5-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2000 1999
---------------------------------
Operating activities
Net income $ 4,864,375 $ 3,376,772
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,221,343 2,278,784
Loss on the sale of OTB site 1,730,174 -
Provision for deferred income taxes (16,353) (93,332)
Changes in operating assets and liabilities:
Accounts and other receivables (2,560,337) (1,273,075)
Inventories 23,146 37,342
Prepaid expenses and other current assets (213,950) (15,951)
State income taxes receivable 213,219 (17,544)
Accounts payable and accrued expenses 726,469 5,151,652
State income taxes payable 34,900 142,776
Due to affiliate, net (5,571,865) 1,889,272
Outstanding pari-mutuel tickets payable (7,115) (182,315)
---------------------------------
Net cash provided by operating activities 1,444,006 11,294,381
Investing activities
Purchase of racetrack properties, net of disposals (1,677,471) (660,046)
Increase in short-term investments (11,943) (8,279)
---------------------------------
Net cash used by investing activities (1,689,414) (668,325)
Financing activities
Payment of notes and accrued interest payable to affiliates (58,937,341) -
Increase in notes and accrued interest payable to affiliates - 4,597,116
---------------------------------
Net cash (used in) provided by financing activities (58,937,341) 4,597,116
---------------------------------
(Decrease) increase in cash and cash equivalents and
equity in pooled cash and cash equivalents (59,182,749) 15,223,172
Cash and cash equivalents and equity in pooled cash and
cash equivalents at beginning of year 74,742,938 59,519,766
---------------------------------
Cash and cash equivalents and equity in pooled cash and
cash equivalents at end of year $ 15,560,189 $74,742,938
=================================
See accompanying notes.
-6-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000
1. Corporate Organization and Basis of Presentation
Ladbroke Racing Pennsylvania (LRP) and its wholly owned subsidiaries, Washington
Trotting Association, Inc. (WTA) and Mountain Laurel Racing, Inc. (MLR), are
engaged in racetrack and related operations involving harness racing events.
Through October 16, 2000, LRP (the Company) was a wholly owned subsidiary of
Ladbroke Racing Corporation (LRC). On October 17, 2000, Ladbroke Racing Wyoming,
Inc. (LRW), a wholly owned subsidiary of LRC, issued 400 shares of stock to LRC
for its wholly owned investment in LRP. LRP and LRW are under common control of
LRC; therefore, the historic basis of accounting was maintained for LRP. The
ultimate parent corporation of LRC and its subsidiaries is Hilton Group PLC
(formerly Ladbroke Group PLC), a United Kingdom corporation. Also included in
these financial statements is Ladbroke Food Service (LFS), a wholly owned
subsidiary of LRP, and Ladbroke Racing Management Pennsylvania (LRMP), a
partnership owned equally by WTA and MLR which currently operates four off-track
wagering locations in Western Pennsylvania.
WTA and MLR are licensed and regulated by the Commonwealth of Pennsylvania in
order to engage in racetrack and related operations involving harness racing
events. The nature of these operations is highly dependent on regulations and
statutes enacted by the Commonwealth of Pennsylvania.
2. Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash on hand and demand
deposits with a financial institution. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents include $3,005,291 and $2,535,761 at
December 31, 2000 and 1999, respectively, that represent cash deposits made by
the Company's customers for telephone wagering accounts. The liability for these
deposits is included in accounts payable and accrued expenses.
-7-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Short-Term Investments
Short-term investments are carried at cost (which approximates market). At
December 31, 2000, these investments have been pledged as collateral for purse
payments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Goodwill
Goodwill, which represents the excess cost of the racing entities (WTA and MLR)
over the fair value of their assets and liabilities at the acquisition date, is
being amortized over forty years.
Racetrack Properties
Racetrack properties are stated on the basis of cost. Depreciation is computed
by the straight-line method over the useful lives of the assets. Useful lives
for buildings, leasehold improvements, and furniture, fixtures and equipment are
twenty-five years, twenty years and five to ten years, respectively.
Advertising Expense
The cost of advertising is expensed as incurred.
Income Taxes
The Company does not file a separate federal income tax return, but is included
in a consolidated federal income tax return filed by its United States parent
(Ladbroke Hotels USA Corporation) and other affiliated companies. Under a tax
allocation agreement dated December 23, 1999 with Hilton International Company
(HIC), the Company records no federal income tax provisions and resulting
liabilities. All federal income tax liabilities are borne by HIC, commencing
with the 1999 income tax year. For purposes of preparing these stand-alone
financial statements, a federal tax provision has been calculated and included
in amounts due to affiliates. Deferred income taxes relating to timing
differences associated with the recognition of certain income and expense items
for income tax purposes are recognized under this tax sharing arrangement.
Separate state income tax returns are filed for the Company and its
subsidiaries.
-8-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. Equity in/Advances from Pooled Cash and Cash Equivalents
The Company participates in a pooled cash and cash equivalents management system
sponsored by its ultimate United States parent, Ladstock Holding Corporation
(Ladstock). Monies included in the pool represent deposits and withdrawals made
by the Company, Ladstock, and other United States affiliates. Cash and cash
equivalents are allocated to the Company based on the bank's tracking of each
subsidiary's activity. The balance at year-end represents the Company's
allocated equity in or allocated advances from this pool less outstanding
checks.
The Company earns interest income or incurs interest expense based on its net
daily position in the pool. The Company was allocated $1,771,945 and $2,923,647
of net interest income in 2000 and 1999, respectively, relating to the pool.
4. Related Parties
LRC allocates corporate overhead expenses to its subsidiaries based on its pro
rata percentage of consolidated revenues. Costs allocated to the Company were
$2,043,286 and $2,684,494 for the years ended December 31, 2000 and 1999,
respectively.
