<Page>
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): November 27, 2002
MAGNA ENTERTAINMENT CORP.
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(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)
<Page>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
PAGE
----
Maryland Jockey Club Companies Audited Combined Financial 3
Statements for the year ended December 31, 2001 with Report
of Independent Auditors
Maryland Jockey Club Companies Unaudited Combined Financial 27
Statements for the nine months ended September 30, 2002 and
September 30, 2001
(b) PRO FORMA FINANCIAL INFORMATION.
Pro Forma Consolidated Statement of Operations and Comprehensive 32
Income for the Year Ended December 31, 2001
Pro Forma Consolidated Statement of Operations and Comprehensive 33
Income for the Nine Months Ended September 30, 2002
Pro Forma Consolidated Balance Sheet as at September 30, 2002 34
Notes to the Pro Forma Consolidated Financial Statements 35
<Page>
MARYLAND JOCKEY CLUB COMPANIES
Audited Combined Financial Statements
Year ended December 31, 2001 with Report of Independent Auditors
4
<Page>
Maryland Jockey Club Companies
Audited Combined Financial Statements
Year ended December 31, 2001
CONTENTS
<Table>
<Caption>
Report of Ernst & Young LLP, Independent Auditors........................................................1
Audited Combined Financial Statements
Combined Balance Sheet...................................................................................2
Combined Statement of Operations.........................................................................4
Combined Statement of Stockholders' Equity and Partners' Deficit.........................................6
Combined Statement of Cash Flows.........................................................................7
Notes to Combined Financial Statements...................................................................8
</Table>
5
<Page>
Report of Ernst & Young LLP, Independent Auditors
Maryland Jockey Club Companies
We have audited the accompanying combined balance sheet of the Maryland Jockey
Club Companies as of December 31, 2001, and the related combined statements of
operations, stockholders' equity, partners' deficit and cash flows for the year
then ended. These financial statements are the responsibility of the Maryland
Jockey Club Companies' management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Maryland Jockey Club Companies as of December 31, 2001, and the combined results
of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
January 20, 2003
6
<Page>
Maryland Jockey Club Companies
Combined Balance Sheet
December 31, 2001
<Table>
<Caption>
ASSETS
Current assets:
Cash and cash equivalents $ 3,203,565
Accounts receivable, less allowance for doubtful accounts
of $127,000 3,422,016
Prepaid expenses 1,080,769
Due from affiliates 1,759,933
Current portion of note receivable from affiliate 309,108
Current portion of notes receivable from unaffiliated
Virginia Racetrack 590,000
------------
Total current assets 10,365,391
Property, plant and equipment:
Land 4,005,012
Buildings, land and leasehold improvements 58,482,984
Machinery, equipment, furniture and fixtures 15,802,998
------------
78,290,994
Less accumulated depreciation (44,793,355)
------------
Net property, plant and equipment 33,497,639
Other noncurrent assets:
Investment in related party 516,124
Investments in affiliates 2,390,223
Note receivable from affiliate 2,967,432
Notes receivable from unaffiliated Virginia Racetrack 942,500
Deferred financing costs, net of accumulated amortization
of $23,999 118,311
Other 251,914
------------
Total other noncurrent assets 7,186,504
------------
Total assets $ 51,049,534
============
</Table>
SEE ACCOMPANYING NOTES.
7
<Page>
<Table>
<Caption>
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' DEFICIT
Current liabilities:
Short-term borrowings $ 2,600,000
Accounts payable and accrued expenses 4,560,859
Pari-mutuel tickets outstanding 2,410,552
Due to affiliates 3,905,350
Current portion of long-term debt 994,488
------------
Total current liabilities 14,471,249
Note payable to related party 2,500,000
Notes payable to affiliate 2,128,999
Long-term debt, less current portion 24,459,239
------------
Total liabilities 43,559,487
------------
Stockholders' equity and partners' deficit
Common stock (Class A), par value $.10 per share,
Authorized shares - 10,000
Issued and outstanding shares - 1,000 100
Common stock (Class B), par value $.10 per share,
Authorized shares - 10,000,
Issued and outstanding shares - 9,000 900
Additional paid-in capital 2,553,700
Retained earnings 10,691,039
Partners' deficit (5,755,692)
------------
Total stockholders' equity and partners' deficit 7,490,047
------------
Total liabilities and stockholders' equity and partners' deficit $ 51,049,534
============
</Table>
SEE ACCOMPANYING NOTES.
8
<Page>
Maryland Jockey Club Companies
Combined Statement of Operations
Year ended December 31, 2001
<Table>
<Caption>
Mutuel play $ 326,478,025
Returned to public (257,901,955)
------------
Gross wagering revenues 68,576,070
------------
Less takeouts:
Stakes and purses 22,008,510
Commissions to unaffiliated Maryland standardbred racetrack 11,471,641
Signal fees 7,946,098
State's share 1,310,691
Pension funds 710,023
Bond fund 1,042,717
------------
44,489,680
------------
24,086,390
------------
Commissions from unaffiliated Maryland standardbred racetrack 9,091,964
Commissions from affiliated off-track betting facilities 2,442,188
------------
11,534,152
------------
Companies' share 35,620,542
Other racing revenue 18,875,399
------------
Revenue from racing $ 54,495,941
============
</Table>
9
<Page>
Maryland Jockey Club Companies
Combined Statement of Operations (continued)
Year ended December 31, 2001
<Table>
<Caption>
Revenue from racing $ 54,495,941
------------
Expenses:
Operating 33,423,258
General and administrative 8,775,188
Depreciation and amortization 3,547,362
Losses from affiliated training center 2,201,306
Losses from affiliated off-track betting facilities 1,459,570
------------
49,406,684
Income from operations 5,089,257
Other income (expense):
Interest expense (1,972,085)
Interest income 414,650
Other income 1,255,089
------------
(302,346)
------------
Income before provision for income taxes 4,786,911
------------
Provision for income taxes 3,294,770
------------
Net income $ 1,492,141
============
</Table>
SEE ACCOMPANYING NOTES.
10
<Page>
Maryland Jockey Club Companies
Combined Statement of Stockholders' Equity and Partners' Deficit
<Table>
<Caption>
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN RETAINED PARTNERS'
(CLASS A) (CLASS B) CAPITAL EARNINGS DEFICIT TOTAL
----------------------------------------------------------------------------------
Balance at December 31, 2000 $ 100 $ 900 $ 2,553,700 $ 6,809,979 $(3,366,773) $ 5,997,906
Net income (loss) -- -- -- 3,881,060 (2,388,919) 1,492,141
----------------------------------------------------------------------------------
Balance at December 31, 2001 $ 100 $ 900 $ 2,553,700 $10,691,039 $(5,755,692) $ 7,490,047
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</Table>
SEE ACCOMPANYING NOTES.
