SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2002
Commission File Number: 000-30578
MAGNA ENTERTAINMENT CORP.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 98-0208374
- ------------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
337 Magna Drive, Aurora, Ontario L4G 7K1
- -------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(905) 726-2462
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
The Registrant had 46,683,884 shares of Class A Subordinate Voting Stock
outstanding as of April 30, 2002. In addition, as of April 30, 2002, 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 1,952,151
Exchangeable Shares remain unexchanged.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
MAGNA ENTERTAINMENT CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(Unaudited)
(U.S. dollars in thousands, except per share figures)
Three months
ended
------------------
March March
31, 31,
2002 2001
-------- --------
Revenues
Racetrack
Gross wagering........................................... $220,353 $192,326
Non-wagering............................................. 23,675 22,589
-------- --------
244,028 214,915
-------- --------
Real estate
Sale of real estate...................................... 637 26,151
Rental and other......................................... 4,134 3,460
-------- --------
4,771 29,611
-------- --------
248,799 244,526
-------- --------
Costs and expenses
Racetrack
Purses, awards and other................................. 140,523 122,232
Operating costs.......................................... 55,344 50,976
General and administrative............................... 10,633 7,962
-------- --------
206,500 181,170
-------- --------
Real estate
Cost of real estate sold................................. 287 14,093
Operating costs.......................................... 2,924 2,688
General and administrative............................... 501 245
-------- --------
3,712 17,026
-------- --------
Predevelopment and other costs............................ 1,541 1,708
Depreciation and amortization............................. 5,326 5,354
Interest expense, net..................................... 67 1,400
-------- --------
217,146 206,658
-------- --------
Income before income taxes ............................... 31,653 37,868
Income taxes.............................................. 13,038 15,400
-------- --------
Net income................................................ 18,615 22,468
Other comprehensive loss..................................
Foreign currency translation adjustment.................. (659) (8,854)
-------- --------
Comprehensive income...................................... $ 17,956 $ 13,614
======== ========
Earnings per share of Class A Subordinate Voting Stock,
Class B Stock or Exchangeable Share:.....................
Basic.................................................... $ 0.22 $ 0.28
Diluted.................................................. $ 0.22 $ 0.28
======== ========
Average number of shares of Class A Subordinate Voting
Stock, Class B Stock and Exchangeable Shares outstanding
during the period [in thousands]:
Basic.................................................... 84,089 80,472
Diluted.................................................. 85,546 80,472
======== ========
2
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
Three months ended
--------------------
March 31, March 31,
2002 2001
--------- ---------
Cash provided from (used for):
OPERATING ACTIVITIES
Net income................................................. $ 18,615 $22,468
Items not involving current cash flows..................... 5,470 (9,507)
-------- -------
Changes in non-cash items related to operations............ 24,085 12,961
(3,136) 8,714
-------- -------
20,949 21,675
-------- -------
INVESTMENT ACTIVITIES
Real estate property and fixed asset additions............. (13,598) (4,204)
Other asset additions...................................... (1,109) (125)
Proceeds on sale of real estate............................ 1,198 6,778
-------- -------
(13,509) 2,449
-------- -------
FINANCING ACTIVITIES
Decrease in bank indebtedness.............................. -- (7,609)
(Repayment of) increase in long-term debt, net............. (981) 9,876
Issuance of share capital.................................. 251 40
-------- -------
(730) 2,307
-------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (67) (878)
-------- -------