Due to affiliate, net, represents amounts payable to LRC. Interest, net includes
$903,721 in 2000 and $325,156 in 1999 relating to intercompany balances with
LRC.
5. Long-Term Liabilities
In 1999, the notes payable to affiliates were payable to Ladstock ($24,019,885)
and LRC ($25,930,941) and bore interest at the LIBOR rate plus 1% and the LIBOR
rate plus 5%, respectively. Effective January 1, 2000, interest expense was not
charged by Ladstock and LRC on the outstanding notes payable balance. On June
30, 2000, all notes and related accrued interest were paid using funds from the
pooled cash system. Interest expense included $4,597,117 relating to these notes
payable for the year ended December 31, 1999.
-9-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Lease Commitments
The Company leases space for its off-track betting facilities under long-term
noncancelable leases with initial lease terms of ten years. Several leases
include options to extend the initial lease term by five or ten years.
Additional amounts are payable based on provisions for contingent rentals based
upon operating expenses and gross sales. These additional payments are charged
to operations as rental expense in the year incurred. Rent expense relating to
these properties for the years ended December 31, 2000 and 1999 was
approximately $793,000 and $896,000, respectively. Minimum future rental
payments relating to these leases are as follows:
2001 $ 604,111
2002 578,278
2003 432,953
2004 209,394
2005 49,980
Thereafter 20,825
----------
$1,895,541
==========
7. Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement No.
109, "Accounting for Income Taxes" (the Statement), which established financial
accounting and reporting standards for the effects of income taxes. In 2000, the
Company has elected to adopt the Statement, effective January 1, 1999. The only
effect in adopting the Statement was to provide the required disclosures of the
Statement; therefore, the adoption had no effect on the Company's financial
position or results of operations for the year ended December 31, 2000 or 1999.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The noncurrent deferred
tax liabilities as of December 31, 2000 and 1999 consisted of tax over book
depreciation of $472,531 and $488,884, respectively.
Income taxes paid during 2000 and 1999 amounted to approximately $734,000 and
$735,000, respectively.
-10-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Retirement Plans
The Company participates in multiemployer defined benefit and contribution plans
for substantially all union employees. Expenses under these plans are based on
stipulated rates per employee and totaled approximately $230,000 and $248,000
for the years ended December 31, 2000 and 1999, respectively. Accumulated plan
benefit information for the multiemployer plans is not readily available.
The Company also participates in a 401(k) retirement savings plan for salaried
and certain hourly employees sponsored by LRC. Company contributions are made
based on a percentage of employees' contributions up to a specified maximum.
Costs charged to operations were approximately $109,000 in 2000 and $105,000 in
1999.
9. Significant Event
On December 21, 2000, LRW and LRC entered into a stock purchase agreement (the
Agreement) with Magna Entertainment Corporation (Magna) which included the sale
of all issued and outstanding shares of common stock of LRP and another LRC
holding. The proposed purchase price approximates $53,000,000 payable in cash,
stock, and a promissory note. The sale is contingent upon Magna obtaining a
license to operate a racetrack in Pennsylvania as well as other conditions
stipulated in the Agreement. The accompanying financial statements do not
reflect any adjustments relating to the asset-carrying amounts should a final
agreement be reached.
-11-
Consolidated Financial Statements
Ladbroke Racing Pennsylvania
and Subsidiaries
Years ended December 31, 1999 and 1998
with Report of Independent Auditors
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999 and 1998
Contents
Report of Independent Auditors....................................... 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets.......................................... 2
Consolidated Statements of Operations................................ 4
Consolidated Statements of Changes in Stockholder's Equity........... 5
Consolidated Statements of Cash Flows................................ 6
Notes to Consolidated Financial Statements........................... 7
[LETTERHEAD OF ERNST & YOUNG]
Report of Independent Auditors
Board of Directors
Ladbroke Racing Pennsylvania and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ladbroke Racing
Pennsylvania and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholder's equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully described in Note 7 to the financial statements, the Company has
not adopted the provisions of Financial Accounting Standards Board Statement No.
109. The effect of this departure from generally accepted accounting principles
on the accompanying financial statements has not been determined.
In our opinion, except for the effects of the departure from generally accepted
accounting principles in the method of accounting for income taxes as discussed
in the preceding paragraph, the financial statement referred to above present
fairly, in all material respects, the consolidated financial position of
Ladbroke Racing Pennsylvania and subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
January 28, 2000
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
-1-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Balance Sheets
December 31
1999 1998
---------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,368,484 $ 1,346,366
Equity in pooled cash and cash equivalents 72,374,454 58,173,400
Short-term investments 229,213 220,934
Accounts and other receivables 2,638,956 1,365,881
Inventories 205,635 242,977
Prepaid expenses and other current assets 171,141 155,190
State income taxes receivable 213,219 195,675
---------------------------------
Total current assets 78,201,102 61,700,423
Goodwill, net of accumulated amortization
of $2,626,248 in 1999 and $2,387,498 in 1998 6,923,748 7,162,498
Racetrack properties:
Land 1,900,613 1,900,613
Buildings 10,053,695 10,053,695
Leasehold improvements 16,398,164 15,482,297
Furniture, fixtures and equipment 10,393,676 10,668,565
---------------------------------
38,746,148 38,105,170
Less accumulated depreciation and amortization (18,753,067) (16,732,101)
---------------------------------
Net racetrack properties 19,993,081 21,373,069
---------------------------------
Total assets $105,117,931 $ 90,235,990
=================================
-2-
December 31
1999 1998
---------------------------------
Liabilities and stockholder's equity
Current liabilities:
Accounts payable and accrued expenses $ 9,973,737 $ 4,822,085
State income taxes payable 352,044 209,268
Due to affiliates 7,524,600 5,635,328
Notes and accrued interest payable to affiliates 27,326,523 25,664,410
Outstanding pari-mutuel tickets payable 711,987 894,302
---------------------------------
Total current liabilities 45,888,891 37,225,393
Notes and accrued interest payable to affiliates 31,610,818 28,675,815
Deferred income taxes 488,884 582,216
Stockholder's equity:
Common stock-5,000 shares authorized, issued
and outstanding, $1 par value 5,000 5,000
Additional paid-in capital 11,193,748 11,193,748
Retained earnings 15,930,590 12,553,818
---------------------------------
Total stockholder's equity 27,129,338 23,752,566
---------------------------------
Total liabilities and stockholder's equity $105,117,931 $ 90,235,990
=================================
See accompanying notes.
