SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
337 Magna Drive, Aurora, Ontario L4G 7K1
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(Address of principal executive offices, including zip code)
(905) 726-2462
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The Registrant had 46,871,764 shares of Class A Subordinate Voting Stock
outstanding as of October 31, 2002. In addition, as of October 31, 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 1,770,067
Exchangeable Shares remain unexchanged.
Page 1
MAGNA ENTERTAINMENT CORP.
I N D E X
PAGES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three and nine month periods ended September 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows for the three and
nine month periods ended September 30, 2002 and 2001 4
Condensed Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001 5
Notes to the Consolidated Financial Statements (Unaudited) 6 - 11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Position 12 - 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23 - 24
Exhibit Index 25
Exhibits 26 - 30
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- -------------------------------------------------------------------------------
[Unaudited]
[U.S. dollars in thousands, except per share figures]
- -------------------------------------------------------------------------------
Three months ended Nine months ended
---------------------- ----------------------
Sept. 30, Sept.30, Sept.30, Sept.30,
2002 2001 2002 2001
--------- -------- -------- --------
Revenues
Racetrack
Gross wagering $ 46,486 $ 45,085 $369,089 $321,574
Non-wagering 11,842 13,394 51,588 50,850
--------- --------- -------- --------
58,328 58,479 420,677 372,424
--------- --------- -------- --------
Real estate
Sale of real estate 1,725 1,091 8,466 37,236
Rental and other 5,380 6,262 13,257 13,890
--------- --------- -------- --------
7,105 7,353 21,723 51,126
--------- --------- -------- --------
65,433 65,832 442,400 423,550
========= ========= ======== ========
Costs and expenses
Racetrack
Purses, awards and other 25,740 24,509 230,100 198,217
Operating costs 36,202 31,686 131,425 117,947
General and administrative 7,335 6,172 27,519 21,402
--------- --------- -------- --------
69,277 62,367 389,044 337,566
--------- --------- -------- --------
Real estate
Cost of real estate sold 1,759 1,054 6,381 20,147
Operating costs 4,744 4,466 10,105 9,882
General and administrative 803 282 1,814 829
--------- --------- -------- --------
7,306 5,802 18,300 30,858
--------- --------- -------- --------
Predevelopment and other costs 70 488 1,694 2,310
Depreciation and amortization 5,414 7,376 16,684 19,360
Interest (income) expense, net (121) 282 (307) 2,360
--------- --------- -------- --------
81,946 76,315 425,415 392,454
--------- --------- -------- --------
Income (loss) before income taxes (16,513) (10,483) 16,985 31,096
Income tax provision (benefit) (6,771) (4,256) 7,030 12,618
--------- --------- -------- --------
Net income (loss) (9,742) (6,227) 9,955 18,478
Other comprehensive income (loss)
Foreign currency translation adjustment (3,462) 2,974 9,637 (5,982)
--------- --------- -------- --------
Comprehensive income (loss) $ (13,204) $ (3,253) $ 19,592 $ 12,496
========= ========= ======== ========
Earnings (loss) per share of Class A Subordinate
Voting Stock, Class B Stock or Exchangeable Share:
Basic $ (0.09) $ (0.07) $ 0.10 $ 0.23
Diluted $ (0.09) $ (0.07) $ 0.10 $ 0.22
========= ========= ======== ========
Average number of shares of Class A Subordinate
Voting Stock, Class B Stock and Exchangeable
Shares outstanding during the period [in thousands]:
Basic 107,107 83,719 98,643 82,107
Diluted 107,128 83,977 99,453 82,439
========= ========= ======== ========
Page 3
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
[Unaudited]
[U.S. dollars in thousands]
- -------------------------------------------------------------------------------
Three months ended Nine months ended
---------------------- ----------------------
Sept. 30, Sept.30, Sept.30, Sept.30,
2002 2001 2002 2001
--------- -------- -------- --------
Cash provided from (used for):
OPERATING ACTIVITIES
Net income (loss) $ (9,742) $ (6,227) $ 9,955 $18,478
Items not involving current cash flows 2,643 6,857 14,218 (4,476)
--------- -------- -------- -------
(7,099) 630 24,173 14,002
Changes in non-cash items related to operations (4,089) (3,956) (5,057) 6,357
--------- -------- -------- -------
(11,188) (3,326) 19,116 20,359
--------- -------- -------- -------
INVESTMENT ACTIVITIES
Acquisition of business, net of cash (594) - (594) (21,035)
Real estate property and fixed asset additions (38,003) (9,111) (71,822) (25,494)
Other asset additions (10,306) (530) (13,340) (366)
Proceeds on sale of real estate 2,284 3,888 9,109 36,793
--------- -------- -------- -------
(46,619) (5,753) (76,647) (10,102)
--------- -------- -------- -------
FINANCING ACTIVITIES
Decrease in bank indebtedness - - - (7,609)
(Repayment of) increase in long-term debt, net (959) (1,090) (9,519) 7,571
Issuance of share capital 29 33 142,393 476
--------- -------- -------- -------
(930) (1,057) 132,874 438
--------- -------- -------- -------
Effect of exchange rate changes on cash
and cash equivalents (231) 1,811 3,197 186
--------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents
during the period (58,968) (8,325) 78,540 10,881
Cash and cash equivalents, beginning of period 176,720 51,182 39,212 31,976
--------- -------- -------- -------
Cash and cash equivalents, end of period $117,752 $42,857 $117,752 $42,857
======== ======== ======== =======
Page 4
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
[Unaudited]
[U.S. dollars and share amounts in thousands]
- -------------------------------------------------------------------------------