Net increase in cash and cash equivalents during the
period.................................................... 6,643 25,553
Cash and cash equivalents, beginning of period............. 39,212 31,976
-------- -------
Cash and cash equivalents, end of period................... $ 45,855 $57,529
======== =======
3
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in thousands)
March December 31,
ASSETS 31, 2002 2001
------ -------- ------------
Current assets:
Cash and cash equivalents................................ $ 45,855 $ 39,212
Restricted cash.......................................... 26,330 18,782
Accounts receivable...................................... 54,076 33,101
Prepaid expenses and other............................... 5,566 5,162
-------- --------
131,827 96,257
-------- --------
Real estate properties and fixed assets, net.............. 581,357 574,677
-------- --------
Other assets, net......................................... 180,725 179,665
-------- --------
Future tax assets......................................... 4,123 3,657
-------- --------
$898,032 $854,256
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and other liabilities..................... $ 92,036 $ 78,337
Income taxes payable....................................... 12,672 1,312
Long-term debt due within one year......................... 18,167 18,133
-------- --------
122,875 97,782
-------- --------
Long-term debt.............................................. 66,653 67,768
-------- --------
Other long-term liabilities................................. 3,305 2,576
-------- --------
Future tax liabilities...................................... 119,138 118,276
-------- --------
Shareholders' equity:
Capital stock issued and outstanding -
Class A Subordinate Voting Stock........................... 159,977 157,633
Exchangeable Shares........................................ 14,707 16,800
Class B Stock.............................................. 394,094 394,094
Contributed surplus......................................... 7,290 7,290
Retained earnings........................................... 30,089 11,474
Accumulated comprehensive loss.............................. (20,096) (19,437)
-------- --------
586,061 567,854
-------- --------
$898,032 $854,256
======== ========
4
MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP") 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 U.S. GAAP for
complete financial statements. The preparation of the consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from estimates.
In the opinion of management, all adjustments, which consist of normal and
recurring adjustments, necessary for fair presentation have been included.
Operating results for the three month period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001.
The Company's racetrack business is seasonal in nature. The Company's
racetrack revenues and operating results for any quarter will not be
indicative of the revenues and operating results for the year. A
disproportionate share of annual revenues and net earnings are earned in the
first quarter of each year.
2.Accounting Change and Pro-Forma Impact
a)Accounting Change
Effective January 1, 2002, the Company implemented Financial Accounting
Standards Board Statement No. 142 ("SFAS 142") Goodwill and Other
Intangible Assets. SFAS 142 requires the application of the non-
amortization and impairment rules for existing goodwill and other
intangible assets that meet the criteria for indefinite life beginning
January 1, 2002. The Company completed the required initial impairment
test during the three months ended March 31, 2002 and determined that
the value of its racing licenses was not impaired. As at March 31, 2002,
racing licenses with a net book value of $171.3 million are included in
Other Assets on the balance sheet.
b)Acquisitions
On April 5, 2001, the Company completed the acquisition of Ladbroke
Racing Pennsylvania, Inc. and Sport Broadcasting, Inc. On October 26,
2001, the Company acquired all the outstanding capital stock of
MKC Acquisition Co., operating as Multnomah Greyhound Park. Both of
these acquisitions are fully disclosed in the Company's consolidated
financial statements for the year ended December 31, 2001. As a result
of these acquisitions being completed subsequent to March 31, 2001,
their results of operations are not included in the Company's results
for the three months ended March 31, 2001.