-3-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1999 1998
------------------------------------
Revenues from operations:
Pari-mutuel commissions and breakage $ 57,539,712 $ 49,790,098
Admissions 102,737 124,319
Food and beverage 4,298,185 5,056,501
Parking 843 1,080
Program sales 940,037 1,038,930
Other operating income 2,220,736 1,658,576
------------------------------------
Total operating revenues 65,102,250 57,669,504
Operating expenses:
Purse payments 13,564,519 13,029,175
Salaries and wages 11,533,047 12,143,408
Operating expenses 19,327,540 13,362,768
Advertising and publicity 1,123,648 1,113,873
Equipment rental and other contractual services 1,190,606 1,018,791
Establishment 4,545,418 4,418,711
Depreciation and amortization 2,278,784 2,546,885
Loss on the sale of OTB site - 350,744
General and administrative 4,672,175 5,156,190
------------------------------------
Total operating expenses 58,235,737 53,140,545
------------------------------------
Income from operations 6,866,513 4,528,959
Other expense:
Interest (net) (1,675,116) (1,683,425)
------------------------------------
Income before income taxes 5,191,397 2,845,534
Income taxes:
Federal income taxes 1,559,500 930,358
State income taxes 348,457 845,168
Deferred income taxes (93,332) (321,000)
------------------------------------
1,814,625 1,454,526
------------------------------------
Net income $ 3,376,772 $ 1,391,008
====================================
See accompanying notes.
-4-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 1999 and 1998
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----------------------------------------------------------------
Balance at December 31, 1997
(Unaudited) $5,000 $11,193,748 $11,162,810 $22,361,558
Net income - - 1,391,008 1,391,008
----------------------------------------------------------------
Balance at December 31, 1998 5,000 11,193,748 12,553,818 23,752,566
Net income - - 3,376,772 3,376,772
----------------------------------------------------------------
Balance at December 31, 1999 $5,000 $11,193,748 $15,930,590 $27,129,338
================================================================
See accompanying notes.
-5-
Ladbroke Racing Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1999 1998
--------------------------------
Operating activities
Net income $ 3,376,772 $ 1,391,008
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,278,784 2,546,885
Loss on sale of OTB site - 350,744
Provision for deferred income taxes (93,332) (321,000)
Changes in operating assets and liabilities:
Accounts and other receivables (1,273,075) (294,445)
Inventories 37,342 36,528
Prepaid expenses and other current assets (15,951) 104,313
State income taxes receivable (17,544) 1,943
Accounts payable and accrued expenses 5,151,652 457,920
State income taxes payable 142,776 209,268
Due to affiliates 1,889,272 1,766,257
Outstanding pari-mutuel tickets payable (182,315) (45,687)
--------------------------------
Net cash provided by operating activities 11,294,381 6,203,734
Investing activities
Purchase of racetrack properties, net of disposals (660,046) (1,131,758)
Proceeds from sale of OTB site - 925,000
Increase in short-term investments (8,279) -
--------------------------------
Net cash used by investing activities (668,325) (206,758)
Financing activities
Increase in notes and accrued interest payable to affiliates 4,597,116 4,389,378
--------------------------------
Net cash provided by financing activities 4,597,116 4,389,378
--------------------------------
Increase in cash and cash equivalents and
equity in pooled cash and cash equivalents 15,223,172 10,386,354
Cash and cash equivalents and equity in pooled cash and
cash equivalents at beginning of year 59,519,766 49,133,412
--------------------------------
Cash and cash equivalents and equity in pooled cash and
cash equivalents at end of year $74,742,938 $59,519,766
================================
See accompanying notes.
-6-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1. Corporate Organization and Basis of Presentation
Ladbroke Racing Pennsylvania (LRP) and its wholly owned subsidiaries, Washington
Trotting Association, Inc. (WTA) and Mountain Laurel Racing, Inc. (MLR), are
engaged in racetrack and related operations involving harness racing events. LRP
(the Company) is a wholly owned subsidiary of Ladbroke Racing Corporation (LRC).
The ultimate parent corporation is Hilton Group PLC (formerly Ladbroke Group
PLC), a United Kingdom corporation. Also included in these financial statements
is Ladbroke Food Service (LFS), a wholly owned subsidiary of LRP, and Ladbroke
Racing Management Pennsylvania (LRMP), a partnership owned equally by WTA and
MLR which operates five off-track wagering locations in Western Pennsylvania.
WTA and MLR are licensed and regulated by the Commonwealth of Pennsylvania in
order to engage in racetrack and related operations involving harness racing
events. The nature of these operations is highly dependent on regulations and
statutes enacted by the Commonwealth of Pennsylvania.
2. Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of cash on hand and demand
deposits with a financial institution. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents include $2,535,761 and $1,427,995 at
December 31, 1999 and 1998, respectively, that represent cash deposits made by
the Company's customers for telephone wagering accounts. The liability for these
deposits is included in accounts payable and accrued expenses.
Short-Term Investments
Short-term investments are carried at cost (which approximates market). At
December 31, 1999, these investments have been pledged as collateral for purse
payments.
-7-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Goodwill
Goodwill, which represents the excess cost of the racing entities (WTA and MLR)
over the fair value of their assets and liabilities at the acquisition date, is
being amortized over forty years.