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $117,752 $ 39,212
Restricted cash 7,260 18,782
Accounts receivable 36,116 33,101
Prepaid expenses and other 6,098 5,162
-------- ---------
167,226 96,257
-------- ---------
Real estate properties and fixed assets, net 631,128 574,677
-------- ---------
Other assets, net 189,124 179,665
-------- ---------
Future tax assets 3,685 3,657
-------- ---------
$991,163 $854,256
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other liabilities $ 62,203 $ 78,337
Income taxes payable 892 1,312
Long-term debt due within one year 18,671 18,133
-------- ---------
81,766 97,782
-------- ---------
Long-term debt 58,549 67,768
-------- ---------
Other long-term liabilities 5,334 2,576
-------- ---------
Future tax liabilities 115,675 118,276
-------- ---------
Shareholders' equity:
Capital stock issued and outstanding -
Class A Subordinate Voting Stock
(issued: 2002 - 46,818; 2001 - 23,324) 303,290 157,633
Exchangeable Shares (issued: 2002 - 1,824; 2001 - 2,263) 13,536 16,800
Class B Stock (issued: 2002 and 2001 - 58,466) 394,094 394,094
Contributed surplus 7,290 7,290
Retained earnings 21,429 11,474
Accumulated comprehensive loss (9,800) (19,437)
-------- ---------
729,839 567,854
-------- ---------
$991,163 $854,256
======== =========
Page 5
MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with 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 and nine month periods ended September 30, 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 income are earned in the first quarter of each year.
2. Accounting Change, Acquisitions 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 first quarter of 2002 and determined that the value of
its racing licenses was not impaired. As at September 30, 2002, racing
licenses with a net book value of $167.6 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. ("Ladbroke") and Sport Broadcasting, Inc.
("SBI"). On October 26, 2001, the Company acquired all the outstanding
capital stock of MKC Acquisition Co. ("MKC"), 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 the timing of these acquisitions, the results
of operations of MKC are not included in the Company's results for the
three and nine month periods ended September 30, 2001 and the results
of operations of Ladbroke are not included for the first quarter of
2001.
Page 6
c) Impact of Accounting Change and Acquisitions
The pro-forma impact of the implementation of SFAS 142 and our
acquisitions is as follows (in thousands, except per share figures):
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
Revenues 2002 2001 2002 2001
------- ------- -------- --------
Revenues as reported $65,433 $65,832 $442,400 $423,550
Restatement for acquisitions - 5,032 - 28,280
------- ------- -------- --------
Pro-forma revenues $65,433 $70,864 $442,400 $451,830
======= ======= ======== ========
Pro-forma revenues excluding
proceeds on the sale of real estate $63,708 $69,773 $433,934 $414,594
======= ======= ======== ========
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
Net Income 2002 2001 2002 2001
------- ------- -------- --------
Net income (loss) as reported $(9,742) $(6,227) $9,955 $18,478
Restatement for change in
intangible assets amortization - 1,411 - 3,352
Restatement for acquisitions - 332 - (810)
------- ------- -------- --------
Pro-forma net income (loss) $(9,742) $(4,484) $9,955 $21,020
======= ======= ======== ========
Pro-forma net income (loss) excluding
gains on the sale of real estate $(9,722) $(4,506) $8,733 $10,865
======= ======= ======== ========
Three months ended Nine months ended
September 30, September 30,
Basic and Diluted ---------------------- ---------------------
Earnings per Share 2002 2001 2002 2001
------- ------- -------- --------
Earnings (loss) per share as reported
Basic $(0.09) $(0.07) $0.10 $0.23
Diluted (0.09) (0.07) 0.10 0.22
Restatement for change in
intangible assets amortization - 0.02 - 0.04
Restatement for acquisitions - - - (0.01)
------- ------- -------- --------
Pro-forma earnings (loss) per share
Basic $(0.09) $(0.05) $0.10 $0.26
Diluted (0.09) (0.05) 0.10 0.25
======= ======= ======== ========
Pro-forma basic and diluted earnings
(loss) per share excluding gains on
the sale of real estate $(0.09) $(0.05) $0.09 $0.13
======= ======= ======== ========
Page 7
3. Capital Stock
Changes in Class A Subordinate Voting Stock, Exchangeable Shares and Class B
Stock for the nine months ended September 30, 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 of Stated Number of Stated Number of Stated
Shares Value Shares Value 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
=========== ========= =========== ========== ========== ===========
Issued on completion of
public offering(i) 23,000 $142,084 - - - -
Issued on exercise of stock options
Conversion of Exchangeable 6 29 - - - -
Shares to Class A
Subordinate Voting Stock 132 981 (132) (981) - -
----------- --------- ----------- ---------- ---------- -----------
Issued and outstanding at
June 30, 2002 46,787 $303,071 1,849 $13,726 58,466 $394,094
=========== ========= =========== ========== ========== ===========
Issued on exercise of stock options
Conversion of Exchangeable 6 29 - - - -
Shares to Class A
Subordinate Voting Stock 25 190 (25) (190) - -
----------- --------- ----------- ---------- ---------- -----------
Issued and outstanding at
September 30, 2002 46,818 $303,290 1,824 $13,536 58,466 $394,094
=========== ========= =========== ========== ========== ===========
(i) On April 10, 2002, the Company completed a public offering of 23 million
shares of its Class A Subordinate Voting Stock, at a price to the public of
U.S. $6.65 per share in the United States, or Cdn. $10.60 per share in
Canada. Expenses of the issue of approximately $10.9 million have been
netted against the cash proceeds.