5
c)Impact of Accounting Change and Acquisitions
The pro-forma impact of the implementation of SFAS 142 and our acquisitions
is as follows:
Three months
ended March 31,
-----------------
Revenues 2002 2001
-------- --------
Revenues as reported...................................... $248,799 244,526
Restatement for acquisitions.............................. - 20,165
-------- --------
Pro-forma revenues........................................ $248,799 $264,691
======== ========
Pro-forma revenues excluding proceeds on the sale of real
estate................................................... $248,162 $238,540
======== ========
Three months
ended March 31,
---------------
Net Income 2002 2001
------- -------
Net income as reported..................................... $18,615 $22,468
Restatement for change in intangible assets amortization... -- 832
Restatement for acquisitions............................... - (987)
------- -------
Pro-forma net income....................................... $18,615 $22,313
======= =======
Pro-forma net income excluding gains on the sale of real
estate.................................................... $18,409 $15,163
======= =======
Three
months
ended March
31,
----------
Basic and Diluted Earnings per Share 2002 2001
----- ----
Basic and diluted earnings per share as reported............... $0.22 $0.28
Restatement for change in intangible assets amortization....... -- 0.01
Restatement for acquisitions................................... - (0.02)
----- -----
Pro-forma basic and diluted earnings per share................. $0.22 $0.27
===== =====
Pro-forma basic and diluted earnings per share excluding gains
on the sale of real estate.................................... $0.22 $0.18
===== =====
6
3.Capital Stock
Changes in Class A Subordinate Voting Stock, Exchangeable Shares and Class B
Stock for the three months ended March 31, 2002 are shown in the following
table (number of shares and stated value in the following table have been
rounded to the nearest thousand):
Class A Subordinate Exchangeable
Voting Stock Shares Class B Stock
--------------------- ----------------- ------------------
Number Stated Number Stated Number Stated
of Shares Value of Shares Value of Shares Value
--------------------- --------- ------- --------- --------
Issued and outstanding
at
December 31, 2001...... 23,324 $ 157,633 2,263 $16,800 58,466 $394,094
Issued under the Plan... 43 251 -- -- -- --
Conversion of
Exchangeable Shares to
Class A Subordinate
Voting Stock........... 282 2,093 (282) (2,093) -- --
-------- ---------- ----- ------- ------ --------
Issued and outstanding
at
March 31, 2002......... 23,649 $ 159,977 1,981 $14,707 58,466 $394,094
======== ========== ===== ======= ====== ========
The Company has a Long-term Incentive Plan (the "Plan") (adopted in 2000)
which allows for the grant of nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock, bonus stock and
performance shares to directors, officers, employees, consultants, independent
contractors and agents. A maximum of 7.9 million shares are available to be
issued under the Plan, of which 6.5 million are available for issuance
pursuant to stock options and tandem stock appreciation rights and 1.4 million
are available for issuance pursuant to any other type of award under the Plan.
During the three months ended March 31, 2002, 42,900 shares were issued under
the Plan.
The Company grants stock options to certain directors, officers, key employees
and consultants to purchase shares of the Company's Class A Subordinate Voting
Stock. All of such stock options give the grantee the right to purchase Class
A Subordinate Voting Stock of the Company at a price no less than the fair
market value of such stock at the date of grant. Generally, stock options
under the Plan vest over a period of two to six years from the date of grant
at rates of 1/7th to 1/3rd per year and expire on or before the tenth
anniversary of the date of grant, subject to earlier cancellation in the
events specified in the stock option agreements entered into by the Company
with each recipient of options.
During the three months ended March 31, 2002, 137,500 stock options were
granted, no stock options were exercised and 5,000 stock options were
cancelled. At March 31, 2002, there were 4,585,833 options outstanding with
the exercise price of the options ranging from $3.91 to $9.43 and an average
exercise price of $6.08.
There were 2,868,500 options exercisable at March 31, 2002 with an average
exercise price of $6.06.
7
4.Earnings Per Share
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share computations (in thousands except per
share amounts):
Three months ended
March 31,
-----------------------
2002 2001
------- -------
Net income............................................. $18,615 $22,468
======= =======
Basic &
Basic Diluted Diluted
------- ------- -------
Weighted Average Shares Outstanding:
Class A Subordinate Voting Stock...................... 23,478 24,935 14,234
Class B Stock......................................... 58,466 58,466 58,466
Exchangeable Shares................................... 2,145 2,145 7,772
------- ------ -------
84,089 85,546 80,472
------- ------ -------
Earnings Per Share..................................... $ 0.22 $ 0.22 $ 0.28
======= ====== =======
5.Commitments and Contingencies
a) The Company is currently considering a major redevelopment of its
Gulfstream Park racetrack in Florida (the "Gulfstream Park
Redevelopment"). Should it proceed as currently contemplated, the
Gulfstream Park Redevelopment would include a simulcast pavilion, a
sports and entertainment arena and a new turf club and grandstand. In
addition, there would be significant modifications and enhancements to
the racetracks and stable areas. If completed, the Gulfstream Park
Redevelopment would require the demolition of a substantial portion of
the current buildings and related structures, which include the
grandstand, turf club and annex. The aggregate carrying value at March
31, 2002 of the assets that would be demolished if the Gulfstream Park
Redevelopment is completed is approximately $23.0 million. If the
Company decides to proceed with the Gulfstream Park Redevelopment and
obtains the approval of its Board of Directors, a reduction in the
expected life of the existing assets would occur and a write-down would
be necessary.