Racetrack Properties
Racetrack properties are stated on the basis of cost. Depreciation is computed
by the straight-line method over the useful lives of the assets. Useful lives
for buildings, leasehold improvements, and furniture, fixtures and equipment are
twenty-five years, twenty years and five to ten years, respectively.
Advertising Expense
The cost of advertising is expensed as incurred.
Income Taxes
The Company does not file a separate federal income tax return, but is included
in a consolidated federal income tax return filed by its United States parent
(Ladbroke Hotels USA Corporation) and other affiliated companies.
Under a tax allocation agreement dated December 23, 1999 with Hilton
International Company (HIC), the Company records no federal income tax
provisions and resulting liabilities. All federal income tax liabilities are
borne by HIC, commencing with the 1999 income tax year. The tax effect of net
operating loss carryforwards available for federal income tax purposes is
recognized to the extent the carryforwards are available and can be utilized by
HIC. For purposes of preparing these stand-alone financial statements, a federal
tax provision has been calculated and included in amounts due to affiliates.
Deferred income taxes relating to timing differences associated with the
recognition of certain income and expense items for income tax purposes are
recognized under this tax sharing arrangement. However, net deferred income tax
benefits are not recorded since realization cannot be assured.
Separate state income tax returns are filed for the Company and its
subsidiaries.
-8-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Equity in/Advances from Pooled Cash and Cash Equivalents
The Company participates in a pooled cash and cash equivalents management system
sponsored by its ultimate United States parent, Ladstock Holding Corporation
(Ladstock). Monies included in the pool represent deposits and withdrawals made
by the Company, Ladstock, and other United States affiliates. Cash and cash
equivalents are allocated to the Company based on the bank's tracking of each
subsidiary's activity. The balance at year-end represents the Company's
allocated equity in or allocated advances from this pool less outstanding
checks.
The Company earns interest income or incurs interest expense based on its net
daily position in the pool. The Company was allocated $2,923,647 and $2,953,935
of net interest income in 1999 and 1998, respectively, relating to the pool.
4. Related Parties
LRC allocates corporate overhead expenses to its subsidiaries on a pro rata
basis. Costs allocated to the Company were $2,684,494 and $1,978,584 for the
years ended December 31, 1999 and 1998, respectively.
Amounts due to affiliates represent primarily amounts payable to LRC. Interest
(net) includes $325,156 in 1999 and $247,980 in 1998 relating to intercompany
balances with LRC.
5. Long-Term Liabilities
The notes payable to affiliates are payable to Ladstock ($24,019,885) and LRC
($25,930,941) and bear interest at the LIBOR rate plus 1% and the LIBOR rate
plus 5%, respectively. The note due to Ladstock matures on December 31, 2000,
and the note payable to LRC matures on December 31, 2006. Interest expense
includes $4,597,117 and $4,389,399 relating to these notes payable for the years
ended December 31, 1999 and 1998, respectively. There were no interest payments
in 1999 or 1998, and such amounts have been added to the notes payable balance.
-9-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Lease Commitments
The Company leases space for its off-track betting facilities under long-term
noncancelable leases with initial lease terms of ten years. Several leases
include options to extend the initial lease term by five or ten years.
Additional amounts are payable based on provisions for contingent rentals based
upon operating expenses and gross sales. These additional payments are charged
to operations as rental expense in the year incurred. Rent expense relating to
these properties for the years ended December 31, 1999 and 1998 was
approximately $896,000 and $900,000, respectively. Minimum future rental
payments relating to these leases are as follows:
2000 $525,073
2001 245,237
2002 57,488
--------
$827,798
========
7. Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement No.
109, "Accounting for Income Taxes," which established financial accounting and
reporting standards for the effects of income taxes. The Company has elected not
to adopt Statement No. 109. While a provision for income taxes has not been
determined in accordance with the pronouncement, management believes that the
effect of not adopting Statement No. 109 is not material to the Company's
financial position, results of operations or related financial statement
disclosures.
The state income tax provisions relate to the separate state income tax
liabilities of the Company and its subsidiaries. Differences between taxable
income for financial reporting and income tax purposes relate to permanent
differences consisting principally of goodwill amortization and timing
differences consisting primarily of depreciation expense. The Company's 1998
state taxable income was reduced by approximately $117,000 due to the
utilization of available net operating loss carryforwards.
The components of income tax expense are as follows:
1999 1998
--------------------------
Current $1,907,957 $1,775,526
Deferred (93,332) (321,000)
--------------------------
Total 1,814,625 $1,454,526
==========================
-10-
Ladbroke Racing Pennsylvania and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Income taxes paid during 1999 and 1998 amounted to approximately $735,000 and
$740,000, respectively.
8. Retirement Plans
The Company participates in multiemployer defined benefit and contribution plans
for substantially all union employees. Expenses under these plans are based on
stipulated rates per employee and totaled approximately $248,000 and $266,000
for the years ended December 31, 1999 and 1998, respectively. Accumulated plan
benefit information for the multiemployer plans is not readily available.
The Company also participates in a 401(k) retirement savings plan for salaried
and certain hourly employees sponsored by LRC. Company contributions are made
based on a percentage of employees' contributions up to a specified maximum.
Costs charged to operations were approximately $105,000 in 1999 and $108,000 in
1998.
9. Significant Event
In 1999, Hilton Group PLC announced its intention to divest its international
betting and gaming businesses, including those involved in the ownership of the
Company and its subsidiaries' operations. The accompanying financial statements
do not reflect any adjustments relating to the asset-carrying amounts should a
final agreement be reached.
10. Impact of Year 2000 (Unaudited)
The Company completed its Year 2000 readiness plan and experienced no
significant operational problems and did not have to activate any contingency
plan. The Company has determined it does not have continued exposure to the Year
2000 issue.
