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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

ý QUARTERLY REPORT

Pursuant to Section 13 or 15(D) of
The Securities Exchange Act of 1934

For the Quarterly Period Ended: September 30, 2003

Commission File Number:    000-30578

MAGNA ENTERTAINMENT CORP.
(Exact Name of Registrant as Specified in its Charter)

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.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

The Registrant had 48,679,796 shares of Class A Subordinate Voting Stock and 58,466,056 shares of Class B Stock outstanding as of October 31, 2003.

MAGNA ENTERTAINMENT CORP.
INDEX

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)

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MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)

4

MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars and share amounts in thousands)

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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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, 2002.

The Company's racing business is seasonal in nature. The Company's racing revenues and operating results for any quarter will not be indicative of the racing revenues and operating results for the year. A disproportionate share of annual revenues and net income is earned in the first quarter of each year.

2.    Acquisitions and Pro-Forma Impact

(a)

Acquisitions



(i)

On August 22, 2003, the Company completed the acquisition of a 30% equity interest in AmTote International, Inc. ("AmTote") for a total cash purchase price, including transaction costs, of $4.2 million. The transaction is subject to a customary post-closing adjustment which will occur in the fourth quarter of 2003. AmTote is a leading provider of totalisator services to the North American pari-mutuel industry and has service contracts with over 70 North American racetracks and other wagering entities. The Company's 30% share of the results of operations of AmTote is accounted for under the equity method.



(ii)

On October 18, 2002, the shares of Flamboro Downs Holdings Limited, the owner and operator of Flamboro Downs, a harness racetrack located in Hamilton, Ontario, 45 miles west of Toronto, were acquired by Ontario Racing Inc. ("ORI"). Flamboro Downs houses a gaming facility with 750 slot machines operated by the Ontario Lottery and Gaming Corporation ("OLGC"). ORI was owned by an employee of the Company. On April 16, 2003, the Company received all necessary regulatory approvals for the acquisition of Flamboro Downs, and accordingly the shares of ORI were transferred to the Company. The results of operations of ORI were accounted for under the equity method for the period from October 18, 2002 to April 16, 2003.

The purchase price, net of cash, was approximately $55.9 million and was previously funded by the Company through a cash advance to ORI at October 18, 2002 of $23.1 million with the remainder satisfied by ongoing payments under secured notes of approximately $32.9 million. The secured notes are repayable in Canadian dollars. In addition, the purchase and sale agreement stipulates that the purchase price may be increased by a maximum of $4.1 million (Cdn. $5.5 million), plus accrued interest, in the event that Flamboro Downs' agreement with the OLGC, with respect to the slot facility, is extended.

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The purchase price of this acquisition has been allocated to the assets and liabilities acquired as follows:

(iii)

On October 23, 2002, the Company completed the acquisition of substantially all the operations and related assets of Lone Star Park at Grand Prairie.



(iv)

On November 27, 2002, the Company completed the acquisition of a controlling interest in the Pimlico Race Course and Laurel Park, which are operated under the trade name "The Maryland Jockey Club". Both of these acquisitions are fully disclosed in the Company's consolidated financial statements for the year ended December 31, 2002.



(v)

The purchase price and related allocations for these acquisitions are preliminary. Adjustments to the purchase price and related preliminary allocations may occur as a result of obtaining more information regarding asset valuations, liabilities assumed, purchase price adjustments pursuant to the purchase agreements, and revisions of preliminary estimates of fair values made at the date of purchase.



(vi)

As a result of the timing of these acquisitions, the results of the operations of these acquisitions are not included in the Company's results for the three and nine month periods ended September 30, 2002.

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(b)

Impact of Acquisitions

The pro-forma impact of our 2002 and 2003 acquisitions, excluding AmTote, if they had occurred on January 1, 2002, is as follows (in thousands, except per share figures):

(i)

There was no 2003 net income impact for the Flamboro Downs acquisition as the results of operations of ORI were accounted for under the equity method for the period January 1, 2003 to April 16, 2003.