b) On March 6, 2002, the Company entered into an agreement with Lone Star
Race Park, Ltd. and LSJC Development Corporation to acquire
substantially all the operations and related assets of Lone Star Park at
Grand Prairie, a Thoroughbred and American Quarter Horse racetrack
located near Dallas, Texas. The acquired assets include the rights under
a long-term lease of Lone Star Park and a related purchase option
exercisable at termination of the lease in 2027. The purchase price of
the acquisition will be satisfied by the payment of $80.0 million in
cash and the assumption of certain liabilities, including the Lone Star
Park capital lease obligation of approximately $19.0 million, subject to
usual adjustments at closing. The transaction is expected to close near
the end of the second quarter of 2002, subject to certain conditions,
including the receipt of regulatory approvals.
8
6.Segment Information
The Company's reportable segments reflect how the Company is organized and
managed by senior management. The Company has two operating segments:
racetrack and real estate operations. The racetrack segment includes the
operation of eight thoroughbred racetracks, one standardbred racetrack, one
greyhound track and one horse boarding and training center. In addition, the
racetrack segment includes off-track betting ("OTB") facilities and a national
account wagering business. The real estate segment includes the operation of
two golf courses and related facilities, a residential housing development
adjacent to our golf course located in Austria and other real estate holdings.
The accounting policies of each segment are the same as those described in the
"Significant Accounting Policies" section in the Company's annual report on
Form 10-K for the year ended December 31, 2001.
The following summary presents key information by operating segment (in
thousands):
Three months ended March 31,
2002
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
Revenues....................................... $244,028 $ 4,771 $248,799
======== ======= ========
Income before income taxes..................... $ 30,223 $ 1,430 $ 31,653
======== ======= ========
Real estate property and fixed asset additions. $ 10,350 $ 3,248 $ 13,598
======== ======= ========
Three months ended March 31,
2001
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
Revenues....................................... $214,915 $29,611 $244,526
======== ======= ========
Income before income taxes..................... $ 25,875 $11,993 $ 37,868
======== ======= ========
Real estate property and fixed asset additions. $ 920 $ 3,284 $ 4,204
======== ======= ========
7.Subsequent Events
a) On April 10, 2002, the Company completed a public offering of 20 million
shares of its Class A Subordinate Voting Stock, at a price to the public of
US$6.65 per share in the United States, or Cdn. $10.60 per share in Canada.
The underwriters for the offering also exercised their over-allotment
option, in full, by purchasing an additional 3 million shares of Class A
Subordinate Voting Stock at the offering prices. The total proceeds to the
Company from the offering, net of underwriters' commissions and issue
expenses, are approximately US$143.0 million.
b) On May 1, 2002, the Company entered into an agreement with respect to a
$75.0 million senior unsecured revolving credit facility. The credit
facility has a term of one year which may be extended with the consent of
both parties.
9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Position
The following discussion of our results of operations and financial position
should be read in conjunction with the unaudited consolidated financial
statements included in this report.
