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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: June 30, 2002
Commission File Number: 000-30578
MAGNA ENTERTAINMENT CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 98-0208374
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 46,800,230 shares of Class A Subordinate Voting Stock
outstanding as of July 31, 2002. In addition, as of July 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 1,841,601
Exchangeable Shares remain unexchanged.
Page 1
MAGNA ENTERTAINMENT CORP.
INDEX
PAGES
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations and Comprehensive Income
for the three and six month periods ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows for the three
and six month periods ended June 30, 2002 and 2001 4
Condensed Consolidated Balance Sheets at June 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--17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18--19
Signatures 19
Exhibit Index 20
Exhibits 21-97
Page 2
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
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[Unaudited]
[U.S. dollars in thousands, except per share figures]
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Three months
ended Six months ended
----------------- ------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- ------- -------- --------
Revenues
Racetrack
Gross wagering $102,250 $84,163 $322,603 $276,489
Non-wagering 16,071 14,867 39,746 37,456
-------- ------- -------- --------
118,321 99,030 362,349 313,945
-------- ------- -------- --------
Real estate
Sale of real estate 6,104 9,994 6,741 36,145
Rental and other 3,743 4,168 7,877 7,628
-------- ------- -------- --------
9,847 14,162 14,618 43,773
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128,168 113,192 376,967 357,718
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Costs and expenses
Racetrack
Purses, awards and other 63,837 51,476 204,360 173,708
Operating costs 39,879 35,285 95,223 86,261
General and administrative 9,551 7,268 20,184 15,230
-------- ------- -------- --------
113,267 94,029 319,767 275,199
-------- ------- -------- --------
Real estate
Cost of real estate sold 4,335 5,000 4,622 19,093
Operating costs 2,437 2,728 5,361 5,416
General and administrative 510 302 1,011 547
-------- ------- -------- --------
7,282 8,030 10,994 25,056
-------- ------- -------- --------
Predevelopment and other costs 83 114 1,624 1,822
Depreciation and amortization 5,944 6,630 11,270 11,984
Interest (income) expense, net (253) 678 (186) 2,078
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126,323 109,481 343,469 316,139
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Income before income taxes 1,845 3,711 33,498 41,579
Income taxes 763 1,474 13,801 16,874
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Net income 1,082 2,237 19,697 24,705
Other comprehensive income (loss)
Foreign currency translation
adjustment 13,758 (102) 13,099 (8,956)
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Comprehensive income $ 14,840 $ 2,135 $ 32,796 $ 15,749
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Earnings per Class A Subordinate
Voting Stock, Class B Stock or
Exchangeable Share:
Basic $ 0.01 $ 0.03 $ 0.21 $ 0.30
Diluted $ 0.01 $ 0.03 $ 0.21 $ 0.30
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Average number of Class A Subordinate
Voting Stock, Class B Stock and
Exchangeable Shares outstanding
during the period [in thousands]:
Basic 104,573 83,566 94,391 82,027
Diluted 105,526 83,788 95,596 82,249
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Page 3
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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[Unaudited]
[U.S. dollars in thousands]
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Three months
ended Six months ended
------------------ ------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- ------- --------- --------
Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 1,082 $ 2,237 $ 19,697 $24,705
Items not involving current cash flows 6,105 (1,826) 11,575 (11,333)
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7,187 411 31,272 13,372
Changes in non-cash items related to
operations 2,168 1,599 (968) 10,313
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9,355 2,010 30,304 23,685
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INVESTMENT ACTIVITIES
Acquisition of business, net of cash -- (21,035) -- (21,035)
Real estate property and fixed asset
additions (20,221) (12,179) (33,819) (16,383)
Other asset (additions) disposals (1,925) 289 (3,034) 164
Proceeds on sale of real estate 5,627 26,127 6,825 32,905
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(16,519) (6,798) (30,028) (4,349)
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FINANCING ACTIVITIES
Decrease in bank indebtedness -- -- -- (7,609)
(Repayment of) increase in long-term
debt, net (7,579) (1,215) (8,560) 8,661
Issuance of share capital 142,113 403 142,364 443
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134,534 (812) 133,804 1,495
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Effect of exchange rate changes on cash
and cash equivalents 3,495 (747) 3,428 (1,625)
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Net increase (decrease) in cash and
cash equivalents during the period 130,865 (6,347) 137,508 19,206
Cash and cash equivalents, beginning of
period 45,855 57,529 39,212 31,976
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Cash and cash equivalents, end of
period $176,720 $51,182 $176,720 $51,182
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Page 4