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 September 30, 2002, 6,000 shares were issued on the exercise of stock
options under the Plan. During the nine months ended September 30, 2002, 54,900
shares were issued under the Plan, including 12,000 shares issued on the
exercise of stock options.
Page 8
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 nine months ended September 30, 2002, 137,500 stock options were
granted, 12,000 stock options were exercised and 17,000 stock options were
cancelled. At September 30, 2002, there were 4,561,833 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 3,632,696 options exercisable at September 30, 2002 with an average
exercise price of $5.98.
4. Earnings (Loss) Per Share
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings (loss) per share computations (in thousands except per
share amounts):
Three months ended Nine months ended
September 30, September 30,
----------------------------------------- ---------------------------------
2002 2001 2002 2001
------------------- ----------------- -------------- ----------------
Net Income (Loss) $(9,742) $(6,227) $9,955 $18,478
=================== ================= =============== ================
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Weighted Average Shares
Outstanding:
Class A Subordinate
Voting Stock 46,801 46,822 20,496 20,754 38,213 39,023 17,001 17,333
Class B Stock 58,466 58,466 58,466 58,466 58,466 58,466 58,466 58,466
Exchangeable Shares 1,840 1,840 4,757 4,757 1,964 1,964 6,640 6,640
------- ------- ------- ------ ------ ------ ------ ------
107,107 107,128 83,719 83,977 98,643 99,453 82,107 82,439
======= ======= ====== ====== ====== ====== ====== ======
Earnings (Loss) Per Share $(0.09) $(0.09) $(0.07) $(0.07) $0.10 $0.10 $0.23 $0.22
======= ======= ====== ====== ====== ====== ====== ======
5. Commitments and Contingencies
a) Although the Company is considering a major redevelopment of its
Gulfstream Park racetrack in Florida (the "Gulfstream Park
Redevelopment"), it has deferred a decision on the project at the
present time. 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 and turf club. The aggregate carrying value at September 30,
2002 of the assets that would be demolished if the Gulfstream Park
Redevelopment were to be 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.
Page 9
b) On July 15, 2002, the Company entered into agreements to acquire a
majority interest in Pimlico Race Course and Laurel Park, which are
operated under the trade name "The Maryland Jockey Club" ("MJC"). Under
the terms of the agreements, the Company will be purchasing 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. Each of the general partner and limited
partner of LRALP is entitled to 50% of the profits or losses of LRALP.
All of these interests are being acquired for an aggregate price of
approximately $50.6 million in cash, subject to normal closing
adjustments. In addition, the Company has agreed to purchase options
from the De Francis family to buy their voting and equity interests in
MJC, 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
right to sell such interests to the Company at any time during the first
five years after the closing. In consideration for its options, the
Company has agreed to pay $18.4 million on closing and an additional
$18.3 million on exercise of the options, subject to an interest
adjustment. The closing of the transaction is expected to occur in the
fourth quarter of 2002, subject to regulatory approvals and legislative
review.
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 and other 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 and other operations 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 September 30, 2002
Real Estate
Racetrack and Other
Operations Operations Total
------------ ------------ ------------
Revenues $ 58,328 $ 7,105 $ 65,433
============ ============ ============
Loss before income taxes $ (15,547) $ (966) $ (16,513)
============ ============ ============
Real estate property and fixed asset additions $ 36,244 $ 1,759 $ 38,003
============ ============ ============
Three months ended September 30, 2001
Real Estate
Racetrack and Other
Operations Operations Total
------------ ------------ ------------
Revenues $ 58,479 $ 7,353 $ 65,832
============ ============ ============
Income (loss) before income taxes $ (11,942) $ 1,459 $ (10,483)
============ ============ ============
Real estate property and fixed asset additions $ 5,868 $ 3,243 $ 9,111
============ ============ ============
Page 10
Nine months ended September 30, 2002
Real Estate
Racetrack and Other
Operations Operations Total
------------ ------------ ------------
Revenues $ 420,677 $ 21,723 $ 442,400
============ ============ ============
Income before income taxes $ 15,457 $ 1,528 $ 16,985
============ ============ ============
Real estate property and fixed asset additions $ 67,359 $ 4,463 $ 71,822
============ ============ ============
Nine months ended September 30, 2001
Real Estate
Racetrack and Other
Operations Operations Total
------------ ------------ ------------
Revenues $ 372,424 $ 51,126 $ 423,550
============ ============ ============
Income before income taxes $ 11,728 $ 19,368 $ 31,096
============ ============ ============
Real estate property and fixed asset additions $ 17,706 $ 7,788 $ 25,494
============ ============ ============
7. Subsequent Events
a) On October 11, 2002, the Company entered into an amending agreement to
increase its senior unsecured revolving credit facility from $75.0
million to $100.0 million. The credit facility has a term of one year,
which expires on October 10, 2003, and may be extended with the consent
of both parties.