Overview
Magna Entertainment Corp. ("MEC") is the leading owner and operator of
thoroughbred racetracks in the United States, based on revenue, and a leading
supplier, via simulcasting, of live racing content to the growing inter-track,
off-track and account wagering markets. We currently operate eight
thoroughbred racetracks, one standardbred racetrack and one greyhound track,
as well as the simulcast wagering venues at these tracks. We have also
commenced development of a horse racetrack on property located approximately
15 miles south of Vienna, Austria. In addition, we operate off-track betting
("OTB") facilities and a national account wagering business known as
XpressBet(TM), which permits customers to place wagers by telephone and over the
Internet on horse races at up to 65 racetracks in North America. We also have
a one-third ownership interest in Racetrack Television Network, LLC, a new
venture formed to telecast races from our racetracks and other racetracks, via
satellite, to paying subscribers. To support certain of our horse racetracks,
we own a horse training center situated approximately 45 miles north of San
Diego, California, and we are currently developing a second horse training
center in Palm Beach County, Florida. We are also exploring the development of
real estate on the land surrounding certain of our racetracks. These real
estate projects could be pursued in conjunction with developers who would be
expected to provide the necessary financing. In addition to our racetracks, we
own a significant real estate portfolio which includes a golf course and
related recreational facilities and a gated residential community under
development in Austria, a golf course in Aurora, Ontario and other real estate
in the United States, Canada and Austria. While we are exploring the
development of some of our real estate, we intend to continue to sell our non-
core real estate in order to generate additional capital to grow and enhance
our racing business.
Seasonality
As a result of the seasonal nature of our racetrack business, our racetrack
revenues and operating results for any quarter will not be indicative of the
revenues and operating results for the year. Because four of our largest
racetracks, Santa Anita Park, Gulfstream Park, Bay Meadows and Golden Gate
Fields, run live race meets principally during the first half of the year, our
racing operations have historically operated at a loss in the second half of
the year, with our third quarter generating the largest loss. This seasonality
has resulted in large quarterly fluctuations in revenue and operating results.
We expect the seasonality of our business to gradually diminish as our
acqusition and account wagering initiatives evolve.
Three months ended March 31, 2002 compared to three months ended March 31,
2001
Racetrack operations
In the three months ended March 31, 2002, we operated three of our largest
racetracks for an additional 9 live race days compared to the prior year
period. The overall increase in live race days at our largest racetracks is
attributable to the increase in awarded race days at Gulfstream Park. This was
partially offset by one less live race day at each of Santa Anita Park and
Golden Gate Fields due to the timing of their race meets. Our other racetracks
operated an additional 50 live race days in the three month period ended March
31, 2002, compared to the prior year period, primarily due to the acquisition
of The Meadows in April 2001 and the lease of Portland Meadows in July 2001,
partially offset by a decrease in live race days at Remington Park as a result
of our desired change from three race meets in 2001 to two race meets in 2002
and the shift of live race days from the first quarter to the fourth quarter
in 2002. The following is a schedule of our actual live race days by racetrack
for the first quarter and awarded live race days for the remaining quarters in
2002 with comparatives for 2001.
10
LIVE RACE DAYS
Awarded Awarded Awarded
Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Total Total
Largest Racetracks 2002 2001 2002 2001 2002 2001 2002 2001 2002/(1)/ 2001
- ------------------ ---- ---- ---- ---- ---- ---- ------- ---- --------- -----
Santa Anita Park/(2)/... 65 66 15 12 -- -- 4 5 84 83
Golden Gate Fields...... 65 66 -- 1 -- -- 39 36 104 103
Bay Meadows............. -- -- 55 56 23 24 26 27 104 107
Gulfstream Park......... 74 63 16 -- -- -- -- -- 90 63
--- --- --- --- --- --- --- --- ----- ---
204 195 86 69 23 24 69 68 382 356
--- --- --- --- --- --- --- --- ----- ---
Other Racetracks
Thistledown............. 2 -- 65 61 61 65 59 61 187 187
Remington Park.......... 1 22 33 37 31 27 48 32 113 118
Great Lakes Downs....... -- -- 37 39 62 65 19 23 118 127
The Meadows............. 51 N/A 62 56 61 64 50 50 224 170
Portland Meadows/(3)/... 18 N/A -- N/A -- -- 27 28 45 28
--- --- --- --- --- --- --- --- ----- ---
72 22 197 193 215 221 203 194 687 630
--- --- --- --- --- --- --- --- ----- ---
TOTAL................... 276 217 283 262 238 245 272 262 1,069 986
=== === === === === === === === ===== ===
- -------
(1) Includes actual live race days for the three months ended March 31, 2002
and awarded live race days for the nine months commencing April 1, 2002
and ending December 31, 2002.