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
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[Unaudited]
[U.S. dollars and share amounts in thousands]
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June 30, December 31,
2002 2001
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ASSETS
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Current assets:
Cash and cash equivalents $ 176,720 $ 39,212
Restricted cash 7,239 18,782
Accounts receivable 36,806 33,101
Prepaid expenses and other 5,937 5,162
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226,702 96,257
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Real estate properties and fixed assets, net 604,604 574,677
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Other assets, net 182,440 179,665
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Future tax assets 3,876 3,657
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$1,017,622 $854,256
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable and other liabilities $ 61,815 $ 78,337
Income taxes payable 7,362 1,312
Long-term debt due within one year 18,604 18,133
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87,781 97,782
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Long-term debt 59,654 67,768
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Other long-term liabilities 4,747 2,576
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Future tax liabilities 122,426 118,276
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Shareholders' equity:
Capital stock issued and outstanding -
Class A Subordinate Voting Stock (issued: 2002 -
46,787; 2001 - 23,324) 303,071 157,633
Exchangeable Shares (issued: 2002 - 1,849; 2001 -
2,263) 13,726 16,800
Class B Stock (issued: 2002 and 2001 - 58,466) 394,094 394,094
Contributed surplus 7,290 7,290
Retained earnings 31,171 11,474
Accumulated comprehensive loss (6,338) (19,437)
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743,014 567,854
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$1,017,622 $854,256
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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 six month periods ended June 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 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 June 30, 2002, racing
licenses with a net book value of $171.3 million are included in Other
Assets on the balance sheet.
b) Acquisitions
On April 5, 2001, the Company completed the acquisition of Ladbroke
Racing Pennsylvania, Inc. ("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 six month periods ended June 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 amounts):
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
----------------- -----------------
Revenues
Revenues as reported $128,168 $113,192 $376,967 $357,718
Restatement for acquisitions -- 3,083 -- 23,248
-------- -------- -------- --------
Pro-forma revenues $128,168 $116,275 $376,967 $380,966
======== ======== ======== ========
Pro-forma revenues excluding
proceeds on the sale of real
estate $122,064 $106,281 $370,226 $344,821
======== ======== ======== ========
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
----------------- -----------------
Net Income
Net income as reported $ 1,082 $ 2,237 $ 19,697 $ 24,705
Restatement for change in
intangible assets amortization -- 1,109 -- 1,941
Restatement for acquisitions -- (155) -- (1,142)
-------- -------- -------- --------
Pro-forma net income $ 1,082 $ 3,191 $ 19,697 $ 25,504
======== ======== ======== ========
Pro-forma net income excluding
gains on the sale of real estate $ 45 $ 181 $ 18,451 $ 15,372
======== ======== ======== ========
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
----------------- -----------------
Basic and Diluted Earnings per
Share
Basic and diluted earnings per
share as reported $ 0.01 $ 0.03 $ 0.21 $ 0.30
Restatement for change in
intangible assets amortization -- 0.01 -- 0.02
Restatement for acquisitions -- -- -- (0.02)
-------- -------- -------- --------
Pro-forma basic and diluted
earnings per share $ 0.01 $ 0.04 $ 0.21 $ 0.30
======== ======== ======== ========
Pro-forma basic and diluted
earnings per share excluding gains
on the sale of real estate $ -- $ -- $ 0.19 $ 0.19
======== ======== ======== ========
Page 7
3. Capital Stock
Changes in Class A Subordinate Voting Stock, Exchangeable Shares and Class B
Stock for the six months ended June 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 Voting Exchangeable
Stock Shares Class B Stock
------------------ ----------------- ------------------
Number Stated Number Stated Number Stated
of Shares Value of Shares Value of Shares Value
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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) -- --
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Issued and outstanding
at March 31, 2002 23,649 $159,977 1,981 $14,707 58,466 $394,094
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Issued on completion of
public offering(i) 23,000 142,084 -- -- -- --
Issued on exercise of
stock options 6 29 -- -- -- --
Conversion of
Exchangeable Shares to
Class A Subordinate
Voting Stock 132 981 (132) (981) -- --
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Issued and outstanding
at June 30, 2002 46,787 $303,071 1,849 $13,726 58,466 $394,094
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(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 June 30, 2002, 6,000 shares were issued on the
exercise of stock options under the Plan. During the six months ended June 30,
2002, 48,900 shares were issued under the Plan, including 6,000 shares issued
on the exercise of stock options.