-11-
Sport Broadcasting, Inc.
Years ended December 31, 2000, 1999 and 1998
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Sport Broadcasting, Inc.
We have audited the accompanying balance sheets of Sport Broadcasting, Inc. as
at December 31, 2000, 1999 and 1998 and the related statements of operations and
deficit and cash flows for the periods then ended. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as, evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Sport Broadcasting, Inc. as at
December 31, 2000, 1999 and 1998 and the results of its operations and cash
flows for the periods then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Mississauga, Canada,
June 14, 2001. Chartered Accountants
Sport Broadcasting, Inc.
Statement of Operations and Deficit
For the year For the year For the period
ended ended ended
December 31, December 31, December 31,
2000 1999 1998
Loss in equity
accounted investment (2,018,994) (1,596,747) (109,904)
------------------------------------------------------
Net loss (2,018,994) (1,596,747) (109,904)
Deficit, Beginning of Year (1,706,651) (109,904) -
------------------------------------------------------
Deficit, End of Year (3,725,645) (1,706,651) (109,904)
======================================================
Sport Broadcasting, Inc.
Statement of Operations and Deficit
For the year For the year For the period
ended ended ended
December 31, December 31, December 31,
2000 1999 1998
Loss in equity
accounted investment (2,018,994) (1,596,747) (109,904)
------------------------------------------------------
Net loss (2,018,994) (1,596,747) (109,904)
Deficit, Beginning of Year (1,706,651) (109,904) -
------------------------------------------------------
Deficit, End of Year (3,725,645) (1,706,651) (109,904)
======================================================
Sport Broadcasting, Inc.
Statement of Cash Flows
For the year For the year For the period
ended ended ended
December 31, December 31, December 31,
2000 1999 1998
Cash flows from operating activities:
Net loss (2,018,994) (1,596,747) (109,904)
Loss from equity investment 2,018,994 1,596,747 109,904
----------------------------------------------------------
- - -
----------------------------------------------------------
Cash flows from investing activities:
Investment in The Racing Network (note 2) (1,372,500) (650,000) (2,500,000)
----------------------------------------------------------
(1,372,500) (650,000) (2,500,000)
----------------------------------------------------------
Cash flows from financing activities:
Capital contributions (note 3(b)) 1,372,500 650,000 2,500,000
Issuance of capital stock - - 1
----------------------------------------------------------
1,372,500 650,000 2,500,001
----------------------------------------------------------
Change in cash - - 1
Cash, Beginning of year 1 1 -
----------------------------------------------------------
Cash, End of year 1 1 1
==========================================================
Sport Broadcasting, Inc.
Notes to Financial Statements
December 31, 2000, 1999 and 1998
1. Description of business and significant accounting policies
Sport Broadcasting, Inc. (the "Company") is a Delaware Corporation formed in
1998 to acquire an interest in The Racing Network, LLC ("The Racing Network"), a
limited liability company formed under the Delaware Limited Liability Company
Act. On November 30, 1998, the Company entered into an agreement to acquire a
17.5% membership interest in The Racing Network. The Racing Network was
incorporated to acquire, develop, own and operate a network for delivery of
televised sporting events, primarily horse racing, by video signal to subscriber
homes and offices throughout North America, using satellite technology.
Investment
The Company accounts for its investment in The Racing Network over which it has
significant influence, on the equity basis of accounting, whereby the investment
is initially recorded at cost, adjusted to recognize the Company's share of
earnings or losses of the investee company and reduced by any dividends
received.
2. Investment
The Company holds an 18.3% interest (1999: 18.3%, 1998: 17.5%) in The Racing
Network.
The following is a summary of the major components of the financial statements
of The Racing Network:
2000 1999 1998
$ $ $
Balance Sheets
Current assets 1,313,597 4,981,057 7,660,549
Long-term assets 4,455,224 5,259,796 1,041,405
Current liabilities 1,455,700 1,056,492 434,029
Long-term liabilities 4,133,952 4,725,000 -
Statements of Operations
Revenues 2,532,269 288,495 -
Expenses 12,879,574 9,309,989 637,232
-------------------------------------------
Loss from operations (10,347,305) (9,021,494) (637,232)
Other income (expense) (685,447) 1,154 9,212
-------------------------------------------
Net loss (11,032,752) (9,020,340) (628,020)
===========================================
The Racing Network has incurred substantial losses since inception and such
losses are expected to continue through 2001. In addition, the revenues have not
been sufficient to cover the expenses. These factors raise substantial doubt
about The Racing Network's ability to continue as a going concern. Management is
working on a reformulated business plan and is analyzing the operating structure
in efforts to expand and grow the revenue base and reduce operating expenses.
The above financial information does not reflect any adjustments that might be
necessary if The Racing Network is unable to continue as a going concern.
3. Capital Stock
(a) Common stock
2000 1999 1998
Authorized $ $ $
Unlimited number of common shares, par value of $0.01 per share
Issued
100 shares (1999: 100, 1998: 100) 1 1 1
==========================
(b) Contributed Surplus
During the year ended December 31, 2000, the Company received capital
contributions of $1,372,500 (1999: $650,000, 1998: $2,500,000) which were
utilized to fund investment acquisitions.
4. Income Taxes
The Company has approximately $3.5 million (1999: $1.4 million, 1998: $nil) of
losses available to reduce future income taxes. No benefit from these loss
carryforwards have been reflected in these financial statements.
ITEM 7. Financial Statements and Exhibits
(b) Pro forma financial information
Magna Entertainment Corp.