3.    Bank Indebtedness

During the three months ended September 30, 2003, a subsidiary of the Company borrowed $4.7 million under a $10.0 million revolving credit loan facility to fund capital expenditures. The indebtedness under the facility is secured by deeds of trust on land, buildings and improvements and security interests in all other assets of the subsidiary and certain of its affiliates. The advances under the facility bear interest at either the U.S. Prime rate or the London Interbank Offering Rate ("LIBOR") plus 2.6%. The annual interest rate on September 30, 2003 applicable to the advances then outstanding was 3.7%.

4.    8.55% Convertible Subordinated Notes

In June 2003, the Company issued $150.0 million of 8.55% convertible subordinated notes which mature on June 15, 2010. The unsecured notes are convertible at any time at the option of the holders into shares of Class A Subordinate Voting Stock at a conversion price of $7.05 per share. The conversion price may be adjusted under certain circumstances. The notes are redeemable in whole or in part, at the Company's option, on or after June 2, 2006, at the principal amount plus accrued and unpaid interest, provided that, in connection with any redemption occurring on or after June 2, 2006 and before June 2, 2008, the closing price of the Class A Subordinate Voting Stock has exceeded 125% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the trading day prior to mailing of the notice of redemption. At September 30, 2003, all the notes remained outstanding.

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The Company incurred issue expenses of approximately $5.0 million, which have been recorded as a reduction of the outstanding notes balance. The notes balance will be accreted to its face value over the term to maturity.

5.    Capital Stock and Long-term Incentive Plan

(a)

Capital Stock

Changes in Class A Subordinate Voting Stock and Class B Stock for the nine months ended September 30, 2003 are shown in the following table (number of shares and stated value in the following table have been rounded to the nearest thousand):

(i)

There were no changes in the number of shares outstanding or the stated value of either the Class A Subordinate Voting Stock or Class B Stock during the three months ended September 30, 2003.



(b)

Long-term Incentive Plan

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 7.8 million shares of Class A Subordinate Voting Stock 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, 2003, no shares were issued under the Plan or on the exercise of stock options. During the nine months ended September 30, 2003, 31,965 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 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 1/7^th to 1/3^rd 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.

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During the three months ended September 30, 2003, no stock options were granted or exercised and 641,333 stock options were cancelled or expired. During the nine months ended September 30, 2003, 640,000 stock options were granted, 6,000 stock options were exercised and 653,333 stock options were cancelled or expired. At September 30, 2003, there were 5,342,500 stock options outstanding with exercise prices ranging from $3.91 to $9.43 per share and a weighted average exercise price of $6.20 per share.

There were 3,939,477 stock options exercisable at September 30, 2003 with a weighted average exercise price of $6.08 per share.

Financial Accounting Standards Board Statement No. 123 ("SFAS 123"), "Accounting and Disclosure of Stock-Based Compensation" provides companies an alternative to accounting for stock-based compensation as prescribed under APB Opinion No. 25 ("APB 25"). SFAS 123 encourages, but does not require companies to recognize an expense for stock-based awards at their fair value on the date of grant. SFAS 123 allows companies to continue to follow existing accounting rules (intrinsic value method under APB 25 which does not give rise to an expense) provided that pro-forma disclosures are made of what net income and earnings per share would have been had the fair value method been used. The Company accounts for stock-based compensation under APB 25 and provides pro-forma disclosure required by SFAS 123.

There were 640,000 stock options granted during the nine months ended September 30, 2003 with an average fair value of $1.50 per option. For the nine months ended September 30, 2002, 137,500 stock options were granted with an average fair value of $4.08 per option.

The fair value of stock option grants is estimated at the date of grant using the Black-Scholes option valuation model with the following assumptions:

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that require input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

The Company's SFAS 123 pro-forma net income (loss) and the related per share amounts are as follows:

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6.    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):

7.    Currency Translation Adjustment

Unrealized currency translation adjustments arise on the translation to U.S. dollars of assets and liabilities of the Company's self-sustaining foreign operations. During the three month and nine month periods ended September 30, 2003, the Company incurred unrealized currency translation gains of $0.1 million and $23.9 million respectively, primarily from the strengthening of the EURO and the Canadian dollar against the U.S. dollar.