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.
Page 8
During the six months ended June 30, 2002, 137,500 stock options were granted,
6,000 stock options were exercised and 5,000 stock options were cancelled. At
June 30, 2002, there were 4,579,833 options outstanding with the exercise
price of the options ranging from $3.91 to $9.43 and an average exercise price
of $6.08.
There were 2,742,744 options exercisable at June 30, 2002 with an average
exercise price of $6.11.
4. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share computations (in thousands except per
share amounts):
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------
Net Income $1,082 $2,237 $19,697 $24,705
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- --------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Weighted Average
Shares Outstanding:
Class A Subordinate
Voting Stock 44,198 45,151 17,676 17,898 33,980 35,185 15,964 16,186
Class B Stock 58,466 58,466 58,466 58,466 58,466 58,466 58,466 58,466
Exchangeable Shares 1,909 1,909 7,424 7,424 1,945 1,945 7,597 7,597
- --------------------------------------------------------------------------------------
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104,573 105,526 83,566 83,788 94,391 95,596 82,027 82,249
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Earnings Per Share $ 0.01 $ 0.01 $ 0.03 $ 0.03 $ 0.21 $ 0.21 $ 0.30 $ 0.30
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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 for the time
being. Should it proceed as currently contemplated, the Gulfstream Park
Redevelopment would include a simulcast pavilion, a sports and
entertainment arena and a new turf club and grandstand. In addition,
there would be significant modifications and enhancements to the
racetracks and stable areas. If completed, the Gulfstream Park
Redevelopment would require the demolition of a substantial portion of
the current buildings and related structures, which include the
grandstand, turf club and annex. The aggregate carrying value at June
30, 2002 of the assets that would be demolished if the Gulfstream Park
Redevelopment is completed is approximately $23.0 million. If the
Company decides to proceed with the Gulfstream Park Redevelopment and
obtains the approval of its Board of Directors, a reduction in the
expected life of the existing assets would occur and a write-down would
be necessary.
b) On March 6, 2002, the Company entered into an agreement with Lone Star
Race Park, Ltd. and LSJC Development Corporation to acquire
substantially all the operations and related assets of Lone Star Park at
Grand Prairie, a Thoroughbred and American Quarter Horse racetrack
located near Dallas, Texas. The acquired assets include the rights under
a long-term lease of Lone Star Park and a related purchase option
exercisable at termination of the lease in 2027. The purchase price of
the acquisition will be satisfied by the payment of $80.0 million in
cash and the assumption of certain liabilities, including the Lone Star
Park capital lease obligation of approximately $19.0 million, subject to
usual adjustments at closing. The transaction is expected to close in
the third quarter of 2002, subject to certain conditions, including the
receipt of regulatory approvals.
