AURORA, ON, Nov. 5 /PRNewswire-FirstCall/ - Magna Entertainment Corp.
("MEC") (NASDAQ: MECA; TSX: MEC.A) today reported its financial results for
the third quarter ended September 30, 2008.
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Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
2008 2007 2008 2007
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(unaudited) (unaudited)
Revenues(i) $ 81,577 $ 81,482 $ 478,835 $ 503,090
Earnings (loss) before
interest, taxes,
depreciation and
amortization
("EBITDA")(i)(iii) $ (20,357) $ (23,402) $ 714 $ 5,121
Net income (loss)
Continuing
operations(iii) $ (50,582) $ (44,575) $ (86,539) $ (59,194)
Discontinued
operations(ii)(iii) 2,223 (5,236) (29,534) (11,585)
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Net loss $ (48,359) $ (49,811) $(116,073) $ (70,779)
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Diluted earnings (loss)
per share(iv)
Continuing
operations(iii) $ (8.64) $ (8.28) $ (14.82) $ (11.00)
Discontinued
operations(ii)(iii) 0.38 (0.97) (5.05) (2.15)
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Diluted loss per share(iv) $ (8.26) $ (9.25) $ (19.87) $ (13.15)
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(i) Revenues and EBITDA for all periods presented are from continuing
operations only.
(ii) Discontinued operations for the three and nine months ended
September 30, 2008 and 2007 include the operations of Remington
Park in Oklahoma, Thistledown in Ohio, Portland Meadows in Oregon,
Great Lakes Downs in Michigan and Magna Racino(TM) in Austria.
(iii) EBITDA, net loss and diluted loss per share from continuing
operations for the nine months ended September 30, 2008 include a
write-down of $5.0 million related to the Dixon, California real
estate property.
Net loss and diluted loss per share from discontinued operations
for the nine months ended September 30, 2008 include write-downs
of $29.2 million related to Magna Racino(TM) long-lived assets and
$3.1 million related to Instant Racing terminals and the
associated facility at Portland Meadows.
EBITDA, net loss and diluted loss per share from continuing
operations for the three and nine months ended September 30, 2007
include a write-down of $1.4 million related to the Porter, New
York real estate which was sold in the fourth quarter of 2007 and
the first quarter of 2008.
(iv) The Company completed a reverse stock split, effective July 22,
2008, of the Company's Class A Subordinate Voting Stock ("Class A
Stock") and Class B Stock utilizing a 1:20 consolidation ratio. As
a result of the reverse stock split, every 20 shares of the
Company's issued and outstanding Class A Stock and Class B Stock
were consolidated into one share of the Company's Class A Stock
and Class B Stock, respectively. In addition, the exercise prices
of the Company's stock options and the conversion prices of the
Company's convertible subordinated notes have been adjusted, such
that, the number of shares potentially issuable on the exercise of
stock options and/or conversion of subordinated notes will reflect
the 1:20 consolidation ratio. Accordingly, all of the Company's
issued and outstanding Class A Stock and Class B Stock and all
performance share awards, outstanding stock options to purchase
Class A Stock and all performance share awards, outstanding stock
options to purchase Class A Stock and subordinated notes
convertible into Class A Stock for all periods presented have been
restated to reflect the reverse stock split.
All amounts are reported in U.S. dollars in thousands, except per
share figures.
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MEC also announced that it has engaged Miller Buckfire & Co., LLC ("Miller
Buckfire") as its financial advisor and investment banker to review and
evaluate various strategic alternatives including additional asset sales,
financing and balance sheet restructuring opportunities. Miller Buckfire will
also assist MEC in identifying, managing and executing its asset sales program
and possible joint venture transactions.
Frank Stronach, MEC's Chairman and Chief Executive Officer, commented:
"Although MEC has a strong asset base, we remain burdened with far too much
debt and interest expense. Our previously announced debt elimination plan has
been negatively affected by the weak real estate and credit markets, which
have impacted our ability to sell non-core assets. As a result, we are
evaluating MEC's core operations with a view to possibly selling or joint
venturing one or more of MEC's core racetracks in order to strengthen MEC's
balance sheet and liquidity position. Working with Miller Buckfire, we intend
to develop and execute a plan to sell or joint venture certain core assets and
enhance MEC's capital structure. Despite very difficult economic conditions in
the U.S., our EBITDA loss modestly improved in the third quarter of 2008
compared to the same period last year due to improved results at Gulfstream
Park and XpressBet(R). Although the weak economy will continue to present
challenges in the near-term, we are very conscious of the fact that we must
significantly improve our operating results."