8.    Commitments and Contingencies

(a)

In connection with its acquisition of a controlling interest in The Maryland Jockey Club, Maryland Racing, Inc. ("MRI"), a wholly-owned subsidiary of the Company, has agreed with the Maryland Racing Commission to spend a minimum of $5.0 million by August 31, 2003, an additional $5.0 million by December 31, 2003, and an additional $5.0 million by June 30, 2004 on capital expenditures and renovations at Pimlico Race Course, Laurel Park, Bowie Training Center and their related facilities and operations. At September 30, 2003, MRI has spent $2.8 million and the remaining $2.2 million, which was required to be spent by August 31, 2003, was placed in an escrow account to be applied to future capital expenditures.



(b)

In connection with its acquisition of a controlling interest in The Maryland Jockey Club, the Company has an obligation to pay $18.3 million on exercise of either the put or call options for the remaining interest in The Maryland Jockey Club. At September 30, 2003, this obligation has been reflected on the condensed consolidated balance sheet as long-term debt due after one year.



(c)

As previously disclosed, the revenue sharing and operations agreement between The Maryland Jockey Club and the owner of Rosecroft Raceway is scheduled to expire on March 31, 2004. If this agreement is not renewed on comparable terms, there may be a material decline in the revenues of The Maryland Jockey Club that could materially adversely affect the Company's operating results. At this time, the Company is uncertain as to likelihood of a renewal of this agreement on comparable terms.



(d)

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, 2003 of the assets that would be demolished if the Gulfstream Park Redevelopment is completed is approximately $21.4 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.



(e)

The lease of our Bay Meadows property is scheduled to expire on December 31, 2003, and discussions are currently underway with the landlord to extend the term of the lease. The Company is exploring alternative venues, including vacant land that has been purchased in Dixon, California for future development, to conduct the racing dates currently held at Bay Meadows after the expiry of the lease term. In October 2003, "Town Hall" meetings were held with the residents of the City of Dixon to review the proposed development, in stages, of "Dixon Downs", a thoroughbred racetrack with an associated retail shopping and entertainment complex. This project, which is still in the early stages of planning, is subject to regulatory and other approvals. At this time, the Company is uncertain as to the likelihood of renewal of the Bay Meadows lease or the terms upon which such renewal may be achieved. If this lease is not renewed on comparable terms or at all, or an alternative venue arranged, the Company's operating results would be materially adversely affected.

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(f)

The Company is currently in the process of performing annual impairment tests on goodwill and other intangible assets under SFAS 142, "Goodwill and Other Intangible Assets", and on long-lived assets under SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Certain of our business operations have not met our business plan expectations, have experienced negative earnings before interest, income taxes, depreciation and amortization over the past several years, or have not previously been tested by us for impairment because they have just been acquired or recently commenced operations. Impairment tests will be conducted in the fourth quarter of 2003 after completion of our annual business planning process. The Company has not yet determined the impact, if any, of these tests on our consolidated financial statements.

9.    Segment Information

The Company's reportable segments reflect how the Company is organized and managed by senior management. The Company has two operating segments: racing operations and real estate and other operations. The racing segment includes the operation or management of twelve thoroughbred racetracks, two standardbred racetracks, one racetrack that runs both thoroughbred and standardbred meets, one greyhound track and three thoroughbred training centers. In addition, the racing segment includes off-track betting facilities, a national account wagering business and HorseRacing TV™. The real estate and other operations segment includes the operation of two golf courses and related facilities, residential housing developments adjacent to the golf courses 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, 2002.

The following summary presents key information by operating segment (in thousands):

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10.    MI Developments Transaction

On August 19, 2003, the shareholders of our former parent company, Magna International Inc. ("Magna"), approved the spin off to its shareholders of its wholly-owned subsidiary, MI Developments Inc. ("MID"). As a result of the spin off transaction, which was effected on September 2, 2003, MID has acquired Magna's controlling interest in the Company. The Company and MID operate as separate public companies each having its own board of directors and management team.