Page 9
c) On June 4, 2002, the Company entered into an agreement to acquire all
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. Flamboro Downs also houses a gaming facility with
752 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 added to purses and the other half being retained by Flamboro
Downs. The acquisition cost, which is subject to the usual adjustments
at closing, is expected to be approximately $47 million, and will be
satisfied by a vendor take-back mortgage of approximately $26 million
with the remainder paid in cash. The transaction is expected to close in
the third quarter of 2002, subject to certain conditions, including the
receipt of regulatory approvals.
6. Segment Information
The Company's reportable segments reflect how the Company is organized and
managed by senior management. The Company has two operating segments:
racetrack and real estate operations. The racetrack segment includes the
operation of eight thoroughbred racetracks, one standardbred racetrack, one
greyhound track and one horse boarding and training center. In addition, the
racetrack segment includes off-track betting ("OTB") facilities and a national
account wagering business. The real estate segment includes the operation of
two golf courses and related facilities, a residential housing development
adjacent to our golf course located in Austria and other real estate holdings.
The accounting policies of each segment are the same as those described in the
"Significant Accounting Policies" section in the Company's annual report on
Form 10-K for the year ended December 31, 2001.
The following summary presents key information by operating segment (in
thousands):
Three months ended June 30, 2002
Real Estate
Racetrack and Other
Operations Operations Total
- -------------------------------------------------------------------------------
Revenues $118,321 $ 9,847 $128,168
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Income before income taxes $ 66 $ 1,779 $ 1,845
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Real estate property and fixed asset additions $ 9,584 $10,637 $ 20,221
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Three months ended June 30, 2001
Real Estate
Racetrack and Other
Operations Operations Total
- -------------------------------------------------------------------------------
Revenues $ 99,030 $14,162 $113,192
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Income (loss) before income taxes $ (2,205) $ 5,916 $ 3,711
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Real estate property and fixed asset additions $ 8,082 $ 4,097 $ 12,179
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Page 10
Six months ended June 30, 2002
Real Estate
Racetrack and Other
Operations Operations Total
- -------------------------------------------------------------------------------
Revenues $362,349 $14,618 $376,967
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Income before income taxes $ 31,004 $ 2,494 $ 33,498
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Real estate property and fixed asset additions $ 19,934 $13,885 $ 33,819
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Six months ended June 30, 2001
Real Estate
Racetrack and Other
Operations Operations Total
- -------------------------------------------------------------------------------
Revenues $313,945 $43,773 $357,718
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Income before income taxes $ 23,670 $17,909 $ 41,579
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Real estate property and fixed asset additions $ 9,002 $ 7,381 $ 16,383
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7. Subsequent Event
On July 15, 2002, the Company entered into agreements to form an alliance with
the De Francis family to own and operate Pimlico Race Course and Laurel Park,
which are operated under the trade name "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 fall of 2002, subject to regulatory approvals and legislative
review.
Page 11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Position
The following discussion of our results of operations and financial position
should be read in conjunction with the unaudited consolidated financial
statements included in this report.
Overview
Magna Entertainment Corp. ("MEC", "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. We currently
operate eight thoroughbred racetracks, one standardbred racetrack and one
greyhound track, as well as the simulcast wagering venues at these tracks.
MEC has also contracted to purchase Lone Star Park at Grand Prairie, a
Thoroughbred and American Quarter Horse racetrack located near Dallas, Texas,
and Flamboro Downs, a Harness racetrack located near Hamilton, Ontario, 45
miles west of Toronto, Ontario, in each case subject to regulatory approvals.