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 our racing revenues and operating results for the year.
Revenues from continuing operations were $81.6 million for the three
months ended September 30, 2008, an increase of $0.1 million or 0.1% compared
to $81.5 million for the three months ended September 30, 2007. Revenues from
continuing operations were impacted by:
- Maryland operations revenues below the prior year period by
$3.2 million primarily due to decreased average daily attendance and
handle at both Laurel Park and Pimlico;
- Southern U.S. operations revenues below the prior year period by
$1.2 million primarily due to decreased average daily attendance and
handle at Lone Star Park;
- PariMax operations revenues below the prior year period by
$0.6 million primarily due to reduced revenues at AmTote's Australian
operations and reduced tote service revenues with the overall
industry decline in wagering handle, partially offset by increased
wagering at XpressBet(R) with access to new racing content that was
not previously available to XpressBet(R);
- Northern U.S. operations revenues below the prior year period by
$0.5 million primarily due to decreased average daily attendance and
handle at The Meadows;
- California operations revenues above the prior year period by
$3.1 million due to 10 additional live race days at Golden Gate
Fields with a change in the racing calendar and additional awarded
live race days; and
- Florida operations revenues above the prior year period by
$2.6 million primarily due to the offering of simulcasting at
Gulfstream Park after the live race meet ended, which was not
available in the prior year comparative period, and increased slot
revenues at Gulfstream Park.
Revenues were $478.8 million in the nine months ended September 30, 2008,
a decrease of $24.3 million or 4.8% compared to $503.1 million for the nine
months ended September 30, 2007. The decreased revenues in the nine months
ended September 30, 2008 compared to the prior year period are primarily due
to the same factors impacting the three months ended September 30, 2008 as
well as California operations revenues below the prior year period by
$18.1Â million due to the net loss of 8 live race days at Santa Anita Park due
to excessive rain and track drainage issues with the new synthetic racing
surface that was installed in the fall of 2007, Maryland operations revenues
below the prior year period by $11.1 million due to 13 fewer live race days at
Laurel Park and decreased handle and wagering on the 2008 Preakness(R) and
real estate and other operations revenues above the prior year period by
$4.3Â million due to the sale of real estate and increased housing unit sales
at our European residential housing development.
EBITDA loss from continuing operations was $20.4 million for the three
months ended September 30, 2008, an improvement of $3.0 million or 13.0%
compared to an EBITDA loss of $23.4 million for the three months ended
September 30, 2007. The improved EBITDA loss from continuing operations was
primarily due to:
- Corporate office costs below the prior year period by $2.4 million
primarily due to lower severance in the current year period compared
to the prior year period;
- Florida operations above the prior year period by $1.5 million due to
increased gaming and simulcasting revenues at Gulfstream Park as
noted above, combined with reduced operating costs and improved food
and beverage operations; and
- A write-down of $1.4 million recorded in the prior year period
related to the Porter, New York real estate;
partially offset by:
- Increased predevelopment and other costs of $2.4 million incurred
pursuing alternative gaming opportunities including the November 4,
2008 Maryland gaming referendum, evaluating financing alternatives
and legal costs relating to the protection of our content
distribution rights.
EBITDA of $0.7 million for the nine months ended September 30, 2008,
decreased $4.4 million from $5.1 million in the nine months ended
September 30, 2007 primarily due to the same factors impacting EBITDA for the
three months ended September 30, 2008 as well as:
- Maryland operations below the prior year period by $5.9 million due
to decreased revenues at Laurel Park and Pimlico as noted above,
combined with increased severance costs in the current year period;
- A write-down of long-lived assets of $5.0 million relating to an
impairment charge related to the Dixon, California real estate
property in the nine months ended September 30, 2008, which
represented the excess of the carrying value of the asset over the
estimated fair value less selling costs;
- California operations below the prior year period by $4.0 million for
the reasons noted above which decreased revenues at Santa Anita Park;
partially offset by:
- Residential development and other above the prior year period by
$2.3 million due to the sale of real estate and increased housing
unit sales at our European residential housing development;
- Recognition of $2.0 million of deferred gain on The Meadows
transaction; and
- PariMax operations above the prior year period by $1.8 million for
the reasons noted above which increased revenues at XpressBet(R).
Net loss for the three months ended September 30, 2008 was $48.4 million,
an improvement of $1.5 million or 2.9% compared to the same period last year.