Pro Forma Consolidated Balance Sheet
As at December 31, 2000
(Unaudited)
(U.S. dollars in thousands)
Magna Ladbroke Ladbroke Ladbroke
Entertainment Acquisition Consolidation
Corp. Adjustments
(note 2(b)(ii) (note 2(b)(iii) (note 2(b)(v))
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents 31,976 15,561 (26,500) (1,953)
Restricted cash 13,461 241
Accounts receivable 33,399 5,199
Prepaid expenses and other 7,984 567
- -----------------------------------------------------------------------------------------------------------------------
86,820 21,568 (26,500) (1,953)
- -----------------------------------------------------------------------------------------------------------------------
Real estate properties, net 539,629 15,465
Fixed assets, net 28,636 2,493 (367)
Other assets, net 117,561 6,685 22,973
Future tax assets 8,393
- -----------------------------------------------------------------------------------------------------------------------
781,039 46,211 (3,894) (1,953)
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank indebtedness 7,609
Accounts payable 37,400 10,700
Accrued salaries and wages 7,614
Refundable deposits 2,033
Other accrued liabilities 14,140 1,600
Income taxes payable 1,111 387
Due to affiliate, net 1,953 (1,953)
Long-term debt due within one year 12,754 6,625
Deferred revenue 3,660 705
- -----------------------------------------------------------------------------------------------------------------------
86,321 13,745 8,225 (1,953)
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt 63,343 6,625
- -----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 234
- -----------------------------------------------------------------------------------------------------------------------
Future tax liabilities 89,353 472
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Class A Subordinate Voting Stock 100,770 13,250
Exchangeable Shares 57,937
Class B Stock 394,094
Contributed Surplus 1,352 11,199 (11,199)
Accumulated (deficit) retained earnings (1,990) 20,795 (20,795)
Accumulated comprehensive deficit (10,375)
- -----------------------------------------------------------------------------------------------------------------------
541,788 31,994 (18,744)
- -----------------------------------------------------------------------------------------------------------------------
781,039 46,211 (3,894) (1,953)
=======================================================================================================================
Sport Sport Pro Forma
Broadcasting Inc. Broadcasting Inc. Consolidated
Adjustments Balance
(note 2(c)(ii)) (note 2(c)(iii)) Sheet
- ------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents 19,084
Restricted cash 13,702
Accounts receivable 38,598
Prepaid expenses and other 8,551
- ------------------------------------------------------------------------------------------------------------
79,935
- ------------------------------------------------------------------------------------------------------------
Real estate properties, net 555,094
Fixed assets, net 30,762
Other assets, net 797 (797) 147,215
Future tax assets 8,393
- ------------------------------------------------------------------------------------------------------------
797 (797) 821,403
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank indebtedness 7,609
Accounts payable 48,100
Accrued salaries and wages 7,614
Refundable deposits 2,033
Other accrued liabilities 15,740
Income taxes payable 1,498
Due to affiliate, net 0
Long-term debt due within one year 19,379
Deferred revenue 4,365
- ------------------------------------------------------------------------------------------------------------
106,338
- ------------------------------------------------------------------------------------------------------------
Long-term debt 69,968
- ------------------------------------------------------------------------------------------------------------
Other long-term liabilities 234
- ------------------------------------------------------------------------------------------------------------
Future tax liabilities 89,825
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity
Class A Subordinate Voting Stock 114,020
Exchangeable Shares 57,937
Class B Stock 394,094
Contributed Surplus 4,523 (4,523) 1,352
Accumulated (deficit) retained earnings (3,726) 3,726 (1,990)
Accumulated comprehensive loss (10,375)
- ------------------------------------------------------------------------------------------------------------
797 (797) 555,038
- ------------------------------------------------------------------------------------------------------------
797 (797) 821,403
============================================================================================================
6
Magna Entertainment Corp.
Pro Forma Consolidated Statement of Operations and Comprehensive Loss
For the year ended December 31, 2000
(Unaudited)
(U.S. dollars in thousands, except per share information)
BMOC and
Magna BMOC and BMC Ladbroke Ladbroke Sport Sport
Entertainment BMC Companies Adjustments Broadcasting, Broadcasting,
Corp. Companies Adjustments Inc. Inc. Adjust-
(note 2 (note 2 (note 2 (note 2 (note 2 ments (note 2
(a)(i) (a)(ii) (b)(i)) (b)(iv) (c)(i)) (c)(iii))
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue
Racetrack
Gross wagering 301,288 19,184 34,352 64,282 8,870
Non-wagering 53,961 10,656 6,353
Real Estate
Sale of real estate 37,630
Rental and other 20,684
Other
- -----------------------------------------------------------------------------------------------------------------------------------
413,563 29,840 34,352 70,635 8,870
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Racetrack
Purses, awards and other 190,043 34,352 14,244 7,249
Operating costs 128,612 17,414 880 41,621
General and administrative 18,117 2,385 4,492
Real Estate
Real estate sold 30,656
Operating costs 18,928
General and administrative 1,133
Depreciation and amortization 20,061 985 313 2,221 998
Predevelopment and other costs (income) 4,245 (174) 1,730 2,019 (646)
Interest expense 3,263 3,085 795
Interest income (3,048) (4,959)
- ------------------------------------------------------------------------------------------------------------------------------------
412,010 20,610 35,545 62,434 9,042 2,019 (646)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,553 9,230 (1,193) 8,201 (172) (2,019) 646
Income tax provision (benefit) 1,112 3,215 3,337 390 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 441 9,230 (4,408) 4,864 (562) (2,019) 646
Other comprehensive loss
Foreign currency translation adjustment (8,938)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) (8,497) 9,230 (4,408) 4,864 (562) (2,019) 646
====================================================================================================================================
Income per share for the Class A
Subordinate Voting Stock, Class B Stock or
Exchangeable Shares:
Basic $ 0.01
Diluted $ 0.01
====================================================================================================================================
Average number of shares of Class A
Subordinate Voting Stock, Class B Stock and
Exchangeable Shares outstanding during the
period (in thousands):
Basic 80,422 3,178
Diluted 80,424 3,178
====================================================================================================================================
Pro Forma
Consolidated
Total
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue
Racetrack
Gross wagering 427,976
Non-wagering 70,970
Real Estate
Sale of real estate 37,630
Rental and other 20,684
Other 0
- ----------------------------------------------------------------------------------------------------------------------------------
557,260
- ----------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Racetrack
Purses, awards and other 245,888
Operating costs 188,527
General and administrative 24,994
Real Estate
Real estate sold 30,656
Operating costs 18,928
General and administrative 1,133
Depreciation and amortization 24,578
Predevelopment and other costs (income) 7,174
Interest expense 7,143
Interest income (8,007)
- ----------------------------------------------------------------------------------------------------------------------------------
541,014
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 16,246
Income tax provision (benefit) 8,054
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 8,192
Other comprehensive loss
Foreign currency translation adjustment (8,938)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) (746)
==================================================================================================================================
Income per share for the Class A
Subordinate Voting Stock, Class B Stock or
Exchangeable Shares:
Basic $ 0.10
Diluted $ 0.10
==================================================================================================================================
Average number of shares of Class A
Subordinate Voting Stock, Class B Stock and
Exchangeable Shares outstanding during the
period (in thousands):
Basic 83,600
Diluted 83,602
=================================================================================================================================
7
MAGNA ENTERTAINMENT CORP.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
(a) Pro Forma Consolidated Balance Sheet
The pro forma consolidated balance sheet as at December 31, 2000 has been
prepared from:
(i) the audited consolidated balance sheet of Magna Entertainment Corp.