In addition, on July 15, 2002, MEC entered into an agreement, subject to
regulatory approvals and legislative review, to form an alliance to own and
operate Pimlico Race Course and Laurel Park, which are operated under the
trade name of "Maryland Jockey Club". We have also commenced development of a
horse racetrack on property located approximately 15 miles south of Vienna,
Austria. In addition, we operate off-track betting ("OTB") facilities and a
national account wagering business known as XpressBet/TM/, which permits
customers to place wagers by telephone and over the Internet on horse races
run at up to 65 racetracks in North America. We also have a one-third
ownership interest in Racetrack Television Network, LLC ("RTN"), a new 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 only shown 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 horse racetracks, we own a horse training
center situated approximately 45 miles north of San Diego, California, and we
are currently developing a second horse training center in Palm Beach County,
Florida. We are also exploring the development of real estate on the land
surrounding certain of our racetracks. These real estate projects could be
pursued in conjunction with developers who would be expected to provide
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, a golf course in Aurora, Ontario
and other real estate in the United States, Canada and Austria. While we
are exploring the development of some of our real estate, we intend to
continue to sell our non-core real estate in order to generate additional
capital to grow and enhance our racing business.
Seasonality
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.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Racetrack operations
In the six months ended June 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 and two additional awarded
race days at Santa Anita Park. This was partially offset by 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 48
live race days in the six-month period ended June 30, 2002, compared to the
prior year
Page 12
period, primarily due to the acquisition of The Meadows in April 2001, the
lease of Portland Meadows in July 2001, and a shift of live race days into the
second quarter from the third quarter 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 and the shift of live
race days from the first quarter to the fourth quarter in 2002. The following
is a schedule of our actual live race days by racetrack for the first and
second quarters and awarded live race days for the remaining quarters in 2002
with comparatives for 2001.
LIVE RACE DAYS(1)
Awarded Awarded
Q2 Q2 Q1 Q1 Q3 Q3 Q4 Q4 Total Total
Largest Racetracks 2002 2001 2002 2001 2002 2001 2002 2001 2002(2) 2001
- ------------------ ---- ---- ---- ---- ------- ---- ------- ---- ------- -----
Santa Anita Park(3) 15 12 65 66 -- -- 4 5 84 83
Golden Gate Fields -- 1 65 66 -- -- 39 36 104 103
Bay Meadows 55 56 -- -- 23 24 26 27 104 107
Gulfstream Park 16 -- 74 63 -- -- -- -- 90 63
--- --- --- --- --- --- --- --- ----- ---
86 69 204 195 23 24 69 68 382 356
--- --- --- --- --- --- --- --- ----- ---
Other Racetracks
- ----------------
Thistledown 65 61 2 -- 61 65 59 61 187 187
Remington Park 33 37 1 22 31 27 48 32 113 118
Great Lakes Downs 37 39 -- -- 62 65 19 23 118 127
The Meadows 56 56 51 N/A 61 64 50 50 218 170
Portland Meadows(4) -- N/A 18 N/A -- N/A 27 28 45 28
--- --- --- --- --- --- --- --- ----- ---
191 193 72 22 215 221 203 194 681 630
--- --- --- --- --- --- --- --- ----- ---
TOTAL 277 262 276 217 238 245 272 262 1,063 986
=== === === === === === === === ===== ===
(1) Excludes pending acquisitions expected to close in the third and fourth
quarters of 2002.
(2) Includes actual live race days for the six months ended June 30, 2002 and
awarded live race days for the six months commencing July 1, 2002 and
ending December 31, 2002.
(3) Excludes The Oak Tree Meet, which is hosted by the Oak Tree Racing
Association at Santa Anita Park.
(4) 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 will resume 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 $362.3 million for the six months
ended June 30, 2002 compared to $313.9 million in the 2001 comparable period,
an increase of $48.4 million or 15.4%. 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/
into the California market in the first quarter of 2002.
In the six months ended June 30, 2002, gross wagering revenues for our
racetracks increased 16.7% to $322.6 million compared to $276.5 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 the launch of XpressBet/TM/
into the California market in the first quarter of 2002. Non-wagering revenues
in the six months ended June 30, 2002 increased 6.1%
Page 13
to $39.7 million from $37.5 million in the six months ended June 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.