b) On October 18, 2002, the shares of Flamboro Downs Holdings Limited, the
owner and operator of Flamboro Downs, a harness racetrack located near
Hamilton, Ontario, 45 miles west of Toronto, were acquired by Ontario
Racing Inc. ("ORI"). ORI is a former subsidiary of MEC that is presently
owned by an employee of MEC. Five days after the Company receives all
necessary regulatory approvals for the acquisition of Flamboro Downs,
the shares of ORI will be transferred to the Company. Approval is
expected to occur within 90 days. The Company will equity account for
these operations until the necessary regulatory approvals are obtained.
Flamboro Downs also houses a gaming facility with 750 slot machines
operated by the Ontario Lottery and Gaming Corporation. Pursuant to an
agreement with the Ontario Lottery and Gaming Corporation, Flamboro
Downs receives 20% of the "net win" (slot machine revenues minus payout
to slot players), with one-half of that amount distributed as purses and
the other half being retained by Flamboro Downs. The purchase price, net
of cash, was $55.2 million and was satisfied by vendor take-back notes
of approximately $36.4 million with the remainder paid in cash. MEC has
guaranteed the vendor take-back notes and funded the cash portion of the
purchase price.
c) On October 23, 2002, the Company completed the acquisition of
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 was satisfied by the payment of approximately $81.0
million in cash and the assumption of certain liabilities, including the
Lone Star Park capital lease obligation of approximately $19.0 million.
d) On October 31, 2002, the Board of Directors of the Company's subsidiary,
MEC Holdings (Canada) Inc., called for the redemption of all of its
outstanding Exchangeable Shares, other than those currently held by the
Company or another subsidiary of the Company, on December 30, 2002. The
consideration for this redemption will be provided by the Company, which
has announced that it has elected to exercise its Redemption Call Right
to purchase the Exchangeable Shares to be redeemed, by issuing in
exchange one share of Class A Subordinate Voting Stock of the Company
for each such Exchangeable Share. As such, the proposed redemption will
not require any expenditure of cash on the part of the Company or MEC
Holdings (Canada) Inc.
Page 11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Position
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", "we" or the "Company") 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. At September 30, 2002, we
operated eight thoroughbred racetracks, one standardbred racetrack and one
greyhound track, as well as the simulcast wagering venues at these tracks. On
October 23, 2002, MEC completed the acquisition of Lone Star Park at Grand
Prairie, a Thoroughbred and American Quarter Horse racetrack located near
Dallas, Texas. In addition, on October 18, 2002, Ontario Racing Inc. ("ORI")
acquired Flamboro Downs, a Harness racetrack located in Hamilton, Ontario, 45
miles west of Toronto, Ontario. ORI is a former subsidiary of MEC that is
presently owned by an employee of MEC. Five days after the Company receives all
necessary regulatory approvals for the acquisition of Flamboro Downs, the shares
of ORI will be transferred to the Company. These approvals are expected to be
received by January 2003. As previously reported, on July 15, 2002, MEC entered
into agreements, subject to regulatory approvals and legislative review, to
acquire a majority interest in Pimlico Race Course and Laurel Park, which are
operated under the trade name of "The Maryland Jockey Club". On November 13,
2002, the Maryland Racing Commission unanimously approved the transaction. The
transaction is scheduled to be considered for approval by the Virginia Racing
Commission on November 20, 2002. Pending this final regulatory approval, the
transaction is expected to close in late November or early December 2002. 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 permit customers to place wagers by telephone and
over the Internet on horse races run at up to 65 racetracks in North America. We
also have a one-third ownership interest in Racetrack Television Network, LLC
("RTN"), a venture formed to telecast races from our racetracks and other
racetracks, via private direct to home satellite, to paying subscribers. MEC
also owns and operates HorseRacing TV(TM), a new television channel focused
exclusively on horse racing that we launched on RTN in July 2002. While
HorseRacing TV(TM) is currently shown only on RTN, we are in discussions with
cable and satellite operators with the goal of achieving broader distribution of
HorseRacing TV(TM). To support certain of our thoroughbred racetracks, we own a
horse training center situated approximately 45 miles north of San Diego,
California, and we are currently developing a second thoroughbred 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 marketing and development expertise and 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 and in Canada 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.
Page 12
The lease of our Bay Meadows property expires on December 31, 2002. The Company
is currently in discussions with the landlord to extend the lease for at least
one year at market rent and expects to finalize an extension prior to year-end.