Net loss from continuing operations increased $6.0 million as the improved
EBITDA loss was more than offset by increased interest expense with higher
debt levels this quarter compared to the prior year period. Net income from
discontinued operations increased $7.5 million primarily due to increased
revenues and EBITDA from Remington Park's slot operations as well as the
recognition of certain tax benefits related to our Austrian operations. Net
loss for the nine months ended September 30, 2008 was $116.1 million, an
increase of $45.3 million or 64.0% compared to the same period last year. Net
loss from continuing operations increased $27.3 million with decreased EBITDA,
increased interest expense and increased depreciation and amortization. Net
loss from discontinued operations increased $18.0 million and was positively
impacted by the same factors noted above for the three months ended
September 30, 2008, but these improvements were negatively impacted by a
write-down of long-lived assets of $32.3 million at Magna Racino(TM) and
Portland Meadows.
During the three months ended September 30, 2008, cash used for operating
activities of continuing operations was $26.5 million, which improved
$4.0Â million from cash used for operating activities of continuing operations
of $30.5 million in the three months ended September 30, 2007, primarily due
to an increase in cash provided from non-cash working capital balances. In the
three months ended September 30, 2008, cash provided from non-cash working
capital balances of $11.3 million is primarily due to a decrease in accounts
receivable at September 30, 2008 compared to the respective balance at
June 30, 2008. Cash used for investing activities of continuing operations in
the three months ended September 30, 2008 was $7.0 million, including
$9.3Â million of expenditures on real estate property and fixed asset
additions and $0.8 million of expenditures on other asset additions, partially
offset by $3.0 million of proceeds received on the disposal of real estate
properties and fixed assets and $0.1 million received on the settlement of a
real estate sale holdback. Cash provided from financing activities of
continuing operations during the three months ended September 30, 2008 of
$23.2 million arising from proceeds from indebtedness and long-term debt with
our parent of $21.7 million, proceeds from bank indebtedness of $11.0 million
and proceeds from long-term debt of $1.6 million, partially offset by
repayment of indebtedness and long-term debt with our parent company of $5.0
million, repayment of bank indebtedness of $4.2 million and repayment of other
long-term debt of $1.8 million.
Although we continue to take steps to implement our debt elimination plan,
real estate and credit markets have continued to demonstrate weakness to date
in 2008 and we will not be able to complete asset sales as quickly as
originally planned nor do we expect to achieve proceeds of disposition as high
as originally contemplated. Given our upcoming debt maturities and our
operational funding requirements, we will again need to seek extensions and/or
additional funds in the short-term from one or more possible sources to meet
our obligations as they come due. The availability of such extensions and/or
additional funds from existing lenders, including our controlling shareholder,
or from other sources is not assured and, if available, the terms thereof are
not determinable at this time. We expect that we will enter into negotiations
with such existing lenders, including our controlling shareholder, with a view
to extending, restructuring or refinancing such facilities. There is no
assurance that negotiations with our existing lenders will result in a
favorable outcome for us.
MEC, North America's largest owner and operator of horse racetracks, based
on revenue, develops, owns and operates horse racetracks and related
pari-mutuel wagering operations, including off-track betting facilities. MEC
also develops, owns and operates casinos in conjunction with its racetracks
where permitted by law. MEC owns and operates AmTote International, Inc., a
provider of totalisator services to the pari-mutuel industry, XpressBet(R), a
national Internet and telephone account wagering system, as well as
MagnaBet(TM) internationally. Pursuant to joint ventures, MEC has a fifty
percent interest in HorseRacing TV(R), a 24-hour horse racing television
network and TrackNet Media Group, LLC, a content management company formed to
distribute the full breadth of MEC's horse racing content.
This press release contains "forward-looking statements" within the
meaning of applicable securities legislation, including Section 27A of the
United States Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the United States Securities Exchange Act of 1934, as amended
(the "Exchange Act") and forward-looking information as defined in the
Securities Act (Ontario) (collectively referred to as forward-looking
statements). These forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
the Securities Act (Ontario) and include, among others, statements regarding:
our debt reduction plans and efforts, including the current status and the
potential impact of the September 12, 2007 adopted plan to eliminate our debt
(the "Plan"), as to which there can be no assurance of success; expectations
as to our ability to complete asset sales as contemplated by the Plan or
otherwise (including, without limitation, the timing or pricing of such
sales); expectations as to our ability to negotiate and close, on acceptable
terms, one or more core asset sale transactions; the impact of the short-term
bridge loan facility (the "Bridge Loan") of up to $125.0 million with a
subsidiary of MEC's controlling shareholder, MIÂ Developments Inc.;
expectations as to our ability to comply with the Bridge Loan and other credit
facilities; our ability to continue as a going concern; strategies and plans;
expectations as to financing and liquidity requirements and arrangements;
expectations as to operations; expectations as to revenues, costs and
earnings; the time by which certain redevelopment projects, transactions or
other objectives will be achieved; estimates of costs relating to
environmental remediation and restoration; proposed developments, products and
services; expectations as to the timing and receipt of government approvals
and regulatory changes in gaming and other racing laws and regulations;
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, beliefs 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. Undue reliance should not be placed on such statements.