11
<Page>
Maryland Jockey Club Companies
Combined Statement of Cash Flows
Year ended December 31, 2001
<Table>
<Caption>
OPERATING ACTIVITIES
Net income $ 1,492,141
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,547,362
Changes in operating assets and liabilities:
Accounts receivable, net (1,303,679)
Prepaid expenses and other assets 5,346
Accounts payable and accrued expenses 359,999
Pari-mutuel tickets outstanding (132,420)
Due from/to affiliates (4,435,928)
-----------
Net cash used in operating activities (467,179)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,299,964)
Repayment of notes receivable from unaffiliated Virginia Racetrack 217,500
Decrease in note receivable from affiliate 103,741
Increase in investment in related party (151,424)
Increase in investment in affiliates (15,252)
-----------
Net cash used in investing activities (4,145,399)
FINANCING ACTIVITIES
Proceeds from long-term debt 5,000,000
Net proceeds from short-term borrowings 2,100,000
Principal payments on long-term debt (760,608)
Payments on notes payable to affiliate (139,242)
-----------
Net cash provided by financing activities 6,200,150
-----------
Increase in cash and cash equivalents 1,587,572
Cash and cash equivalents at beginning of year 1,615,993
-----------
Cash and cash equivalents at end of year $ 3,203,565
===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,848,095
===========
</Table>
SEE ACCOMPANYING NOTES.
12
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements
December 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying combined financial statements include the accounts of the
following entities collectively referred to throughout as the Maryland Jockey
Club Companies or Companies. These Companies operate the only thoroughbred
racetracks in Maryland - Pimlico Race Course and Laurel Park. All companies in
the combined group are under common management and represent the operating
activities associated with thoroughbred racing and wagering in the State of
Maryland.
The Pimlico Racing Association, Inc and its wholly subsidiary, the Maryland
Jockey Club of Baltimore City, Inc., (collectively Pimlico) own the real
property and other assets comprising Pimlico Race Course in Baltimore, Maryland.
Laurel Racing Association, Inc. (LRAI) is the general partner of Laurel Racing
Association Limited Partnership (Laurel). Laurel consists of the general partner
and a limited partner. The general partner has exclusive and complete discretion
in the management and control of Laurel and as such, the operations of Laurel
have been consolidated within LRAI. Laurel owns the real property and other
assets comprising Laurel Park in Laurel, Maryland.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMBINATION
All inter-company accounts and transactions have been eliminated in combination.
13
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Companies' financial instruments consisting of Cash
and Cash Equivalents, Accounts Receivable, Due from Affiliates, Prepaid
Expenses, Accounts Payable and Accrued Expenses, Pari-mutuel Tickets Outstanding
and Due to Affiliates approximate fair value given the short-term nature of
these financial instruments.
The Companies also have financial instruments in Notes Receivables from
Affiliates, Notes Receivable from Unaffiliated Virginia Racetrack, Short-term
Borrowings, Long-term Debt, Notes Payable to Affiliates and a Note Payable to a
Related Party with fair values that approximate carrying value.
CASH EQUIVALENTS
The Companies consider all highly liquid investments with maturity of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are generally due within 30 days and collateral is not
required. The Company's policy is to write off all accounts that have been
identified as uncollectible. An allowance for doubtful accounts is recorded for
accounts not yet written off which may become uncollectible in future periods.
Accounts receivable primarily includes unpaid signal fees and common pool
wagering settlements.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. The provision for
depreciation has been computed using accelerated tax methods, which do not
differ materially from depreciation methods that are in accordance with
accounting principles generally accepted in the United States.
The Companies' major classes of property and equipment the related useful lives
are as follows:
Furniture and fixtures 3-7 years
Machinery and equipment 3-7 years
Land improvements 15 years
Buildings and improvements 18-40 years
14
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Certain expenses incurred in obtaining long-term financing are being amortized
over a period which approximates the term of the indebtedness. Amortization is
computed using the straight-line method.
PARI-MUTUEL TICKETS OUTSTANDING
The Companies hold amounts owed for unclaimed winning tickets from recent meets.
Any amounts not claimed within one year will be remitted to the Maryland Racing
Commission in accordance with state law. Amounts related to unclaimed tickets
greater than one year old were remitted to the Maryland Racing Commission.
REVENUE RECOGNITION
The Companies record gross wagering revenues associated with horse racing on a
daily basis. Wagering revenues are recognized gross of purses, stakes and awards
and pari-mutuel wagering taxes. The costs to these amounts are shown as "Less
Takeouts" in the accompanying combined statement of operations.
COMPANIES' SHARE
Mutuel play reflects the results of 109 days of live racing conducted at Pimlico
Race Course and 110 days of live racing conducted at Laurel Park for the year
ended December 31, 2001.
SIGNAL FEES AND COMMON POOL WAGERING COMMISSIONS
Signal fees and common pool wagering commissions are based on an established
percentage of mutuel play. These amounts represent both signal fees paid to
non-Maryland racetracks by the Companies and common pool wagering commissions
earned on live racing conducted by the Companies.
OTHER RACING REVENUE
Other meeting revenue includes non-wagering revenue primarily related to live
racing days and simulcast only days. Revenues include admissions, parking,
program sales, concession commission, signal fees and other non-wagering
revenues.
15
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EMPLOYEE BENEFIT PLANS
Maryland law requires Pimlico and Laurel to withhold a specified percentage of
mutuel play for employee benefits. An amount withheld is remitted to the
Maryland Race Track Employees' Pension Fund and the Maryland Harness Track
Employees Pension Fund on behalf of their employees. The residual amount is
remitted to a plan sponsored by the State of Maryland covering state employees
working at Maryland racetracks. The Maryland Race Track Employees' Pension Fund,
a defined benefit plan, was established by the Companies and certain other
Maryland racing industry employers. Such contributions are reflected in the
accompanying combined statement of operations within pension funds. Under this
plan, the Companies are not required to fund any additional amounts beyond the
amounts withheld based upon mutuel play.
The Companies sponsor a defined contribution plan for eligible nonunion
employees. The Companies match 25% of the first 3% and 50% of the next 1%
contributed by eligible employees. For the period ended December 31, 2001, the
Companies recognized $53,654 within general and administrative expense in the
accompanying combined statement of operations.
Additionally, the Companies sponsor a defined contribution plan for all eligible
union employees. The plan does not require the Companies to make contributions
to the plan; however, the Companies can voluntarily elect to make contributions.
As of December 31, 2001, the Companies have not made any contributions to this
plan.
ADVERTISING COSTS
The Companies expense most costs of advertising the first time the advertising
takes place, except for direct-response advertising, which is capitalized and
expensed when redeemed on the day of the promotion.
Direct-response advertising consists primarily of mystery vouchers that can be
redeemed on a specific racing day. Mystery vouchers are sent to customers with
an indeterminable value assigned to the voucher, which can only be determined
when used to place a bet at one of the Companies' racetracks or its affiliated
off-track betting parlors. The capitalized costs of this advertising are
expensed when redeemed.
At December 31, 2001, $316,463 of advertising was reported as prepaid expenses
and the total amount charged to advertising expense during 2001 was $3,547,283.
16
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INCOME
In 2001, the Companies received proceeds from an insurance claim related to a
fire at Pimlico Race Course on Preakness Day in 1998. The insurance proceeds
amounted to approximately $1,126,000 which covered expenses related to repairs
and unrealized revenues related to interruption in business.
INCOME TAXES
The Companies consist of both corporations and partnerships. The corporations
account for income taxes in accordance with the liability method for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. No provision has been
recorded for income taxes at Laurel as any income or loss of this entity is
included in the tax returns of the partners.
2. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of December
31, 2001:
Trade payables $2,058,055
Accrued salaries and benefits 732,897
Deferred revenue 600,517
Taxes payable 384,750
Interest payable 291,976
Other 492,664
------------
$4,560,859
------------
------------
17
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
3. INVESTMENTS IN AFFILIATES
AFFILIATED OFF-TRACK BETTING FACILITIES
Laurel and Pimlico entered into agreements with an unaffiliated Maryland
standardbred racetrack to form Maryland OTB Facilities LLC (Maryland OTB) and
New Maryland OTB Facilities LLC (New Maryland OTB), collectively referred to as
"Affiliated Off-Track Betting Facilities." Maryland OTB was formed to account
for the operations and distributions of commission of two Maryland
off-track-betting facilities. New Maryland OTB was formed to operate a separate
Maryland off-track-betting facility in addition to accounting for the operations
and distributions of commission. Laurel and Pimlico each have a 40% equity
interest in both Maryland OTB and New Maryland OTB and share proportionately in
any gains or losses. At December 31, 2001, the equity investment recorded by the
Laurel and Pimlico for Maryland OTB and New Maryland OTB was $800 each.
Summarized financial information for the Affiliated Off-Track Betting as of and
for the year ended December 31, 2001:
<Table>
<Caption>
ASSETS
Cash $ 950,529
Property and equipment, net 3,005,505
Other 2,302,861
-----------
Total assets $ 6,258,895
===========
LIABILITIES
Accounts payable and accrued expenses $ 911,373
Pari-mutuel tickets outstanding 484,952
Due to related parties 1,584,030
Note payable to affiliates 3,276,540
-----------
Total liabilities $ 6,256,895
===========
OPERATIONS
Gross wagering revenues $ 2,442,188
Commissions to affiliates (2,442,188)
Other revenue 111,047
Operating expenses (1,651,184)
Other (284,326)
-----------
Net loss (1,824,463)
Minority interest in net loss 364,893
-----------
Net loss for Pimlico and Laurel $(1,459,570)
===========
</Table>
18
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
3. INVESTMENTS IN AFFILIATES (CONTINUED)
AFFILIATED TRAINING CENTER
Laurel and Pimlico indirectly own a 50.5% and 49.5% interest, respectively, in
Southern Maryland Agricultural Association (SMAA), which owns and operates the
Bowie Race Course Training Center. Laurel and Pimlico's investment in SMAA is
accounted for under the equity method and, accordingly, is carried at cost as
adjusted for capital contributions and their proportionate share of the training
center costs. Laurel and Pimlico are responsible under the Maryland racing law
for costs of operations, maintenance and improvements to the training facility.
At December 31, 2001, the total equity investment of Laurel and Pimlico in SMAA
was $2,388,283. There is a difference between Laurel's investment in SMAA and
its share of SMAA's equity. In June 2001, the financial accounting standards
board issued Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (Statement
No. 142). Statement No. 142, which will be adopted by Laurel in 2002, will
require a one time adjustment to increase Laurel's investment by approximately
$314,000 to reflect its proportionate share of the underlying equity of SMAA.
This adjustment will be recorded as a cumulative effect of an accounting change
in 2002.
Summarized financial information for the Affiliated Training Center as of and
for the year ended December 31, 2001:
<Table>
<Caption>
ASSETS
Cash $ 25,984
Property and equipment, net 1,127,229
Notes receivable from affiliates 2,128,999
Other 142,959
-----------
Total assets $ 3,425,171
===========
LIABILITIES
Accounts payable and accrued expenses $ 253,871
Due to related parties 468,533
-----------
Total liabilities $ 722,404
===========
OPERATIONS
Operating Expenses $(2,653,017)
Other 451,711
-----------
Net loss $(2,201,306)
===========
</Table>
19
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
4. INVESTMENT IN RELATED PARTY AND NOTE PAYABLE TO RELATED PARTY
Pimlico has recorded an equity investment in Triple Crown Productions LLC for
which it owns a 33.33% interest. In 1999, Pimlico entered into a promissory note
agreement that bears interest at 6.1%, annually and is payable on September 14,
2005. The outstanding balance of this note at December 31, 2001 was $2,500,000.
For the year ended December 31, 2001 interest expense of $152,500 for this
promissory note agreement is included in interest expense in the combined
statement of operations.
5. NOTE RECEIVABLE FROM AFFILIATE
In 2000, Pimlico entered into a promissory note agreement with New Maryland OTB
to assist in the financing of property, plant and equipment. The promissory note
bears interest based on the prime interest rate adjusted quarterly. Principal
and interest payments are due quarterly beginning January 2002 through 2014. The
outstanding balance under this agreement was $3,276,540 at December 31, 2001.
For the year ended December 31, 2001, interest earned on notes receivable from
affiliate of $236,148 is included in interest income.
6. UNAFFILIATED VIRGINIA RACETRACK
MANAGEMENT FEES
Under the terms of a contractual agreement, Laurel and Pimlico perform various
management services for an unaffiliated Virginia Racetrack and its related
Virginia off-track betting facilities. For the services provided, Pimlico and
Laurel are entitled to receive a management fee based on a percentage of the
mutuel play at these locations. Management fees earned and expenses incurred in
the day-to-day operations of the racetrack are as follows for the year ended
December 31, 2001:
<Table>
<Caption>
Management fee $ 1,721,900
Management expenses (1,018,504)
----------------
Net management fee from unaffiliated Virginia
racetrack $ 703,396
----------------
----------------
</Table>
20
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
6. UNAFFILIATED VIRGINIA RACETRACK (CONTINUED)
NOTES RECEIVABLE
In 1998, Laurel and Pimlico earned and accrued management fees of $1,450,000.
This amount was converted into two seven-year promissory notes maturing December
31, 2005. The notes bears interest at the rate of 7.75% per year. Interest only
was payable quarterly through 2000 and principal is to be amortized and paid
together with interest in quarterly installments over the remaining five-year
term of the note. As of December 31, 2001, the balance of these notes was
$1,532,500.
In 1999, $600,000 of the management fee earned during 1999 was deferred and
converted into a promissory note bearing interest at the prime rate. During
2000, Laurel and Pimlico received $300,000 in partial repayment of the principal
balance in accordance with the terms of the promissory notes.
7. LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Laurel and Pimlico have bank term loans, which have outstanding principal
balances of $20,453,727 at December 31, 2001. These loans requires quarterly
principal and interest payments through December 1, 2013, at which time the
remaining balance of $2.7 million for each loan is due. These loans bears
interest at 6.50% until December 1, 2003 at which time the interest rate will
reset to 300 basis points above the then current rate for a fixed income U.S.
Treasury security with a comparable term. The rates also resets in a similar
fashion on December 1, 2008.
Effective as of December 31, 2001, $5,000,000 of Pimlico's line of credit was
converted to a 15-year term bank loan bearing interest at 300 basis points above
the 5-year treasury rate. Payments of principal and interest are due quarterly
over the 15-year term and the loan is callable on December 31, 2006 and December
31, 2011.
The term loans are secured by deeds of trust on land, buildings and
improvements, security interests in all other assets, and are guaranteed by
Pimlico. In addition, Pimlico is required to comply with certain operational and
financial covenants.