(the "Company") as at December 31, 2000;
(ii) the audited consolidated balance sheet of Ladbroke Racing
Pennyslvania and Subsidiaries ("Ladbroke") as at December 31, 2000;
and
(iii) the audited balance sheet of Sport Broadcasting, Inc. ("SBI") as at
December 31, 2000.
(b) Pro Forma Consolidated Statement of Operations and Comprehensive Loss
The pro forma consolidated statement of operations and comprehensive loss
for the year ended December 31, 2000 has been prepared from:
(i) the audited consolidated statement of operations and comprehensive
loss of the Company for the year ended December 31, 2000;
(ii) the audited combined statement of income of Bay Meadows Operating
Company, LLC ("BMOC") and Bay Meadows Catering ("BMC") (collectively
"Bay Meadows") for the period from January 1, 2000 to November 17,
2000, the date of acquisition;
(iii) the audited consolidated statement of operations of Ladbroke for the
year ended December 31, 2000; and
(iv) the audited statement of operations of SBI for the year ended
December 31, 2000.
These pro forma consolidated financial statements should be read in conjunction
with the historical financial statements of Ladbroke and SBI, including the
related notes thereto, presented elsewhere herein, as well as the historical
financial statements of the Company BMOC and BMC including the related notes
thereto, previously filed with the Securities and Exchange Commission.
These pro forma consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
("US GAAP").
These pro forma consolidated financial statements are not necessarily indicative
of the financial position or results of operations that would have resulted had
the relevant transactions taken place at the respective dates referred to below.
2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
These pro forma consolidated financial statements have been presented assuming
that the acquisitions described below had been completed as of January 1, 2000
for the pro forma consolidated statement of operations and comprehensive loss
and as of December 31, 2000 for the pro forma consolidated balance sheet. The
pro forma consolidated financial statements give effect to the following items:
(a) Bay Meadows
On November 17, 2000, the Company acquired all the membership interests in BMOC
and all of the capital stock in BMC for a purchase price, including estimated
transaction costs, of $24,100,000 paid in cash.
(i) The pro forma consolidated statement of operations and comprehensive
loss for the year ended December 31, 2000 include the results of
operations of BMOC and BMC for the period from January 1, 2000 to
November 17, 2000, the date of acquisition.
(ii) The pro forma consolidated statement of operations and comprehensive
loss for the year ended December 31, 2000 include adjustments that
arise as a result of the acquisition of Bay Meadows and the
application of purchase accounting. The adjustments to the results of
BMOC and BMC included in the pro forma consolidated statements of
operations and comprehensive loss for the year ended December 31,
2000 are:
- The impact of the application of purchase accounting to the Bay
Meadows transaction on November 17, 2000, results in an increase
of other assets (racing licence) of $17,458,000 and an increase
of goodwill of $749,000. As a result, additional depreciation and
amortization expense of $800,000 is required to amortize the
increase in the book value of the racing licence and goodwill,
each over 20 years.
- Prior to the acquisition by the Company, Bay Meadows distributed
$5,653,000 of racetrack property improvements and equipment to
their parent company. As such, an adjustment to decrease
depreciation and amortization expense of $487,000 is required as
a result of racetrack property improvements and equipment not
acquired.
- Under a prepaid lease agreement entered into between the Company
and the owner of the racetrack land and facilities, an adjustment
is required to increase the rent paid in 2000 by $880,000.
- The BMOC statement of operations present gross wagering revenues
net of purses, awards and other expenses. For the year ended
December 31, 2000, purses, awards and other expenses were
$34,352,000. An adjustment has been made to increase both gross
wagering revenues and purses, awards and other expenses by
$34,352,000.
- An additional tax expense of $3,215,000 is required as a result
of the above noted adjustments and the taxation of the BMOC
results in the Company, effected at a combined federal and state
tax rate of 40%.