(2) Excludes The Oak Tree Meet, which is hosted by the Oak Tree Racing
Association at Santa Anita Park.
(3) The live race meet at Portland Meadows concluded early, on February 10,
2002, as a result of a dispute with the United States Environmental
Protection Agency ("EPA"). This resulted in 21 less live race days than
were awarded in Q1 2002. In addition, Portland Meadows will not operate
live racing in Q2 2002 where we were awarded 13 live race days. We have
recently constructed a storm water retention system acceptable to the EPA
and we will recommence live racing in October 2002.
11
Live race days are a significant factor in the operating and financial
performance of our racing business. Another significant factor is the level of
wagering per customer on our racing content on-track, at inter-track simulcast
locations and at OTB facilities. There are also many other factors that have a
significant impact on our racing revenues which include, but are not limited
to: attendance at our racetracks, inter-track simulcast locations and OTB
facilities; activity through our account wagering systems; the average field
size per race; our ability to attract the industry's top horses and trainers;
and changes in the economy.
Revenues from our racetrack operations were $244.0 million for the three
months ended March 31, 2002 compared to $214.9 million in the 2001 comparable
period, an increase of $29.1 million or 13.6%. Racetrack revenues increased
primarily as a result of the acquisition of MEC Pennsylvania in April 2001,
the additional live race days at Gulfstream Park, the lease of Portland
Meadows in July 2001, the launch of XpressBet/TM/ into the California market and
improved results at Santa Anita Park.
In the three months ended March 31, 2002, gross wagering revenues for our
racetracks increased 14.6% to $220.4 million compared to $192.3 million for
the comparable 2001 period primarily as a result of our acquisitions, the
increase in live race days, increased handle at Santa Anita Park and the
launch of XpressBet/TM/ into the California market. Non-wagering revenues in the
three months ended March 31, 2002 increased 4.8% to $23.7 million from $22.6
million in the three months ended March 31, 2001. Non-wagering revenues are
primarily comprised of food and beverage sales, program sales, parking
revenues and admissions income. The increase in non-wagering revenues was
primarily due to the increase in the number of live race days.
Purses, awards and other in the three months ended March 31, 2002 were $140.5
million compared to $122.2 million in the comparable period in 2001. Operating
costs increased from $51.0 million in the three months ended March 31, 2001 to
$55.3 million in the three months ended March 31, 2002. As a percentage of
total racetrack revenues, operating costs decreased from 23.7% in the three
months ended March 31, 2001 to 22.7% in the three months ended March 31, 2002.
The reduction in operating costs as a percentage of revenues is primarily the
result of continued cost savings and other synergies realized on the
consolidation of racetracks during the period, partially offset by an increase
in insurance costs of approximately $0.7 million.
Racetrack general and administrative expenses were $10.6 million in the three
months ended March 31, 2002, compared to $8.0 million in the three months
ended March 31, 2001, an increase of $2.7 million. The increase is primarily
attributable to an increased number of racetracks and the higher costs of the
corporate head office, which were lower during the three months ended March
31, 2001, as several members of the corporate management team added in 2001
joined after March 31, 2001.