21
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
7. LONG-TERM DEBT AND SHORT-TERM BORROWINGS (CONTINUED)
Maturities of term loans are as follows:
<Table>
<Caption>
2003 $ 994,488
2004 1,089,579
2005 1,175,877
2006 1,269,013
2007 5,290,110
Thereafter 15,634,660
--------------
$ 25,453,727
--------------
--------------
</Table>
Pimlico also has a revolving line of credit agreement for working capital and
capital expenditures. The line provides for borrowings of up to $10 million at
the bank's prime rate of interest through December 1, 2013, when any remaining
balance is due. At December 31, 2001, $2,600,000 was outstanding under the line
of credit. The weighted average interest rate during 2001 for these short-tem
borrowings were 6.36%.
Interest expense on bank term loans and the revolving line of credit was
$1,739,910 for the year ended December 31, 2001.
8. NOTES PAYABLE TO AFFILIATE
Laurel and Pimlico have promissory note agreements with SMAA. The outstanding
balance under these notes was $2,128,999 at December 31, 2001. These notes bear
interest at 7.75% annually and mature January 1, 2003.
For the year ended December 31, 2001, interest expense related to the
aforementioned notes of $79,675 for Laurel and Pimlico is included in interest
expense in the accompanying combined statement of operations.
9. LEASES
On November 1, 1999, Pimlico entered into an operating lease with an unrelated
party for an off-track betting facility located in Northeast, Maryland. Monthly
rental payments of $12,000 are due through November 1, 2004 and are increased
thereafter by the annual increase in the Consumer Price Index for the remainder
of the lease term that expires November 1, 2014. Pimlico is also contingently
liable for an additional rental fee equal to the amount by which 1.05% of the
mutuel play on the premises exceeds the base annual rents.
22
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
9. LEASES (CONTINUED)
For the year ended December 31, 2001, rental payments and an additional rent
payment made to the unrelated party were $144,000 and $16,065, respectively.
10. INCOME TAXES
Pimlico and LRAI file separate federal tax returns and are not able to offset
income and losses between the two companies. The provision for income taxes in
the accompanying financial statements has been recorded based upon the net
income of Pimlico.
LRAI recorded no provision or benefit for income taxes based upon losses
incurred by Laurel. No deferred tax assets have been recorded for LRAI in the
accompanying financial statements since these assets are not realizable based
upon the current operating losses of Laurel.
Provision for income taxes includes deferred taxes resulting from temporary
differences between the tax basis of assets and liabilities and their recorded
amounts on the combined balance sheet. The principal sources of the temporary
differences between the tax basis of assets and liabilities include accrued
expense, accounts receivable, property and equipment and investments in
affiliates and partnerships.
The following is a summary of the components of income tax expense related to
the Companies' taxable operations for the year ended December 31, 2001:
<Table>
<Caption>
Current:
Federal $ 2,778,428
State 499,403
----------------
3,277,831
Deferred:
Federal 15,329
State 1,610
----------------
16,939
----------------
$ 3,294,770
----------------
----------------
</Table>
23
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The Companies' effective tax rate differs from the federal statutory rate of 34%
as a result of the following:
<Table>
<Caption>
Federal statutory rate 34.0%
Effective of:
Net losses of Laurel Racing Association Limited Partnership 17.0
Nondeductible losses of joint venture operations 13.0
Permanent items 0.7
State 2.3
Other 1.8
-------
68.8%
-------
-------
</Table>
The effect of temporary differences are as follows as of December 31, 2001:
<Table>
<Caption>
Deferred tax assets:
Property and equipment $ 242,745
Accrued expense 171,600
Accounts receivable 29,250
Other 149
---------
Total deferred tax assets 443,744
Less valuation allowance (242,745)
---------
Net deferred tax assets 200,999
Deferred tax liabilities:
Investment in affiliates and partnerships (227,981)
---------
Net deferred tax liabilities (227,981)
---------
Net deferred tax liability $ (26,982)
=========
</Table>
The Companies have recognized a valuation allowance in the amount of $242,745
for deferred tax assets that may not be realizable in the future.
During 2001, the Companies' paid $2,190,922 for income taxes.
24
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
11. OTHER AFFILIATED CORPORATIONS
RACE TRACK PAYROLL ACCOUNT, INC.
Laurel and Pimlico each own 50% of Race Track Payroll Account, Inc. (RTPA). RTPA
administers and maintains payroll transactions for the Association. For these
services, Laurel and Pimlico paid RTPA $160,095 for the year ended December 31,
2001.
Summarized balance sheet information for RTPA as of December 31, 2001:
<Table>
<Caption>
ASSETS
Cash $352,679
Due from affiliates 312,395
--------
Total assets $665,074
========
LIABILITIES
Accounts payable and accrued expenses $670,921
--------
Total liabilities $670,921
========
</Table>
MARYLAND THOROUGHBRED PURSE ACCOUNT, INC.
Laurel and Pimlico, with the concurrence of the Horsemen, formed the Maryland
Thoroughbred Purse Account, Inc. (MTPA) to manage, invest and in all respects
administer the Horsemens' share of the monies derived from mutuel play conducted
by Laurel and Pimlico. MTPA is owned 50% each by Laurel and Pimlico. During
2001, Laurel and Pimlico were charged fees of $93,600 by MTPA for the
administrative costs of the purse account. For the year ended December 31, 2001,
MTPA, in its capacity as administrator, incurred expenses in excess of revenues
of $84,748 (including the aforementioned fees).
25
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
11. OTHER AFFILIATED CORPORATIONS (CONTINUED)
Summarized financial information for MTPA as of December 31, 2001:
<Table>
<Caption>
ASSETS
Restricted cash for payment of Maryland Horsemen Owners' liabilities $3,931,468
Accounts receivable, net 1,247,988
Due from affiliates 2,568,042
----------
Total assets $7,747,498
==========
LIABILITIES
Maryland Horsemen Owners' liabilities $7,085,348
Accounts payable and accrued expenses 306,875
Due to related parties 360,120
----------
Total liabilities $7,752,343
==========
</Table>
12. LAND LEASE AND GUARANTEE
In 2000, Laurel began leasing to a not-for-profit entity, for a nominal amount,
approximately three acres of land within Laurel Park for the development of two
dormitories. An officer of Laurel is also an officer and director of this
not-for-profit entity. The dormitories provide housing and improved quality of
life for some of Laurel's backstretch workers. As part of the lease and
dormitory financing agreement, leased land is restricted by deed for the next 50
years for the purpose of low income housing, subject to certain exceptions.
Laurel has agreed to manage the dormitories and deposit approximately $4,000 per
year through 2040 in a collateral account to enable the not-for-profit entity to
make principal payments on its indebtedness. Laurel has also guaranteed
performance by the not-for-profit entity of its non-monetary obligations,
payment of all operating deficits incurred by the project, and annual principal
payments of indebtedness of through 2039.
For the year ended December 31, 2001, Laurel made payments of principal and
interest of $28,795. Laurel is also responsible for all costs of the project not
covered by rent. The not-for-profit entity collects rent on these dormitories of
approximately $32,400 which was transferred to Laurel for payment of these
obligations and to cover other costs associated with the project.
26
<Page>
Maryland Jockey Club Companies
Notes to Combined Financial Statements (continued)
12. LAND LEASE AND GUARANTEE (CONTINUED)
These obligations are not expected to have a material impact on the Companies
operating results in future periods and are not included in Note 7, Long-Term
Debt and Short-Term Borrowings.