Purses, awards and other in the six months ended June 30, 2002 were $204.4
million compared to $173.7 million in the comparable period in 2001. Operating
costs increased from $86.3 million in the six months ended June 30, 2001 to
$95.2 million in the six months ended June 30, 2002. As a percentage of total
racetrack revenues, operating costs decreased from 27.5% in the six months
ended June 30, 2001 to 26.3% in the six months ended June 30, 2002. The
reduction in operating costs as a percentage of revenues is primarily the
result of continued cost savings and other synergies realized on the
consolidation of racetracks during the period, partially offset by an increase
in insurance costs of approximately $1.8 million and an increase in utility
costs of approximately $0.8 million. We anticipate insurance costs to remain at
increased levels for at least the balance of the current year.
Racetrack general and administrative expenses were $20.2 million in the six
months ended June 30, 2002, compared to $15.2 million in the six months ended
June 30, 2001, an increase of $5.0 million. As a percentage of total racetrack
revenues, general and administrative expenses increased from 4.9% in the six
months ended June 30, 2001 to 5.6% in the six months ended June 30, 2002. The
increase is primarily attributable to an increased number of racetracks and
higher costs of the corporate head office, which were lower during the six
months ended June 30, 2001, as several members of the corporate management
team added in 2001 joined late in the second quarter of 2001.
Real estate operations
Revenues from real estate operations decreased $29.2 million to $14.6 million
in the six months ended June 30, 2002, compared to the prior year comparable
period. Earnings before interest, taxes, depreciation and amortization
("EBITDA") from real estate operations decreased to $3.6 million in the six
months ended June 30, 2002, compared to $18.7 million in the six months ended
June 30, 2001. We generated revenues on the sale of non-core real estate
properties of $6.7 million during the six months ended June 30, 2002,
resulting in a gain of $2.1 million. We generated revenues and gains of $36.1
million and $17.1 million, respectively, on the sale of non-core real estate
properties in the six months ended June 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 in the current year
period.
Predevelopment and other costs
Predevelopment and other costs decreased $0.2 million to $1.6 million for the
six months ended June 30, 2002, compared to the six months ended June 30,
2001, as a result of lower activity on certain development projects in the
current period.
Depreciation and amortization
Depreciation and amortization decreased $0.7 million from $12.0 million for
the six months ended June 30, 2001 to $11.3 million for the six months ended
June 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 $3.2
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
Our net interest expense has decreased $2.3 million in the six months ended
June 30, 2002 compared to the six months ended June 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 14
Income tax provision
We recorded an income tax provision of $13.8 million on income of $33.5
million for the six months ended June 30, 2002, compared to a provision of
$16.9 million on income of $41.6 million for the six months ended June 30,
2001. Our effective tax rate has remained relatively constant over both
periods at 41.2% and 40.6%, respectively.
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Racetrack operations
Revenues from our racetrack operations were $118.3 million for the three
months ended June 30, 2002, compared to $99.0 million in the 2001 comparable
period, an increase of $19.3 million or 19.5%. Racetrack revenues increased
primarily as a result of additional live race days at Gulfstream Park and
Santa Anita Park, the acquisition of Multnomah in the fourth quarter of 2001
and the launch of XpressBet/TM/ into the California market in the first
quarter of 2002.
Purses, awards and other in the three months ended June 30, 2002 were $63.8
million compared to $51.5 million in the comparable period in 2001. Operating
costs increased from $35.3 million in the three months ended June 30, 2001 to
$39.9 million in the comparable 2002 period. As a percentage of total
racetrack revenues, operating costs decreased from 35.6% in the three months
ended June 30, 2001 to 33.7% in the three months ended June 30, 2002. The
decrease in operating costs as a percentage of revenues is primarily the
result of continued cost savings and other synergies realized on the
consolidation of racetracks during the period partially offset by an increase
in insurance costs of approximately $1.1 million and an increase in utility
costs of approximately $0.5 million. We anticipate insurance costs to remain at
increased levels for at least the balance of the current year.