Real estate operations
Revenues from real estate operations decreased $24.8 million to $4.8 million
in the three months ended March 31, 2002 compared to the prior year comparable
period. EBITDA from real estate operations decreased to $1.1 million in the
three months ended March 31, 2002 compared to $12.6 million in the three
months ended March 31, 2001. We generated revenues on the sale of non-core
real estate property of $0.6 million during the three months ended March 31,
2002, resulting in a gain of $0.4 million. We generated revenues and gains of
$26.2 million and $12.1 million, respectively, on the sale of non-core real
estate properties in the three months ended March 31, 2001. The decrease in
EBITDA from real estate operations is primarily attributable to the lower gain
on the sale of non-core real estate properties in the current quarter.
Predevelopment and other costs
Predevelopment and other costs decreased $0.2 million to $1.5 million for the
three months ended March 31, 2002, compared to the three months ended March
31, 2001, as a result of lower activity on certain development projects in the
current quarter.
Depreciation and amortization
Depreciation and amortization remained relatively consistent with the prior
year comparable period, at $5.3 million for the three months ended March 31,
2002, primarily as a result of the implementation of
12
Statement of Financial Accounting Standards Board Statement No. 142, Goodwill
and Intangible Assets. The implementation of this Statement resulted in the
cessation of amortization of goodwill and intangible assets that meet the
criteria for indefinite life, effective January 1, 2002. The impact of this
new Statement was to reduce depreciation and amortization expense by $1.4
million from the prior year period, which has been offset by increased
depreciation and amortization related to our acquisition of MEC Pennsylvania
and increased depreciation on recent fixed asset additions.
Interest income and expense
Our net interest expense has decreased $1.3 million in the three months ended
March 31, 2002 compared to the three months ended March 31, 2001 which is
attributable to lower interest rates and the capitalization of interest on
certain properties under development in the current quarter.
Income tax provision
We recorded an income tax provision of $13.0 million on income of $31.7
million for the three months ended March 31, 2002, compared to a provision of
$15.4 million on income of $37.9 million for the three months ended March 31,
2001. Our effective tax rate has remained relatively constant over both
periods at 41.2% and 40.7%, respectively.
Liquidity and Capital Resources
At March 31, 2002, we had cash and cash equivalents of $45.9 million and total
shareholders' equity of $586.1 million.
Subsequent to March 31, 2002, we completed a share offering which generated
net proceeds of approximately $143.0 million. In addition, on May 1, 2002, we
entered into an agreement with respect to a $75.0 million senior unsecured
revolving credit facility. The credit facility has a term of one year which
may be extended with the consent of both parties.
For the three months ended March 31, 2002, we invested $13.6 million in real
estate property and fixed asset additions. We anticipate capital expenditures
of approximately $65.0 million for the year ending December 31, 2002 which
excludes expenditures for the proposed redevelopment of Gulfstream Park (see
note 5(a) to the unaudited consolidated financial statements). The capital
expenditures relate to maintenance capital improvements to the racetracks of
approximately $17.7 million, expenditures for construction of the Palm Meadows
training center and other racetrack property enhancements of $35.8 million,
the completion of the Aurora golf course of $7.2 million, infrastructure and
predevelopment costs on certain of our properties of $1.1 million, and $3.2
million on account wagering activities, including telephone, Internet and
interactive television initiatives.
Operating activities
Cash provided by operating activities was $20.9 million for the three months
ended March 31, 2002, compared to $21.7 million for the comparable period in
the prior year. The decrease from the comparable 2001 period was primarily due
to an increase in accounts receivable at Santa Anita Park as a result of
increased revenues, partially offset by higher net income after giving effect
to non-cash items.
Investing activities
Cash used in investing activities for the three months ended March 31, 2002
was $13.5 million including investments of $13.6 million in real estate
property and fixed asset additions and $1.1 million of other asset additions,
partially offset by $1.2 million of proceeds received on the sale of non-core
real estate. Net proceeds from investing activities for the three months ended
March 31, 2001 were $2.5 million, including $6.7 million of proceeds on the
sale of non-core real estate and other assets, partially offset by $4.2
million invested in real estate property and fixed asset additions.