13. CONTRACTS, COMMITMENTS AND CONTINGENCIES
Laurel and Pimlico use equipment in the operation of the tracks under a
long-term agreement. Expenses under this agreement are based on negotiated
percentages of the daily mutuel play including inter-track wagers. Laurel and
Pimlico incurred expenses of $570,519 and $694,448, respectively, for the year
ended December 31, 2001.
14. ACQUISITION OF THE MARYLAND JOCKEY CLUB COMPANIES
On November 27, 2002, Maryland Racing, Inc., a wholly-owned subsidiary of Magna
Entertainment Corp. ("MEC"), completed its acquisition of a majority interest in
Pimlico Race Course and Laurel Park by acquiring a 51% voting and equity
interest in Pimlico and a 51% voting and 58% equity interest in Laurel. MEC also
has call options to purchase the remaining interest in Pimlico and Laurel and
the remaining shareholders of Pimlico and Laurel also have put options with
terms that are similar to the terms of the call options available to MEC.
27
Maryland Jockey Club Companies
Combined Balance Sheets
(Unaudited)
SEPTEMBER 30 SEPTEMBER 30
2002 2001
---------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,104,179 $ 2,650,982
Accounts receivable 2,605,505 2,288,985
Due from affiliates -- 1,270,792
Prepaid expenses 896,971 1,126,814
Current portion of notes receivable from affiliates 309,108 --
Current portion of note receivable
from unaffiliated Virginia Racetrack 290,000 590,000
---------------------------------------
Total current assets 6,205,763 7,927,573
Property, plant and equipment:
Land 4,086,603 4,069,869
Buildings and land improvements 61,125,651 57,798,687
Machinery, equipment, furniture and fixtures 15,809,748 15,346,299
---------------------------------------
81,022,002 77,214,855
Less accumulated depreciation (47,403,355) (43,765,923)
---------------------------------------
Net property, plant and equipment 33,618,647 33,448,932
Other noncurrent assets:
Investments in related parties 575,900 516,124
Investments in affiliates 1,543,517 759,707
Notes receivable from affiliates 2,720,147 3,276,540
Notes receivable from unaffiliated
Virginia Racetrack 678,000 1,091,376
Receivable from concessionaire 626,973 561,619
Deferred financing costs, net 139,232 118,146
Other 684,072 134,086
---------------------------------------
Total noncurrent assets 6,967,841 6,457,598
---------------------------------------
Total assets $ 46,792,251 $47,834,103
=======================================
28
Maryland Jockey Club Companies
Combined Balance Sheets
(Unaudited)
SEPTEMBER 30 SEPTEMBER 30
2002 2001
----------------------------------------
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' DEFICIT
Current liabilities:
Short-term borrowings $ -- $ 7,600,000
Accounts payable and accrued expenses 6,182,376 7,095,928
Pari-mutuel tickets outstanding 1,933,886 2,350,201
Due to related parties 2,175,692 1,781,798
Current portion of long-term debt 1,041,216 761,079
----------------------------------------
Total current liabilities 11,333,170 19,589,006
Notes payable to affiliates 963,000 496,000
Note payable to related party 2,500,000 2,500,000
Long-term debt, less current portion 21,767,217 15,493,083
----------------------------------------
Total liabilities 36,563,387 38,078,089
Stockholders' equity and partners' deficit
Common stock (Class A), par value $.10 per share, 100 100
Authorized shares - 10,000
Issued and outstanding shares - 1,000
Common stock (Class B), par value $.10 per share, 900 900
Authorized shares - 10,000
Issued and outstanding shares - 9,000
Additional paid-in capital 2,553,700 2,553,700
Retained earnings 15,635,014 14,448,234
Partners' deficit (7,960,850) (7,246,920)
----------------------------------------
Total stockholders' equity and partners' deficit 10,228,864 9,756,014
Total liabilities, stockholders' equity and partners' deficit $ 46,792,251 $47,834,103
========================================
29
Maryland Jockey Club Companies
Combined Statements of Operations
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001
----------------------------------------
Mutuel play $ 242,861,589 $244,883,398
Returned to public 192,324,833 193,304,266
----------------------------------------
Gross wagering revenues 50,536,756 51,579,132
----------------------------------------
Less takeouts:
Stakes and purses 16,129,780 16,545,430
Commissions to unaffiliated Maryland
standardbred racetrack 8,432,998 8,643,955
Signal fees 5,989,817 5,903,293
State's share 969,020 981,717
Pension funds 522,195 534,752
Bond fund 706,561 780,760
----------------------------------------
32,750,371 33,389,907
----------------------------------------
17,786,385 18,189,225
Commission from unaffiliated Maryland
standardbred racetrack 6,533,620 6,794,894
Commissions from affiliated off track betting facilities 1,794,850 1,830,790
----------------------------------------
Companies' share 26,114,855 26,814,909
Other racing revenue 16,467,664 17,094,697
----------------------------------------
Revenue from racing $42,582,519 $43,909,606
----------------------------------------
30
Maryland Jockey Club Companies
Combined Statements of Operations (continued)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001
----------------------------------------
Revenue from racing $ 42,582,519 $ 43,909,606
Expenses:
Operating 25,109,062 25,149,056
Depreciation and amortization 2,619,279 2,528,637
General and administrative 7,213,490 6,692,095
Loss on affiliated training center 1,614,580 1,615,264
Loss on affiliated off track betting facilities 853,461 1,102,358
----------------------------------------
37,409,872 37,087,410
Income from operations 5,172,647 6,822,196
Other income (expense):
Interest expense (1,492,227) (1,470,848)
Interest income 187,924 362,027
Other (expense) income (131,063) 182,996
----------------------------------------
Income before provision for income taxes 3,737,281 5,896,371
Provision for income taxes 1,390,018 2,138,909
----------------------------------------
Net income $ 2,347,263 $ 3,757,462
========================================
31
Maryland Jockey Club Companies
Combined Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001
-------------------------------------
OPERATING ACTIVITIES
Net income $2,347,263 $3,757,462
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,619,279 2,528,637
Changes in operating assets and liabilities:
Accounts receivable, net 189,538 (732,267)
Prepaid expenses and other assets 44,566 (293,884)
Accounts payable and accrued expenses 1,621,517 2,894,744
Pari-mutuel tickets outstanding (476,666) (192,771)
Due to/from related parties 30,275 (6,078,076)
-------------------------------------
Net cash provided by operating activities 6,375,772 1,883,845
INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,731,008) (3,223,825)
Repayment of notes receivable from Unaffiliated Virginia Racetrack 564,500 68,624
Net increase in investments in related parties 1,476,266 1,719,005
Net (decrease) increase in other assets and investments (373,623) 219,754
-------------------------------------
Net cash used in investing activities (1,063,865) (1,216,442)
FINANCING ACTIVITIES
Net proceeds from long-term debt -- 7,100,000
Net payments on short-term borrowings (2,600,000) --
Payment on notes to affiliates (1,165,999) (1,772,241)
Principal payments on long-term debt (2,645,294) (4,960,173)
-------------------------------------
Net cash (used in) provided by financing activities (6,411,293) 367,586
-------------------------------------
Decrease in cash and cash equivalents (1,099,386) 1,034,989
Cash and cash equivalents at beginning of year 3,203,565 1,615,993
-------------------------------------
Cash and cash equivalents at end of year $2,104,179 $2,650,982
=====================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $1,492,227 $1,470,848
32
MAGNA ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2001
- --------------------------------------------------------------------------------
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
THE MARYLAND
JOCKEY CLUB
SPORT SPORTS THE ADJUSTMENTS
BROAD- BROADCASTING MARYLAND ---------------
MAGNA LADBROKE CASTING, INC. JOCKEY COMBI-
ENTER- LADBROKE ADJUSTMENTS INC. ADJUSTMENTS CLUB NATION OTHER PRO FORMA
TAINMENT (NOTE (NOTE (NOTE (NOTE (NOTE (NOTE (NOTE CONSOLIDATED
CORP. 2(a)(i)) 2(a)(ii)) 2(b)(i)) 2(b)(ii)) 2(c)(i)) 2(c)(v)) 2(c)(v)) TOTAL
--------------------------------------------------------------------------------------------------
REVENUES
Racetrack
Gross wagering $393,981 $16,759 $1,683 $ 80,110 $10,699 $503,232
Non-wagering 65,430 1,470 20,130 1,377 88,407
--------------------------------------------------------------------------------------------------
459,411 18,229 1,683 - - 100,240 12,076 - 591,639
--------------------------------------------------------------------------------------------------
Real Estate
Sale of real estate 40,600 40,600
Rental and other 19,050 19,050