Forward-looking statements are based on information available at the time
and/or management's good faith assumptions and analyses made in light of our
perception of historical trends, current conditions and expected future
developments, as well as other factors we believe are appropriate in the
circumstances and are subject to known and unknown risks, uncertainties and
other unpredictable factors, many of which are beyond our control, that could
cause actual events or results to differ materially from such forward-looking
statements. Important factors that could cause actual results to differ
materially from our forward-looking statements include, but may not be limited
to, material adverse changes in: general economic conditions; the popularity
of racing and other gaming activities as recreational activities; the
regulatory environment affecting the horse racing and gaming industries; our
ability to obtain or maintain government and other regulatory approvals
necessary or desirable to proceed with proposed real estate developments;
increased regulation affecting certain of our non-racetrack operations, such
as broadcasting ventures; and our ability to develop, execute or finance our
strategies and plans within expected timelines or budgets. In drawing
conclusions set out in our forward-looking statements above, we have assumed,
among other things, that we will continue with our efforts to implement the
Plan, although not on the originally contemplated time schedule, negotiate and
close, on acceptable terms, one or more core asset sale transactions, comply
with the terms of and/or obtain waivers or other concessions from our lenders,
refinance or repay on maturity our existing financing arrangements (including
our senior secured revolving credit facility with a Canadian financial
institution and the Bridge Loan), possibly obtain additional financing on
acceptable terms to fund our ongoing operations and there will not be any
material further deterioration in general economic conditions or any further
significant decline in the popularity of horse racing and other gaming
activities beyond that which has already occurred in the current economic
downturn; nor any material adverse changes in weather and other environmental
conditions at our facilities, the regulatory environment or our ability to
develop, execute or finance our strategies and plans as anticipated.
Forward-looking statements speak only as of the date the statements were
made. We assume no obligation to update forward-looking statements to reflect
actual results, changes in assumptions or changes in other factors affecting
forward-looking statements. 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.
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
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(Unaudited)
(U.S. dollars in thousands, except per share figures)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2008 2007 2008 2007
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Revenues
Racing and gaming
Pari-mutuel wagering $ 47,423 $ 44,124 $ 339,359 $ 359,883
Gaming 9,290 9,015 33,794 31,831
Non-wagering 21,917 25,648 95,765 105,790
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78,630 78,787 468,918 497,504
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Real estate and other
Sale of real estate - - 1,492 -
Residential
development and
other 2,947 2,695 8,425 5,586
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2,947 2,695 9,917 5,586
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81,577 81,482 478,835 503,090
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Costs, expenses and
other income
Racing and gaming
Pari-mutuel purses,
awards and other 26,839 23,967 203,975 216,340
Gaming purses, taxes
and other 6,372 6,118 22,843 22,002
Operating costs 50,093 53,290 193,615 201,611
General and
administrative 13,300 17,300 42,361 49,168
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96,604 100,675 462,794 489,121
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Real estate and other
Cost of real estate
sold - - 1,492 -
Operating costs 1,757 1,185 3,653 2,915
General and
administrative 97 152 363 561
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1,854 1,337 5,508 3,476
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Predevelopment and
other costs 2,766 393 4,213 1,765
Depreciation and
amortization 11,362 10,098 33,634 27,809
Interest expense, net 18,115 11,712 50,608 34,219
Write-down of long-lived
assets - 1,444 5,000 1,444
Equity loss 710 1,035 2,619 2,163
Recognition of
deferred gain on
The Meadows transaction - - (2,013) -
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131,411 126,694 562,363 559,997
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Loss from continuing
operations before
income taxes (49,834) (45,212) (83,528) (56,907)
Income tax expense
(benefit) 748 (637) 3,011 2,287
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Loss from continuing
operations (50,582) (44,575) (86,539) (59,194)
Income (loss) from
discontinued
operations 2,223 (5,236) (29,534) (11,585)
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Net loss (48,359) (49,811) (116,073) (70,779)
Other comprehensive
income (loss)
Foreign currency
translation