Financing activities
Cash used in financing activities was $0.7 million for the three months ended
March 31, 2002 related to the repayment of long-term debt of $1.0 million,
partially offset by the issuance of share capital of $0.3
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million. For the three months ended March 31, 2001, cash provided by financing
activities was $2.3 million. During the three months ended March 31, 2001, we
received net proceeds on long term debt of $9.9 million which were partially
offset by the repayment of $7.6 million of bank indebtedness.
Accounting Developments
Effective January 1, 2002, we adopted the new Standard of the Financial
Accounting Standards Board with respect to Goodwill and Other Intangible
Assets. Under the new Standard, goodwill and other intangible assets that meet
the criteria for indefinite life are no longer amortized but are subject to an
annual impairment test. We completed the required initial impairment test
during the three months ended March 31, 2002 and determined that the value of
our racing licenses was not impaired.
For the three months ended March 31, 2001, application of the non-amortization
provision of the new standards would have resulted in an increase in net
income of $0.8 million and diluted earnings per share of $0.01.
Also, under Staff Accounting Bulletin 74, we are required to disclose certain
information related to new accounting standards, which have not yet been
adopted due to delayed effective dates.
During 2001, the Financial Accounting Standards Board issued Statement No. 143
("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143 requires
that legal obligations arising from the retirement of tangible long-lived
assets, including obligations identified by a company upon acquisition and
construction during the operating life of a long-lived asset, be recorded and
amortized over the asset's useful life using a systematic and rational
allocation method. SFAS 143 is effective for fiscal years starting after June
15, 2002. We are currently reviewing SFAS 143 and have not determined the
impact, if any, of this pronouncement on our consolidated financial
statements.
Forward-looking Statements
This Management's Discussion and Analysis of Results of Operations and
Financial Position contains forward-looking statements as defined by the U.S.
Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These
forward-looking statements may include, among others, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; proposed new products and services; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on our consolidated financial position, operating results, prospects or
liquidity; projections, predictions, expectations, estimates or forecasts as
to our financial and operating results and future economic performance; and
other matters that are not historical facts.
Forward-looking statements should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or the times at or by which such performance or results will be
achieved. Forward-looking statements are based on information available at the
time and/or management's good faith belief with respect to future events, and
are subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in the statements.
Important factors that could cause such differences include, but are not
limited to, the factors discussed in the "Risk Factors" section of the
Company's annual report on Form 10-K for the year ended December 31, 2001 and
our subsequent public filings.
Forward-looking statements speak only as of the date the statement was made.
We assume no obligation to update forward-looking information to reflect
actual results, changes in assumptions or changes in other factors affecting
forward-looking information. If we update one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect thereto or with respect to other forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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No material changes since year-end.
PART II -- OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
Not applicable
Item 2.CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
Item 3.DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5.OTHER INFORMATION
Not applicable
Item 6.EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
None.
(b)Reports on Form 8-K
Date Items Reported and Financial Statements Filed
---- ---------------------------------------------
February 14, 2002 Financial results for the fourth quarter and year
(filed: February 15, 2002) ended December 31, 2001.
March 11, 2002 A subsidiary of the Registrant, MEC Lone Star,
(filed: March 11, 2002) L.P., entered into an asset purchase agreement with
Lone Star Race Park, Ltd. and LSJC Development
Corporation to acquire substantially all of the
operations and related assets of Lone Star Park at
Grand Prairie.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAGNA ENTERTAINMENT CORP.
(Registrant)
by: __________/s/Graham J. Orr
Graham J. Orr, Executive Vice-
President and Chief Financial
Officer
by: __________/s/Gary M. Cohn
Gary M. Cohn, Vice-President,
Special
Projects and Secretary
Date: May 14, 2002
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