--------------------------------------------------------------------------------------------------
59,650 - - - - - - - 59,650
--------------------------------------------------------------------------------------------------
519,061 18,229 1,683 - - 100,240 12,076 - 651,289
--------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Racetrack
Purses, awards and other 243,389 4,088 1,302 44,490 10,699 303,968
Operating costs 152,561 10,953 33,423 4,656 201,593
General and administrative 31,092 566 8,775 280 40,713
--------------------------------------------------------------------------------------------------
427,042 15,607 1,302 - - 86,688 15,635 - 546,274
--------------------------------------------------------------------------------------------------
Real Estate
Cost of real estate sold 20,171 20,171
Operating costs 15,789 15,789
General and administrative 1,130 1,130
--------------------------------------------------------------------------------------------------
37,090 - - - - - - - 37,090
--------------------------------------------------------------------------------------------------
Predevelopment and other costs 3,240 430 101 3,661 (3,661) 3,771
Depreciation and amortization 26,194 495 731 3,547 353 31,320
Interest expense, net 2,682 549 1,557 115 1,155 6,058
--------------------------------------------------------------------------------------------------
496,248 16,102 2,582 430 101 95,453 12,442 1,155 624,513
--------------------------------------------------------------------------------------------------
Income (loss) before income taxe 22,813 2,127 (899) (430) (101) 4,787 (366) (1,155) 26,776
Income tax provision (recovery) 9,349 884 (360) 3,295 (462) 12,706
Minority interest 366 366
--------------------------------------------------------------------------------------------------
Net income (loss) 13,464 1,243 (539) (430) (101) 1,492 - (693) 14,436
Other comprehensive loss
Foreign currency translation
adjustment (9,062) (9,062)
--------------------------------------------------------------------------------------------------
Comprehensive income (loss) $4,402 $1,243 ($539) ($430) ($101) $1,492 - ($693) $5,374
--------------------------------------------------------------------------------------------------
Earnings per share for Class A
Subordinate Voting Stock,
Class B Stock or Exchangeable
Share:
Basic $0.16 $0.17
Diluted $0.16 $0.17
--------------------------------------------------------------------------------------------------
Average number of shares of
Class A Subordinate Voting
Stock, Class B Stock and
Exchangeable Shares outstanding
during the period [in thousands]
Basic 82,930 795 83,725
Diluted 83,242 795 84,037
--------------------------------------------------------------------------------------------------
MAGNA ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
THE MARYLAND JOCKEY
CLUB ADJUSTMENTS
MAGNA THE MARYLAND -------------------------------- PRO FORMA
ENTERTAINMENT JOCKEY CLUB COMBINATION OTHER CONSOLIDATED
CORP. (NOTE 2(c)(i)) (NOTE 2(c)(v)) (NOTE 2(c)(v)) TOTAL
------------------------------------------------------------------------------------------
REVENUES
Racetrack
Gross wagering $369,089 $58,865 $8,200 $436,154
Non-wagering 51,588 16,336 1,232 69,156
------------------------------------------------------------------------------------------
420,677 75,201 9,432 - 505,310
------------------------------------------------------------------------------------------
Real Estate
Sale of real estate 8,466 8,466
Rental and other 13,257 13,257
------------------------------------------------------------------------------------------
21,723 - - - 21,723
------------------------------------------------------------------------------------------
442,400 75,201 9,432 - 527,033
------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Racetrack
Purses, awards and other 230,100 32,750 8,158 271,008
Operating costs 131,425 25,109 3,309 159,843
General and administrative 27,519 7,213 372 35,104
------------------------------------------------------------------------------------------
389,044 65,072 11,839 - 465,955
------------------------------------------------------------------------------------------
Real Estate
Cost of real estate sold 6,381 6,381
Operating costs 10,105 10,105
General and administrative 1,814 1,814
------------------------------------------------------------------------------------------
18,300 - - - 18,300
------------------------------------------------------------------------------------------
Predevelopment and other costs 1,694 2,469 (2,469) 1,694
Depreciation and amortization 16,684 2,619 246 19,549
Interest expense (income), net (307) 1,304 37 864 1,898
------------------------------------------------------------------------------------------
425,415 71,464 9,653 864 507,396
------------------------------------------------------------------------------------------
Income (loss) before income taxes 16,985 3,737 (221) (864) 19,637
Income tax provision (recovery) 7,030 1,390 (346) 8,074
Minority interest 221 221
------------------------------------------------------------------------------------------
Net income (loss) 9,955 2,347 - (518) 11,784
Other comprehensive income
Foreign currency translation
adjustment 9,637 9,637
------------------------------------------------------------------------------------------
Comprehensive income $19,592 $2,347 - ($518) $21,421
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Earnings per share for Class A
Subordinate Voting Stock,
Class B Stock or Exchangeable Share:
Basic $0.10 $0.12
Diluted $0.10 $0.12
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Average number of shares of Class A
Subordinate Voting Stock, Class B
Stock and Exchangeable Shares
outstanding during the period
[in thousands]
Basic 98,643 98,643
Diluted 99,453 99,453
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
33
MAGNA ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
(UNAUDITED)
(U.S. DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
THE MARYLAND JOCKEY
CLUB ADJUSTMENTS
MAGNA THE MARYLAND -------------------------------------- PRO FORMA
ENTERTAINMENT JOCKEY CLUB COMBINATION PURCHASE ACCOUNTING CONSOLIDATED
CORP. (NOTE 2(c)(ii)) NOTE 2(c)(iii)) (NOTE 2(c)(iv)) BALANCE SHEET
--------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $117,752 $2,104 ($36) ($71,898) $47,922
Restricted cash 7,260 2,300 9,560
Accounts receivable 36,116 3,205 209 39,530
Prepaid expenses and other 6,098 897 78 7,073
--------------------------------------------------------------------------------------
167,226 6,206 2,551 (71,898) 104,085
--------------------------------------------------------------------------------------
Real estate properties and fixed assets,
net 631,128 33,619 3,931 32,903 701,581
--------------------------------------------------------------------------------------
Other assets, net 189,124 6,967 (4,014) 92,930 285,007
--------------------------------------------------------------------------------------
Future tax assets 3,685 3,685
--------------------------------------------------------------------------------------
$991,163 $46,792 $2,468 $53,935 $1,094,358
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities $62,203 $10,292 $3,431 $2,800 $78,726
Income taxes payable 892 892
Long-term debt due within one year 18,671 1,041 19,712
--------------------------------------------------------------------------------------
81,766 11,333 3,431 2,800 99,330
--------------------------------------------------------------------------------------
Long-term debt 58,549 25,230 (963) 18,313 101,129
--------------------------------------------------------------------------------------
Other long-term liabilities 5,334 5,334
--------------------------------------------------------------------------------------
Future tax liabilities 115,675 43,051 158,726
--------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital stock issued and outstanding -
Class A Subordinate Voting Stock
(issued: 2002 - 46,818) 303,290 303,290
Exchangeable Shares (issued: 2002 - 1,824) 13,536 13,536
Class B Stock (issued: 2002 - 58,466) 394,094 1 (1) 394,094
Contributed Surplus 7,290 2,554 (2,554) 7,290
Retained earnings 21,429 7,674 (7,674) 21,429
Accumulated comprehensive loss (9,800) (9,800)
--------------------------------------------------------------------------------------
729,839 10,229 - (10,229) 729,839
--------------------------------------------------------------------------------------
$991,163 $46,792 $2,468 $53,935 $1,094,358
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
34
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 September 30, 2002 has been
prepared from the unaudited consolidated balance sheet of Magna
Entertainment Corp. (the "Company") as at September 30, 2002 and the
unaudited consolidated balance sheet of the Maryland Jockey Club Companies
("MJC") as at September 30, 2002.
b) PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
I. The pro forma consolidated statement of operations and comprehensive
income for the nine months ended September 30, 2002 has been prepared
from:
(i) the unaudited consolidated statement of operations and
comprehensive income of the Company for the nine months ended
September 30, 2002; and
(ii) the unaudited consolidated statement of operations of MJC for the
nine months ended September 30, 2002.
II. The pro forma consolidated statement of operations and comprehensive
income for the year ended December 31, 2001 has been prepared from:
(i) the audited consolidated statement of operations and
comprehensive income of the Company for the year ended December
31, 2001;
(ii) the unaudited consolidated statement of operations of Ladbroke
Racing Pennsylvania and Subsidiaries ("Ladbroke") for the period
from January 1, 2001 to April 4, 2001; and
(iii) the unaudited statement of operations of Sports Broadcasting,
Inc. ("SBI") for the three month period ended March 31, 2001;
and
(iv) the audited combined statement of operations of MJC for the year
ended December 31, 2001.
These pro forma consolidated financial statements should be read in
conjunction with the historical financial statements of MJC, including the
related notes thereto, presented elsewhere herein, as well as the
historical financial statements of the Company, Ladbroke and SBI, including
the related notes thereto, previously filed with the U.S. 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 operating results that would have
resulted had the relevant transactions taken place at the respective dates
referred to below.
35
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, 2001
for the pro forma consolidated statements of operations and comprehensive income
and as of September 30, 2002 for the pro forma consolidated balance sheet. The
pro forma consolidated financial statements give effect to the following items:
a) LADBROKE
On April 5, 2001, the Company completed the acquisition of Ladbroke Racing
Pennsylvania, Inc. and Sports Broadcasting, Inc. (collectively "Ladbroke
Racing Pennsylvania and Subsidiaries" or "Ladbroke") for a total purchase
price, including transaction costs, of $46.6 million, net of cash acquired
of $7.0 million. The total purchase price was satisfied by cash payments of
$20.1 million, the issuance of two promissory notes totaling $13,250,000
which bear interest at 6% per annum with the first note in the amount of
$6,625,000 maturing on the first anniversary of the closing date and the
second note in the amount of $6,625,000 maturing on the second anniversary
of the closing date, and by the issuance of 3,178,297 shares of Class A
Subordinate Voting Stock. Ladbroke includes account wagering operations,
The Meadows harness racetrack and four off-track betting facilities located
around the Pittsburgh, Pennsylvania area. In addition, substantially all
the assets of Sports Broadcasting, Inc. consist of an 18.3% interest in The
Racing Network. The Company has determined that the excess of purchase
price over net assets on the Ladbroke acquisition should be allocated to
racing licenses rather than goodwill. As a result, the excess has been
reflected as racing licenses and, accordingly, a deferred tax liability has
been established relating to this asset.
(i) The pro forma consolidated statement of operations and comprehensive
income for the year ended December 31, 2001 includes the
results of Ladbroke for the same period.
(ii) The pro forma consolidated statement of operations and comprehensive
income for the year ended December 31, 2001 includes 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 income for the year ended December 31,
2001 are:
- The Ladbroke unaudited consolidated statement of operations
presents gross wagering revenues net of pari-mutuel taxes. For
the period to our acquisition, these taxes were $1,683,000. An
adjustment has been made to increase both gross wagering
revenues and purses, awards and other expenses by $1,683,000.
- Additional amortization expense of $769,000 as a result of the
increase in other assets (racing licenses), based on the
purchase price allocation, and accounting policy to amortize the
other assets 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 to the date of our
acquisition of $76,295,000. As such, the tax reduction would
decrease purses, awards and other expenses by $381,000.
- On acquisition, the Company issued promissory notes of
$20,100,000, which bear interest at 6% per annum. Accordingly,
there would be an increase in interest expense of $199,000.
- On acquisition, the Company paid cash of approximately
$20,100,000. Accordingly, there would be decreased interest
income earned in the period as a result of these funds being
disbursed at the beginning of the period of approximately
$350,000.
36
- Ladbroke had previously depreciated buildings over a 25 year
period. The Company's accounting policy is to depreciate these
assets over a 40 year period. Accordingly, depreciation and
amortization expense has been reduced by $38,000 to reflect the
longer depreciation period.
- A decrease in income tax expense of $52,000 is required as a
result of the above noted adjustments, effected at a combined
federal and state tax rate of 40%.
- A decrease in deferred income tax expense of $308,000 as a result
of the reversal of deferred income taxes on the amortization of
the other assets (racing license).
(b) SPORT BROADCASTING, INC. ("SBI")
(i) The pro forma consolidated statement of operations and comprehensive
income for the year ended December 31, 2001 includes the results of
SBI for the same period.
(ii) The pro forma consolidated statement of operations and comprehensive
income includes an adjustment to adjust the loss in SBI to only the
contributions made to SBI in the year ended December 31, 2001.
Contributions during the year ended December 31, 2001 were $943,000.
Of these amounts, $531,000 were up to the date of our acquisition and
$412,000 were subsequent to our acquisition. Contributions subsequent
to our acquisition are included in the Company's balances. As the loss
for the period is accounted for by the equity method of accounting, an
adjustment to increase pre-development and other costs by $101,000 is
required to reflect the $531,000 of contributions made.