In response to the current controversy regarding the alleged manipulation of
certain multi-leg wagers, such as "Pick 6" bets, the Company is currently
reviewing its practices and certain of its suppliers' practices in cooperation
with other racetrack operators, industry associations, regulators and others.
The results of the current investigations concerning these wagers and the
growing concern over late posting of odds changes may cause a decline in bettor
confidence and could result in changes to legislation, regulation, or industry
practices, which could materially adversely impact the amount wagered on horse
racing.
Seasonality
Our racetracks operate for prescribed periods each year. As a result, our
racetrack revenues and operating results for any quarter will not be indicative
of the revenues and operating results for the year. Because our four 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 acquisition,
OTB and account wagering initiatives evolve.
Page 13
Results of Operations
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Racetrack operations
In the nine months ended September 30, 2002, we operated our four largest
racetracks for an additional 26 live race days compared to the prior year
period. The overall increase in live race days at those racetracks is
attributable to the 27 additional awarded race days at Gulfstream Park, two
additional awarded race days at Santa Anita Park and two fewer live race days at
Golden Gate Fields and one fewer live race day at Bay Meadows due to the timing
of their race meets. Our other racetracks operated an additional 32 live race
days in the nine-month period ended September 30, 2002, compared to the prior
year period, primarily due to the acquisition of The Meadows in April 2001, the
lease of Portland Meadows in July 2001 and the timing of the live race meet at
Thistledown, 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, the shift of live race days at Remington Park from the first
quarter to the fourth quarter in 2002 and management's decision to reduce the
number of live race days at Great Lakes Downs. The following is a schedule of
our actual live race days by racetrack for the first, second and third quarters
and awarded live race days for the fourth quarter in 2002 with comparatives for
2001.
LIVE RACE DAYS(1)
Q3 Awarded
Q3 Q2 Q1 YTD Q4 Q4 Total Total
------------ ------------ ----------- ----------- ------- ---- ------- -----
Largest Racetracks 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002(2) 2001
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Santa Anita Park (3) - - 15 12 65 66 80 78 4 5 84 83
Golden Gate Fields - - - 1 65 66 65 67 39 36 104 103
Bay Meadows 24 24 55 56 - - 79 80 26 27 105 107
Gulfstream Park - - 16 - 74 63 90 63 - - 90 63
Lone Star Park(4) N/A N/A N/A N/A N/A N/A N/A N/A 23 N/A 23 N/A
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----
24 24 86 69 204 195 314 288 92 68 406 356
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----
Other Racetracks
Thistledown 61 65 65 61 2 - 128 126 59 61 187 187
Remington Park 30 27 33 37 1 22 64 86 48 32 112 118
Great Lakes Downs 62 65 37 39 - - 99 104 19 23 118 127
The Meadows 52 64 56 56 51 N/A 159 120 50 50 209 170
Portland Meadows(5) - - - N/A 18 N/A 18 - 27 28 45 28
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----
205 221 191 193 72 22 468 436 203 194 671 630
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----
TOTAL 229 245 277 262 276 217 782 724 295 262 1,077 986
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ===== ====
(1) Excludes Flamboro Downs and the pending acquisition of a majority interest
in The Maryland Jockey Club.
(2) Includes actual live race days for the nine months ended September 30, 2002
and awarded live race days for the three months commencing October 1, 2002
and ending December 31, 2002.
Page 14
(3) Excludes The Oak Tree Meet, which is hosted by the Oak Tree Racing
Association at Santa Anita Park.
(4) Excludes live race days prior to our acquisition of Lone Star Park at Grand
Prairie on October 23, 2002.
(5) The live race meet at Portland Meadows concluded early, on February 10,
2002, to enable the necessary steps to be taken in order to bring the
facility into compliance with the requirements of the United States
Environmental Protection Agency ("EPA"). This resulted in 21 fewer live race
days than were awarded in Q1 2002 and 13 fewer live race days than were
awarded in Q2 2002. Construction of a storm water retention system
acceptable to the EPA has been completed and live racing resumed in October
2002.
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;
changes in the economy; and the weather.
Revenues from our racetrack operations were $420.7 million for the nine months
ended September 30, 2002, compared to $372.4 million in the 2001 comparable
period, an increase of $48.3 million or 13.0%. Racetrack revenues increased
primarily as a result of the additional live race days at Gulfstream Park,
improved results at Santa Anita Park, the acquisition of MEC Pennsylvania in the
second quarter of 2001 and Multnomah in the fourth quarter of 2001, the lease of
Portland Meadows in the third quarter of 2001 and the launch of XpressBet(TM) in
California in the first quarter of 2002.
In the nine months ended September 30, 2002, gross wagering revenues for our
racetracks increased 14.8% to $369.1 million compared to $321.6 million for the
comparable 2001 period primarily as a result of the increase in live race days,
increased average daily handle at Santa Anita Park, the acquisition of MEC
Pennsylvania in the second quarter of 2001 and Multnomah in the fourth quarter
of 2001, the lease of Portland Meadows in the third quarter of 2001 and the
launch of XpressBet(TM) in California in the first quarter of 2002. Non-wagering
revenues in the nine months ended September 30, 2002 increased 1.5% to $51.6
million from $50.9 million in the nine months ended September 30, 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 partially offset by lower average daily attendance at several of our
facilities.