(b) Ladbroke
On April 5, 2001, the Company completed an agreement with Ladbroke Racing Corp.
and its wholly owned subsidiary, Ladbroke Racing Wyoming, Inc. (collectively
"LRC") to acquire LRC's account wagering operations, The Meadows harness track,
four off-track betting facilities (collectively "Ladbroke Racing Pennsylvania
and Subsidiaries" or "Ladbroke") and Sport Broadcasting, Inc. as further
discussed in note 2(c). The purchase price, excluding estimated transaction
costs of $1,000,000, was $53,000,000 of which $26,500,000 was paid in cash,
$13,250,000 was paid through the issuance of shares of the Company and
$13,250,000 was paid through the issuance of promissory notes bearing interest
at 6% per annum, $6,625,000 of which matures on the first anniversary of the
date of closing and $6,625,000 of which matures on the second anniversary of the
date of closing.
(i) The pro forma consolidated statement of operations and comprehensive
loss for the year ended December 31, 2000 includes the results of
Ladbroke for the same period.
(ii) The pro forma consolidated balance sheet as at December 31, 2000
includes the financial position of Ladbroke as at the same date.
(iii) The pro forma consolidated balance sheet as at December 31, 2000
includes an adjustment to record the application of purchase
accounting to the December 31, 2000 consolidated balance sheet. The
impact of applying purchase accounting is to increase
goodwill by $22,973,000, share capital by $13,250,000, long term debt
by $13,250,000, other accrued liabilities by $1,600,000 and decrease
fixed assets by $367,000 and cash by $26,500,000. The contributed
surplus and accumulated retained earnings of $11,199,000 and
$20,795,000, respectively, are eliminated.
(iv) The pro forma consolidated statement of operations and comprehensive
loss for the year ended December 31, 2000 include adjustments that
arise as a result of the Ladbroke acquisition and the application of
purchase accounting. The adjustments to the results of operations of
Ladbroke included in the pro forma consolidated statement of
operations and comprehensive loss for the year ended December 31,
2000 are:
- The Ladbroke statement of operations present gross wagering
revenues net of pari-mutuel taxes. For the year ended December
31, 2000, these taxes were $7,249,000. An adjustment has been
made to increase both gross wagering revenues and purses, awards
and other expenses by $7,249,000.
- Additional amortization expense of $1,149,000 as a result of the
increase in goodwill, based on the purchase price allocation, and
accounting policy to amortize the goodwill over a 20 year period.
- The State of Pennsylvania has granted the Company a reduction in
pari-mutuel taxes of 0.5% for a period of three years. This
reduction has been calculated based on handle for the year ended
December 31, 2000 of $324,135,000. As such, the tax reduction
would increase gross wagering revenues by $1,621,000.
- On acquisition, the Company issued promissory notes of
$13,250,000 which bear interest at 6% per annum. Accordingly,
there would be an increase in interest expense by $795,000.
- Ladbroke had previously amortized buildings over a 25 year
period. The Company's accounting policy is to amortize these
assets over a 40 year period. Accordingly, depreciation and
amortization expense has been reduced by $151,000 to reflect the
longer depreciation period.
- An increase in income tax expense of $390,000 is required as a
result of the above noted adjustments, effected at a combined
federal and state tax rate of 40%.
(v) In connection with the acquisition the amount due to an affiliate
within Ladbroke of $1,953,000 was settled through cash and cash
equivalents.
(c) Sport Broadcasting, Inc.
(i) The pro forma statement of operations and comprehensive loss for the
year ended December 31, 2000 includes the results of SBI for the same
period.
(ii) The pro forma balance sheet as at December 31, 2000 includes the
financial position of SBI as at the same date.
(iii) The pro forma statement of operations and comprehensive loss includes
an adjustment to reduce the loss in SBI to only the contributions
made to SBI in 2000. Contributions during the year were $1,373,000.
Accordingly, the adjustment required is to reduce pre-development
and other costs by $646,000.
(iv) The pro forma balance sheet as at December 31, 2000 includes an
adjustment to eliminate SBI's other assets, contributed surplus and
the accumulated deficit of $797,000, $4,523,000 and $3,726,000,
respectively. This adjustment is required as a result of the
valuation of the SBI investment at nil in the purchase accounting to
reflect the estimated fair market value of this investment.
ITEM 7. Financial Statements and Exhibits
(c) Exhibits
Exhibit 2 Stock Purchase Agreement dated December 21, 2000 between Magna Previously filed
Entertainment Corp., Ladbroke Racing Wyoming, Inc.
and Ladbroke Racing Corporation, incorporated by
reference to Exhibit 2 to Item 7 of the Form 8-K filed by
Magna Entertainment Corp. dated April 12, 2001. (The
Exhibits to this Agreement, which are identified in the
list appearing at the end of the Table of Contents to the
Purchase Agreement, have been omitted but will be
furnished supplementally to the Commission upon request).
Exhibit 2.1 Amendment No. 1, effective as of the Closing Date, to the Previously filed
Stock Purchase Agreement dated December 21, 2000,
incorporated by reference to Exhibit 2.1 to Item 7 of the
Form 8-K filed by Magna Entertainment Corp. dated April
12, 2001.
Exhibit 2.2 Amending letter agreement dated March 28, 2001, to the Previously filed
Stock Purchase Agreement dated December 21, 2000,
incorporated by reference to Exhibit 2.2 to Item 7 of the
Form 8-K filed by Magna Entertainment Corp. dated April
12, 2001.
Exhibit 23 Consent of Ernst & Young LLP for Ladbroke Racing Pennsylvania 41
and Subsidiaries
Exhibit 23.1 Consent of Ernst & Young LLP for Sport Broadcasting, Inc. 42
Exhibit 23.2 Consent of Ernst & Young LLP for Bay Meadows Operating
Company, LLC and Bay Measows Catering 43
Exhibit 99 Registrant's press release dated April 6, 2001 Previously filed
incorporated by reference to Exhibit 99.1 to Item 7 of
the Form 8-K filed by Magna Entertainment Corp. dated
April 12, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MAGNA ENTERTAINMENT CORP.
(Registrant)
Date: June 19, 2001 by: /s/ Gary M. Cohn
-----------------------------
Gary M. Cohn, Secretary
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