(c) MARYLAND JOCKEY CLUB COMPANIES
On November 27, 2002, the Company completed the acquisition of a
controlling interest in the Pimlico Race Course and Laurel Park, which are
operated under the trade name "The Maryland Jockey Club", for a total
purchase price, including transaction costs, of $84.9 million, net of cash
acquired of $5.3 million. The total purchase price was satisfied by cash
payments of $66.6 million and the obligation to pay $18.3 million, which
bears interest at the six month London Inter-bank Overnight Rate ("LIBOR"),
upon the exercise of either the put or call option described below. Under
the terms of the agreements, the Company acquired a 51% equity and voting
interest in The Maryland Jockey Club of Baltimore City, Inc., the owner of
Pimlico Race Course, a 51% voting interest and a 58% equity interest on a
fully diluted basis in Laurel Racing Assoc., Inc., the general partner and
manager of Laurel Racing Association Limited Partnership ("LRALP"), the
owner of Laurel Park, and the entire limited partnership interest in LRALP.
The Company also purchased options from the De Francis family to buy their
remaining voting and equity interest in The Maryland Jockey Club, which
represent all of the minority interests, at any time during the period
starting 48 months and ending 60 months after the closing of the
transaction. The Company has also granted the De Francis family the option
to sell such interests to the Company at any time during the first five
years after closing. In consideration for these options, the Company paid
$18.4 million on closing and an additional $18.3 million, plus interest at
the six month LIBOR, will be paid on exercise of the options. The put and
call options are viewed, for accounting purposes, on a combined basis with
the minority interest and accounted for as a financing of the Company's
purchase of such minority interest. Accordingly, the Company will
consolidate 100% of the operations of MJC from the date of acquisition.
Pimlico Race Course, the home of the Preakness Stakes, the middle jewel in
thoroughbred racing's Triple Crown, and Laurel Park both are located in the
Baltimore, Maryland area.
(i) The pro forma consolidated statements of operations and comprehensive
income for the year ended December 31, 2001 and the nine months ended
September 30, 2002 include the results of operations of MJC for the
same periods.
(ii) The pro forma consolidated balance sheet as at September 30, 2002
includes the financial position of MJC as at the same date.
37
(iii) The pro forma consolidated balance as at September 30, 2002 includes
an adjustment to eliminate certain investments in entities that are
accounted for on the equity basis of accounting in the MJC balance
sheet. However, as a result of the acquisition, the Company has a
controlling interest in these entities and is required to consolidate
rather than equity account. Accordingly, an adjustment is required to
reduce cash by $36,000, investments by $4,014,000, long-term debt by
$963,000 and increase restricted cash by $2,300,000, accounts
receivable by $209,000, prepaid expenses and other by $78,000, real
estate properties and fixed assets by $3,931,000 and accounts payable
and other liabilities by $3,431,000.
(iv) The pro forma consolidated balance sheet as at September 30, 2002
includes an adjustment to record the application of purchase
accounting to the September 30, 2002 balance sheet. The impact of
applying purchase accounting is to increase other assets (racing
license) by $92,930,000, real estate properties and fixed assets by
$32,903,000, accounts payable and other accrued liabilities by
$2,800,000, long-term debt by $18,313,000, future income tax
liabilities by $43,051,000 and decrease cash by $71,898,000. The
capital stock of $1,000, contributed surplus of $2,554,000 and
retained earnings of $7,674,000 are eliminated.
(v) The pro forma consolidated statements of operations and comprehensive
income for the year ended December 31, 2001 and the nine months ended
September 30, 2002 include adjustments that arise as a result of the
acquisition of MJC and the application of purchase accounting. The
adjustments to the results of operations of MJC included in the pro
forma consolidated statements of operations and comprehensive income
for the year ended December 31, 2001 and the nine months ended
September 30, 2002 are:
FOR THE YEAR ENDED DECEMBER 31, 2001
- The MJC statement of operations reflects commissions earned and
losses from affiliated off- track betting facilities, for which
the Company has a controlling interest, on the equity basis of
accounting. As stated above, the Company is required to
consolidate rather than equity account for these investments and
the adjustment required is to increase gross wagering revenue by
$10,699,000, non-wagering revenue by $1,377,000, purses, awards
and other by $10,699,000, operating costs by $4,656,000, general
and administrative costs by $280,000, depreciation and
amortization expense by $353,000 and interest expense by
$115,000, record minority interest of $366,000 and reduce
predevelopment and other costs by $3,661,000.
- On acquisition, the Company assumed the obligation to pay
$18,312,650, upon the exercise of either the put or call option,
which bears interest at the six month LIBOR. Accordingly, there
would be an increase in interest expense of $269,000 for the year
ended December 31, 2001.
- On acquisition, the Company paid $66,615,000 for the purchase of
MJC. Accordingly, there would be a decrease in interest income of
$886,000 for the year ended December 31, 2001, as these funds
would have not been available to earn interest.
- A reduction in income tax expense of $462,000 for the year ended
December 31, 2001 is required as a result of the above noted
adjustments, effected at a combined federal and state tax rate of
40%.
38
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
- The MJC statement of operations reflects commissions earned and
losses from affiliated off-track betting facilities, for which
the Company has a controlling interest, on the equity basis of
accounting. As stated above, the Company is required to
consolidate rather than equity account for these investments and
the adjustment required to increase gross wagering revenue by
$8,200,000, non-wagering revenue by $1,232,000, purses, awards
and other by $8,158,000, operating costs by $3,309,000, general
and administrative costs by $372,000, depreciation and
amortization expense by $246,000 and interest expense by $37,000,
record minority interest of $221,000 and reduce predevelopment
and other costs by $2,469,000.
- On acquisition, the Company assumed the obligation to pay
$18,312,650, upon the exercise of either the put or call option,
which bears interest at the six month LIBOR. Accordingly, there
would be an increase in interest expense of $201,000 for the nine
months ended September 30, 2002.
- On acquisition, the Company paid $66,615,000 for the purchase of
MJC. Accordingly, there would be a decrease in interest income of
$663,000 for the nine months ended September 30, 2002, as these
funds would have not been available to earn interest.
- A reduction in income tax expense of $346,000 for the nine months
ended September 30, 2002 is required as a result of the above
noted adjustments, effected at a combined federal and state tax
rate of 40%.
39
<Page>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<Table>
<Caption>
(c) EXHIBITS PAGE
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Exhibit 2.1 Stock Purchase Agreement dated July 15, 2002 by and among Previously Filed
the Company, all of the Stockholders of Laurel Racing
Assoc., Inc., and Pimlico Racing Association, Inc., and
Laurel Guida Group, incorporated by reference to Exhibit 2.1
to Item 7 of the Form 8-K filed by Magna Entertainment Corp.
dated December 12, 2002. (The Exhibits to this Agreement,
which are identified in the list appearing at the end of the
Agreement, have been omitted but will be furnished
supplementally to the Commission upon request).
Exhibit 2.2 Option Agreement dated November 27, 2002 by and among the Previously Filed
Company, Joseph LLC, Karin LLC, Joseph A. DeFrancis and
Karin M. DeFrancis, incorporated by reference to Exhibit 2.2
to Item 7 of the Form 8-K filed by Magna Entertainment Corp.
dated December 12, 2002. (Exhibit A to this Agreement has
been omitted but will be furnished supplementally to the
Commission upon request).
Exhibit 23 Consent of Ernst & Young LLP for Maryland Jockey Club 37
Exhibit 99 Registrant's press release dated November 27, 2002, Previously Filed
incorporated by reference to Exhbit 99 to Item 7 of the
Form 8-K filed by Magna Entertainment Corp. dated
December 12, 2002.
</Table>
<Page>
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: February 10, 2003 by: /s/Gary M. Cohn
-----------------------------
Gary M. Cohn, Secretary