Purses, awards and other in the nine months ended September 30, 2002 were $230.1
million compared to $198.2 million in the comparable period in 2001. Operating
costs increased from $117.9 million in the nine months ended September 30, 2001
to $131.4 million in the nine months ended September 30, 2002. The increased
costs included $11.2 million related to acquisitions or new business units not
included in the prior period results. As a percentage of total racetrack
revenues, operating costs decreased from 31.7% in the nine months ended
September 30, 2001 to 31.2% in the nine months ended September 30, 2002. The
reduction in operating costs as a percentage of revenues is primarily the result
of cost savings and other synergies realized on the consolidation of racetracks
during the period, partially offset by an increase in insurance costs of
approximately $2.7 million and an increase in utility costs of approximately
$0.6 million. We anticipate insurance costs to remain at these levels for the
balance of the current year and further increase next year. In addition, we have
incurred costs relating to the start-up of XpressBet(TM) and HorseRacing TV(TM)
in 2002, which have negatively impacted our results.
Page 15
Racetrack general and administrative expenses were $27.5 million in the nine
months ended September 30, 2002, compared to $21.4 million in the nine months
ended September 30, 2001, an increase of $6.1 million. As a percentage of total
racetrack revenues, general and administrative expenses increased from 5.7% in
the nine months ended September 30, 2001 to 6.5% in the nine months ended
September 30, 2002. The increased costs included $1.5 million of costs related
to acquisitions or new business units not included in the prior period results
and higher costs of the corporate head office, as several members of the
corporate and group management teams joined late in the second quarter of 2001
and during 2002.
Real estate operations
Revenues from real estate operations decreased $29.4 million to $21.7 million in
the nine months ended September 30, 2002, compared to the prior year comparable
period. Earnings before interest, taxes, depreciation and amortization
("EBITDA") from real estate operations decreased to $3.4 million in the nine
months ended September 30, 2002, compared to $20.3 million in the nine months
ended September 30, 2001. We generated revenues on the sale of non-core real
estate properties of $8.5 million during the nine months ended September 30,
2002, resulting in a gain of $2.1 million. We generated revenues and gains of
$37.2 million and $17.1 million, respectively, on the sale of non-core real
estate properties in the nine months ended September 30, 2001. The decrease in
EBITDA from real estate operations is primarily attributable to the $15.0
million lower gain on the sale of non-core real estate properties and increased
general and administrative costs in the current year period.
Predevelopment and other costs
Predevelopment and other costs decreased $0.6 million to $1.7 million for the
nine months ended September 30, 2002, compared to the nine months ended
September 30, 2001, as a result of lower activity on certain development
projects in the current year period.
Depreciation and amortization
Depreciation and amortization decreased $2.7 million from $19.4 million for the
nine months ended September 30, 2001 to $16.7 million for the nine months ended
September 30, 2002, primarily as a result of the implementation of Statement of
Financial Accounting Standards Board Statement No. 142, Goodwill and Intangible
Assets ("SFAS 142"). The implementation of SFAS 142 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 SFAS 142 was to reduce
depreciation and amortization expense by $5.6 million from the prior year
period, which has been partially offset by increased depreciation and
amortization of fixed assets at MEC Pennsylvania and increased depreciation on
recent fixed asset additions.
Interest income and expense
Net interest expense decreased $2.7 million in the nine months ended September
30, 2002 compared to the nine months ended September 30, 2001, which is
attributable to the capitalization of interest on certain properties under
development in the current period, interest earned on increased cash balances on
hand and a reduction of debt.
Page 16
Income tax provision
We recorded an income tax provision of $7.0 million on income of $17.0 million
for the nine months ended September 30, 2002, compared to a provision of $12.6
million on income of $31.1 million for the nine months ended September 30, 2001.
Our effective tax rate has increased from 40.6% in the prior year period to
41.4% in the current period primarily due to decreased income in the current
year period from our Austrian operations which are subject to lower income tax
rates.
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Racetrack operations
Revenues from our racetrack operations were $58.3 million for the three months
ended September 30, 2002, compared to $58.5 million in the 2001 comparable
period, a decrease of $0.2 million. Racetrack revenues decreased primarily as a
result of lower average daily attendance at several of our facilities and fewer
live race days at The Meadows which resulted in lower on-track wagering and
signal sale revenues, partially offset by revenues from Multnomah, which was
acquired in the fourth quarter of 2001.
Purses, awards and other in the three months ended September 30, 2002 were $25.7
million compared to $24.5 million in the comparable period in 2001. Operating
costs increased from $31.7 million in the three months ended September 30, 2001
to $36.2 million in the comparable 2002 period. The increased costs included
$4.5 million related to acquisitions or new business units not included in the
prior period results. As a percentage of total racetrack revenue, operating
costs increased from 54.2% in the three months ended September 30, 2001 to 62.1%
in the three months ended September 30, 2002. The increase in operating costs as
a percentage of revenues is primarily the result of an increase in insurance
costs in the quarter of approximately $1.1 million and a general decrease in
racetrack revenues.