Racetrack general and administrative expenses were $9.6 million in the three
months ended June 30, 2002, compared to $7.3 million in the three months ended
June 30, 2001, an increase of $2.3 million. As a percentage of total racetrack
revenues, general and administrative expenses increased from 7.3% in the three
months ended June 30, 2001 to 8.1% in the three months ended June 30, 2002. The
increase is primarily attributable to the increased number of racetracks and
higher costs of the corporate head office.
Real estate operations
Revenues from real estate operations decreased $4.3 million to $9.8 million in
the three months ended June 30, 2002, compared to the prior year comparable
period. EBITDA from real estate operations decreased to $2.6 million in the
three months ended June 30, 2002, compared to $6.1 million in the three months
ended June 30, 2001. The decrease in EBITDA is primarily attributable to the
lower gain on the sale of non-core real estate properties in the three months
ended June 30, 2002 compared to the prior year period.
Depreciation and amortization
Depreciation and amortization decreased by $0.7 million to $5.9 million for
the three months ended June 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 $1.8
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 $0.9 million in the three months ended June
30, 2002, compared to the three months ended June 30, 2001 due to the
capitalization of interest on certain properties under development in the
current quarter, interest earned on increased cash balances on hand and a
reduction of debt.
Page 15
Income tax provision
We recorded an income tax provision of $0.8 million on income of $1.8 million
for the three months ended June 30, 2002, compared to a provision of $1.5
million on income of $3.7 million for the three months ended June 30, 2001.
Our effective tax rate has increased from 39.7% in the prior year period to
41.4% in the current period.
Liquidity and Capital Resources
At June 30, 2002, we had cash and cash equivalents of $176.7 million and total
shareholders' equity of $743.0 million compared to $39.2 million and $567.9
million at December 31, 2001, respectively. In addition, we had $85.0 million of
available credit facilities that were not utilized at June 30, 2002.
For the six months ended June 30, 2002, we invested $33.8 million in real
estate property and fixed asset additions. We anticipate total capital
expenditures of approximately $90.0 million for the year ending December 31,
2002. The capital expenditures in 2002 include $11.5 million related to
maintenance capital improvements at our racetracks and strategic capital
investments of $58.1 million, which includes the Palm Meadows training center to
support our Gulfstream Park operations, our Austrian racetrack and other
racetrack property enhancements. We also expect to invest $3.5 million in our
account wagering operations, including the telephone and Internet, and our
television initiatives, the purchase of real estate for $9.7 million and the
completion of the Aurora Golf course for $7.2 million.
We currently have non-core real estate for sale at an aggregate book value of
$36.0 million that we expect to sell over the next 6 to 18 months at amounts
equal to or greater than book value.
Operating activities
Cash provided by operating activities was $30.3 million for the six months
ended June 30, 2002, compared to $23.7 million for the comparable period in
the prior year. The increase from the comparable 2001 period was due to higher
net income after giving effect to non-cash items, partially offset by an
increased investment in non-cash working capital balances.
Investing activities
Cash used in investing activities for the six months ended June 30, 2002 was
$30.0 million, including investments of $33.8 million in real estate property
and fixed asset additions and $3.0 million of other asset additions, partially
offset by $6.8 million of proceeds received on the sale of non-core real
estate. Cash used in investing activities for the six months ended June 30,
2001 was $4.3 million, including $16.4 million invested in real estate
property and fixed asset additions and $21.0 million invested on the
acquisition of MEC Pennsylvania in April 2001, partially offset by $33.1
million of proceeds on the sale of non-core real estate and other assets.
MEC has contracted to purchase Lone Star Park at Grand Prairie, Flamboro Downs
and a majority interest in the Maryland Jockey Club. These transactions are
expected to close, subject to regulatory and other approvals, in the second
half of 2002. Cash requirements to complete these acquisitions total
approximately $170.0 million, which will be funded from cash on hand and with
utilization of our credit facilities.
Financing activities
Cash provided from financing activities was $133.8 million for the six months
ended June 30, 2002 related to the issuance of share capital for $142.4
million, partially offset by the repayment of long-term debt of $8.6 million.