11.    Subsequent Events

(a)

On October 10, 2003, the Company's $50.0 million credit agreement with respect to its senior, revolving credit facility was amended and extended for one year. The credit facility is available by way of U.S. dollar loans and letters of credit for general corporate purposes. Loans under the facility are secured by a first charge on the assets of Golden Gate Fields and a second charge on the assets of Santa Anita Park. The credit agreement expires on October 8, 2004, unless extended with the consent of both parties.

Loans under the credit facility bear interest at either the U.S. Base rate or LIBOR plus a margin based on the Company's ratio of debt to earnings before interest, taxes, depreciation and amortization. At September 30, 2003, there were no borrowings under this facility, but letters of credit of $21.2 million had been issued.

(b)

As announced in the Company's October 30, 2003 press release, the Company has undertaken a multi-part action plan aimed at improving its future financial results. One-time costs or write-offs associated with this action plan will be incurred in the fourth quarter of 2003. The amount of these costs or write-offs cannot be determined at this time.

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RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES
(U.S. DOLLARS IN THOUSANDS)
(Unaudited)

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")

Please see Item 6 of MEC's Annual Report on Form 10-K for the year ended December 31, 2002 for a discussion of the reasons why management believes that these non-GAAP financial measures provide useful information to investors.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        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 North America's number one owner and operator of horse racetracks, based on revenues, and one of the world's leading suppliers, via simulcasting, of live racing content to the growing inter-track, off-track and account wagering markets. We currently operate or manage twelve thoroughbred racetracks, two standardbred racetracks, one racetrack that runs both thoroughbred and standardbred meets and one greyhound track, as well as the simulcast wagering venues at these tracks. In addition, we operate off-track betting ("OTB") facilities and a national account wagering business known as XpressBet™, which permits customers to place wagers by telephone and over the Internet on horse races run at up to 70 racetracks in North America. We also own and operate HorseRacing TV™, a television network focused on horse racing that we initially launched on the Racetrack Television Network ("RTN") in 2002. HorseRacing TV™ is currently carried on cable systems in nine states, with over 1.2 million subscribers to date. We are in ongoing discussions with cable and satellite operators with the goal of achieving broader distribution for HorseRacing TV™. RTN, in which we have a one-third interest, was formed to telecast races from our racetracks and other racetracks, via private direct to home satellite, to paying subscribers. On August 22, 2003, we acquired a 30% equity interest in AmTote International, Inc., a leading provider of totalisator services to the North American pari-mutuel industry. To support certain of our thoroughbred racetracks, we also own and operate thoroughbred training centers situated near San Diego, California, in Palm Beach County, Florida and in the Baltimore, Maryland area.

        We have commenced development of a horse racetrack and gaming facility near Vienna, Austria, which is scheduled to commence operation of its first live race meet in the second quarter of 2004. We are also developing a new service based near Vienna that will produce and broadcast simultaneous televised coverage of North American horse races and other racing content directly to racetracks and off-track wagering operations throughout Europe, which is scheduled to commence operations during the fourth quarter of 2003. We have also applied for horse racing licenses in certain other jurisdictions, including the Detroit, Michigan area where we have plans to develop a new racetrack, subject to regulatory and other approvals. In October 2003, a subsidiary of MI Developments Inc. ("MID"), our parent company, purchased vacant land in Romulus, Michigan which may serve as the site of the proposed racetrack. We are currently discussing terms of a long-term lease on a portion of such land with MID. In addition, we are actively seeking a developer or strategic partner for the development of leisure and entertainment or retail-based real estate projects on the land surrounding, or adjacent to, certain of our premier racetracks. In addition to our racetracks, we own a significant real estate portfolio which includes two golf courses and related recreational facilities as well as three residential developments in various stages of development in Austria, the United States and Canada.