Racetrack general and administrative expenses were $7.3 million in the three
months ended September 30, 2002, compared to $6.2 million in the three months
ended September 30, 2001, an increase of $1.1 million. The increased costs
included $0.3 million related to acquisitions or new business units not included
in the prior period results. As a percentage of total racetrack revenues,
general and administrative expenses increased from 10.6% in the three months
ended September 30, 2001 to 12.6% in the three months ended September 30, 2002.
The increase is primarily attributable to the higher costs of the corporate head
office and the decrease in total racetrack revenues.
Real estate operations
Revenues from real estate operations decreased $0.2 million to $7.1 million in
the three months ended September 30, 2002, compared to the prior year comparable
period. EBITDA from real estate operations decreased to a loss of $0.2 million
in the three months ended September 30, 2002, compared to income of $1.6 million
in the three months ended September 30, 2001. The decrease in EBITDA is
primarily due to reduced profitability at our golf course operations and
decreased sales of residential properties in Austria.
Page 17
Depreciation and amortization
Depreciation and amortization decreased $2.0 million to $5.4 million for the
three months ended September 30, 2002, primarily as a result of the
implementation of SFAS 142, which resulted in the cessation of amortization of
goodwill and intangible assets that meet the indefinite life criteria. The
impact of SFAS 142 was to reduce depreciation and amortization expense by $2.4
million from the prior year comparable period, which has been partially offset
by increased depreciation and amortization on recent fixed asset additions.
Interest income and expense
Our net interest expense decreased $0.4 million in the three months ended
September 30, 2002, compared to the three months ended September 30, 2001, which
is attributable to interest earned on increased cash balances on hand and a
reduction of debt.
Income tax provision
We recorded an income tax benefit of $6.8 million on a loss of $16.5 million for
the three months ended September 30, 2002, compared to a benefit of $4.3 million
on a loss of $10.5 million for the three months ended September 30, 2001. Our
effective tax rate has remained relatively constant over both periods at 41.0%
and 40.6%, respectively.
Liquidity and Capital Resources
At September 30, 2002, we had cash and cash equivalents of $117.8 million and
total shareholders' equity of $729.8 million, compared to $39.2 million and
$567.9 million at December 31, 2001, respectively. In addition, we had $84.5
million of available credit facilities that were not utilized at September 30,
2002 and we have an additional $25.0 million of available credit facilities that
were obtained subsequent to September 30, 2002. In addition, we would expect to
be able to access the capital markets and other sources of financing to enable
us to grow our business.
For the nine months ended September 30, 2002, we invested $71.8 million in real
estate property and fixed asset additions. We anticipate total capital
expenditures of approximately $114.1 million for the year ending December 31,
2002. The capital expenditures in 2002 include $14.2 million related to
maintenance capital improvements at our racetracks and strategic capital
investments of $99.9 million, which includes $44.4 million related to the Palm
Meadows training center being built to support our Gulfstream Park operations,
$33.6 million on our Austrian racetrack and other racetrack property
enhancements, $3.5 million on our account wagering operations, including the
telephone and Internet, and our television initiatives, $9.7 million for the
purchase of real estate in Florida and California and $8.7 million for the
completion of the Aurora golf course.
We currently have substantial real estate holdings in excess of that needed to
support our racetrack operations. This real estate consists of vacant industrial
lands, rental properties, excess land around several of our racetracks and other
real estate. We are continually re-evaluating each of these holdings in relation
to our core business activities. We will, from time to time, sell or otherwise
monetize some or all of these real estate holdings in order to fund the growth
of our core racetrack operations and related businesses. The aggregate net book
value of these excess real estate assets amounts to approximately $215.0
million.
Page 18
On November 5, 2002, the Company granted an option to East Bay Regional Park
District, a California Special District, exercisable on or before November 20,
2002, to enter into an agreement of purchase and sale to buy approximately 16
acres of excess real estate located at Golden Gate Fields in Berkeley,
California. The value of the consideration to be received by the Company for the
real estate, including certain tax benefits, is $9.9 million. The carrying value
of the real estate at September 30, 2002 is $14.3 million. If the option is
exercised, the Company would record a loss after income taxes of approximately
$2.4 million. The carrying value of this property is based on an allocation of
purchase price for the Golden Gate Fields acquisition in 1999.
Operating activities
Cash provided by operating activities was $19.1 million for the nine months
ended September 30, 2002, compared to $20.4 million for the comparable period in
the prior year. The decrease from the comparable 2001 period was due to a
decrease in non-cash working capital balances, partially offset by an increase
in net income after giving effect to non-cash items.
Investing activities
Cash used in investing activities for the nine months ended September 30, 2002
was $76.6 million, including investments of $71.8 million in real estate
property and fixed asset additions and $13.9 million of other asset additions,
which include deposits on pending acquisitions, partially offset by $9.1 million
of proceeds received on the sale of non-core real estate. Cash used in investing
activities for the nine months ended September 30, 2001 was $10.1 million,
including $25.5 million invested in real estate property and fixed asset
additions, $21.0 million invested on the acquisition of MEC Pennsylvania in
April 2001 and other asset additions of $0.4 million, partially offset by $36.8
million of proceeds on the sale of non-core real estate.