For the six months ended June 30, 2001, cash provided by financing activities
was $1.5 million. During the six months ended June 30, 2001, we received net
proceeds on long term debt of $8.7 million and $0.4 million on the issuance of
share capital, which were partially offset by the repayment of $7.6 million of
bank indebtedness.
For the balance of the year, repayments of long term debt will aggregate
approximately $10.0 million.
Page 16
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.
For the six months ended June 30, 2001, application of the non-amortization
provision of SFAS 142 would have resulted in an increase in net income of
$1.9 million and diluted earnings per share of $0.02.
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 Management's Discussion and Analysis of Results of Operations and
Financial Position contains forward-looking statements as defined by the U.S.
Securities Act of 1933 and the U.S. Securities Act of 1934. These forward-
looking statements may include, among others, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; proposed new products and services; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on our consolidated financial position, operating results, prospects or
liquidity; projections, predictions, expectations, estimates or forecasts as
to our financial and operating results and future economic performance; and
other matters that are not historical facts.
Forward-looking statements should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or the times at or by which such performance or results will be
achieved. Forward-looking statements are based on information available at the
time and/or management's good faith belief with respect to future events, and
are subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in the statements.
Important factors that could cause such differences include, but are not
limited to, the factors discussed in the "Risk Factors" section of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 and
our subsequent public filings.
Forward-looking statements speak only as of the date the statement was made.
We assume no obligation to update forward-looking information to reflect
actual results, changes in assumptions or changes in other factors affecting
forward-looking information. If we update one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect thereto or with respect to other forward-looking statements.
Page 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No material changes since year-end.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant's 2002 Annual Meeting of Stockholders was held on April 18,
2002. Proxies were solicited by the Registrant's Board of Directors pursuant
to Regulation 14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the Board's nominees as listed in the proxy
statement, and all nominees were elected by vote of the stockholders. Voting
results for each nominee were as follows:
Votes
Votes For Against Abstain
Jerry D. Campbell 72,419,727 637 61,015
William G. Davis 72,420,219 88 61,072
Peter M. George 72,419,862 22 61,495
Joseph W. Harper 72,420,342 22 61,015
J. Terrence Lanni 72,420,342 22 61,015
F. Jack Liebau 72,419,662 702 61,015
Edward C. Lumley 72,419,510 87 61,782
Jim McAlpine 70,210,708 2,209,636 61,035
James Nicol 72,419,662 702 61,015
Gino Roncelli 72,227,167 192,697 61,515
Frank Stronach 70,130,199 2,289,685 61,495
John C. York II 72,418,021 637 62,721
The proposal in respect of the ratification of the Board of Directors'
appointment of Ernst & Young, LLP, certified public accountants, as the
Registrant's auditors for the fiscal year ending December 31, 2002 was
approved by a majority of votes of the shares of the Registrant's Class A
Subordinate Voting Stock and Class B Stock represented at the meeting:
72,389,720 shares were voted in favor of the proposal, 52,566 were voted
against; and 39,093 abstained.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See exhibit index on page 20.
Page 18
(b) Reports on Form 8-K
Date Items Reported and Financial Statements Filed
- ---- ---------------------------------------------
May 3, 2002 Financial results for the first quarter ended March 31, 2002, including
(filed: May 7, 2002) the 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
months ended March 31, 2002.
June 7, 2002 The Registrant entered into an agreement to acquire all of the shares of
(filed: June 7, 2002) Flamboro Downs Holdings Limited, the owner and operator of Flamboro
Downs, a harness racetrack located near Hamilton, Ontario, 45 miles west
of Toronto.
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: August 13, 2002
Page 19
EXHIBIT INDEX
Number Description Pages
3.1 Restated Certificate of Incorporation of the Registrant *
3.2 By-laws of the Registrant *
10 Credit Agreement between the Registrant and Bank of Montreal, et al., dated as of May 1, 2002 22 to 95
99 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code 96 to 97
* 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).