        Initiatives related to the passage of legislation permitting alternative gaming at racetracks, such as slot machines, video lottery terminals and other forms of non-pari-mutuel gaming, are currently underway in a number of states in which we operate, including Maryland, Michigan, Ohio, Oklahoma and Pennsylvania. The passage of such legislation can be a long and uncertain process. In addition, should alternative gaming legislation be enacted in any jurisdiction, there are a number of factors which will determine the viability and profitability of such an operation at one of our racetracks. These factors include, without limitation, the income or revenue sharing terms contained in the legislation, the conditions governing the operation of the gaming facility, the number, size and location of the other sites which are licensed to offer alternative gaming in competition with us, the availability of financing on acceptable terms and the provisions of any ongoing agreements with the parties from whom we purchased the racetrack in question.

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        The lease of our Bay Meadows property is scheduled to expire on December 31, 2003, and discussions are currently underway with the landlord to extend the term of the lease. We are exploring alternative venues, including vacant land that we purchased in Dixon, California for future development, to conduct the racing dates currently held at Bay Meadows after the expiry of the lease term. In October 2003, we held "Town Hall" meetings with the residents of the City of Dixon to review the proposed development, in stages, of "Dixon Downs", a thoroughbred racetrack with an associated retail shopping and entertainment complex. This project, which is still in the early stages of planning, is subject to regulatory and other approvals. At this time, we are uncertain as to the likelihood of renewal of the Bay Meadows lease or the terms upon which such renewal may be achieved. If this lease is not renewed on comparable terms or at all, or an alternative venue arranged, our operating results would be materially adversely affected.

        As previously disclosed, the revenue sharing and operations agreement between The Maryland Jockey Club and the owner of Rosecroft Raceway is scheduled to expire on March 31, 2004. If this agreement is not renewed on comparable terms, there may be a material decline in the revenues of The Maryland Jockey Club that could materially adversely affect our operating results. At this time, we are uncertain as to the likelihood of a renewal of this agreement on comparable terms.

        As previously disclosed, we have entered into an agreement to sell approximately 16 acres of excess real estate located at Golden Gate Fields to the East Bay Regional Park District, a California Special District. We are in the process of preparing the land for disposal and expect to complete the sale of this land during the fourth quarter of 2003.

        As announced in our October 30, 2003 press release, we have undertaken a multi-part action plan aimed at improving our future financial results. One-time costs or write-offs associated with this action plan will be incurred in the fourth quarter of 2003. The amount of these costs or write-offs cannot be determined at this time.

Seasonality

        Our racetracks operate for prescribed periods each year. As a result, our racing revenues and operating results for any quarter will not be indicative of the racing revenues and operating results for the year. Because four of our largest racetracks, Santa Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie 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 typically 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 recent acquisitions, OTB network and account wagering initiatives evolve. Some time ago we set out to reduce our reliance on winter racing by acquiring properties that operate at different times throughout the year. The acquisitions of Lone Star Park at Grand Prairie and The Maryland Jockey Club late in 2002 give us significant new content in the second and fourth quarters. In the third quarter of 2003, these acquisitions and Flamboro Downs contributed $2.2 million of EBITDA.

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Results of Operations

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

Racing operations

        In the nine months ended September 30, 2003, we operated our largest racetracks for an additional 220 live race days compared to the prior year period. The overall increase in live race days at those racetracks is primarily attributable to our acquisition of The Maryland Jockey Club and Lone Star Park at Grand Prairie, which were acquired in the fourth quarter of 2002.

        Our other racetracks operated an additional 139 live race days in the nine month period ended September 30, 2003, compared to the prior year period, primarily due to the acquisition of Flamboro Downs on April 16, 2003, additional live race days at Portland Meadows as a result of the 2002 live race meet concluding early in order to permit construction of a storm water retention system, partially offset by a decrease of live race days at Remington Park as a result of our desired reduction in race days.

        Set forth below 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 of 2003 with comparatives for 2002.

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LIVE RACE DAYS