In 2001, we commenced a 200 acre development on our land in Ebreichsdorf,
Austria, consisting of a horse racetrack coupled with a gaming and entertainment
center. The racing surfaces were substantially constructed in 2002, as were
eight barns containing approximately 600 stalls. As of September 30, 2002, we
had spent a total of $21.5 million on improvements to this property. The Company
is continuing joint venture negotiations with an Austrian third party in order
to best capitalize on alternative gaming possibilities within the development.
At the same time, we are developing the final plans for the design, engineering
and financing of the grandstand and entertainment facilities.
Subsequent to September 30, 2002, MEC has completed the acquisition of Lone Star
Park at Grand Prairie. The cash required, net of deposits, to complete this
acquisition and the pending acquisitions, subject to regulatory approvals, of
Flamboro Downs and The Maryland Jockey Club ("MJC") total approximately $161.9
million and is being funded from cash on hand and utilization of our credit
facilities. In addition, certain vendors have a put option and MEC has a call
option to acquire their remaining minority interest in MJC during specified
periods. On the exercise of this option, MEC will pay $18.3 million, subject to
an interest adjustment.
Financing activities
Cash provided from financing activities was $132.9 million for the nine months
ended September 30, 2002 arising from the issuance of share capital for $142.4
million, partially offset by the repayment of long-term debt of $9.5 million.
For the nine months ended September 30, 2001, cash provided by financing
activities was $0.4 million. During the nine months ended September 30, 2001, we
received net proceeds on long-term debt of $7.5 million and $0.5 million on the
issuance of share capital, which were substantially offset by the repayment of
$7.6 million of bank indebtedness.
Page 19
For the balance of the year, repayments of long-term debt will aggregate
approximately $6.1 million.
Accounting Developments
Effective January 1, 2002, we adopted SFAS 142. Under SFAS 142, 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 first quarter of 2002 and determined
that the value of our racing licenses was not impaired. Prior to December 31,
2002, the Company will perform its annual impairment test on goodwill and other
intangible assets under SFAS 142 and complete an impairment test on fixed assets
under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
These tests will be completed at all racetracks, including Remington Park and
other racetracks currently experiencing operating losses. The Company has not
yet determined the impact, if any, of these tests on its consolidated financial
statements.
For the nine months ended September 30, 2001, application of the
non-amortization provision of SFAS 142 would have resulted in increases in net
income of $3.4 million and in diluted earnings per share of $0.04.
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 and 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 Third Quarter Report 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.
Page 20
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
No material changes since year-end.
Item 4. Controls and Procedures
Based on their evaluation, as of a date within 90 days prior to the filing date
of this quarterly report on Form 10-Q, the Registrant's Chief Executive Officer
and Chief Financial Officer have concluded that the Registrant's disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934) are effective. There have been no significant
changes in the Registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies or
material weaknesses.
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
See exhibit index on page 25.
(b) Reports on Form 8-K
Page 21
Date Items Reported and Financial Statements Filed
- ---- ---------------------------------------------
July 16, 2002 The Registrant entered into agreements to form an alliance to own and operate
(filed: July 17, 2002) Pimlico Race Course in Baltimore, Maryland and Laurel Park, in Laurel, Maryland.
August 6, 2002 Financial results for the second quarter ended June 30, 2002, including the
(filed: August 6, 2002) Consolidated Statements of Operations and Comprehensive Income, Condensed Consolidated
Statements of Cash Flows and Condensed Consolidated Balance Sheets of the Registrant
as at and for the three and six month periods ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAGNA ENTERTAINMENT CORP.
(Registrant)
by: /s/Graham J. Orr
-------------------------------------
Graham J. Orr, Executive Vice-
President and Chief Financial Officer
by: /s/Gary M. Cohn
-------------------------------------
Gary M. Cohn, Vice-President, Special
Projects and Secretary
Date: November 14, 2002
Page 22
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
REGARDING MAGNA ENTERTAINMENT CORP.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2002
I, Jim McAlpine, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Magna Entertainment
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Jim McAlpine
--------------------------------------
Jim McAlpine
President and Chief Executive Officer
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CERTIFICATION OF CHIEF FINANCIAL OFFICER
REGARDING MAGNA ENTERTAINMENT CORP.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2002
I, Graham J. Orr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Magna Entertainment
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Graham J. Orr
---------------------------------
Graham J. Orr
Executive Vice-President and
Chief Financial Officer
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EXHIBIT INDEX
Number Description Pages
3.1 Restated Certificate of Incorporation of the Registrant *
3.2 By-laws of the Registrant *
10 Employment Agreement with Peter Beresford
dated July 18, 2002 26-28
99 Certifications pursuant to Section 1350 of Chapter 63 of
Title 18 of United States Code 29-30
* Incorporated by reference to the corresponding exhibit number of the
Registrant's Registration Statement on Form S-1 originally filed on January
14, 2000 (File Number 333-94791).
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