adjustment (737) 2,112 1,345 4,122
Change in fair value
of interest rate
swap (45) (327) 12 (423)
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Comprehensive loss $ (49,141) $ (48,026) $ (114,716) $ (67,080)
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Earnings (loss) per
share for Class A
Subordinate
Voting Stock and
Class B Stock:
Basic and Diluted
Continuing
operations $ (8.64) $ (8.28) $ (14.82) $ (11.00)
Discontinued
operations 0.38 (0.97) (5.05) (2.15)
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Loss per share $ (8.26) $ (9.25) $ (19.87) $ (13.15)
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Average number of
shares of Class A
Subordinate
Voting Stock and
Class B Stock
outstanding during
the period
(in thousands):
Basic and Diluted 5,852 5,386 5,843 5,383
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
(U.S. dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided from
(used for):
Operating activities
of continuing
operations:
Loss from continuing
operations $ (50,582) $ (44,575) $ (86,539) $ (59,194)
Items not involving
current cash flows 12,843 11,115 42,506 28,738
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(37,739) (33,460) (44,033) (30,456)
Changes in non-cash
working capital
balances 11,255 2,973 (8,289) (13,103)
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(26,484) (30,487) (52,322) (43,559)
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Investing activities
of continuing
operations:
Real estate property
and fixed asset
additions (9,302) (19,896) (24,170) (55,757)
Other asset additions (831) (692) (7,873) (3,178)
Proceeds on disposal of
real estate properties - - 1,492 -
Proceeds on disposal of
fixed assets 1,817 2,602 7,162 5,243
Proceeds on real estate
sold to parent - 100 - 88,009
Proceeds on real estate
sold to related parties 1,171 - 32,631 -
Proceeds on settlement
of holdback with parent 123 - 123 -
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(7,022) (17,886) 9,365 34,317
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Financing activities of
continuing operations:
Proceeds from bank
indebtedness 10,959 25,199 48,705 40,940
Proceeds from
indebtedness and long-
term debt with parent 21,659 10,189 72,559 26,518
Proceeds from long-term
debt 1,605 205 4,341 4,345
Repayment of bank
indebtedness (4,201) - (44,670) (21,515)
Repayment of
indebtedness and long-
term debt with parent (4,974) (435) (27,407) (2,588)
Repayment of long-term
debt (1,825) (2,207) (10,703) (31,667)
Redemption of fractional
share capital on
Reverse Stock Split (10) - (10) -
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23,213 32,951 42,815 16,033
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Effect of exchange rate
changes on cash and
cash equivalents (217) 199 (139) 113
-------------------------------------------------------------------------
Net cash flows provided
from (used for)
continuing operations (10,510) (15,223) (281) 6,904
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Cash provided from
(used for) discontinued
operations:
Operating activities of
discontinued operations 929 (3,262) 2,522 (4,618)
Investing activities of
discontinued operations 2,699 (714) (2,284) (3,941)
Financing activities of
discontinued operations 22 (1,637) (12,633) (23,219)
-------------------------------------------------------------------------
Net cash flows provided
from (used for)
discontinued operations 3,650 (5,613) (12,395) (31,778)
-------------------------------------------------------------------------
Net decrease in cash
and cash equivalents
during the period (6,860) (20,836) (12,676) (24,874)
Cash and cash
equivalents, beginning
of period 37,577 54,253 43,393 58,291
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period 30,717 33,417 30,717 33,417
Less: cash and cash
equivalents, end of
period of discontinued
operations (9,346) (10,463) (9,346) (10,463)
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period of continuing
operations $ 21,371 $ 22,954 $ 21,371 $ 22,954
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
(REFER TO NOTE 1 - GOING CONCERN)
(Unaudited)
(U.S. dollars and share amounts in thousands)
September 30, December 31,
2008 2007
-----------------------------
ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 21,371 $ 34,152
Restricted cash 13,358 28,264
Accounts receivable 26,748 32,157
Due from parent 945 4,463
Income taxes receivable - 1,234
Inventories 6,215 6,351
Prepaid expenses and other 14,962 9,946
Assets held for sale 26,984 35,658
Discontinued operations 114,063 75,455
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224,646 227,680
-------------------------------------------------------------------------
Real estate properties, net 702,856 705,069
Fixed assets, net 73,924 85,908
Racing licenses 109,868 109,868
Other assets, net 12,465 10,980
Future tax assets 39,975 39,621
Assets held for sale - 4,482
Discontinued operations - 60,268
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$ 1,163,734 $ 1,243,876
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-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Bank indebtedness $ 43,249 $ 39,214
Accounts payable 41,226 65,351
Accrued salaries and wages 7,298 8,198
Customer deposits 2,760 2,575
Other accrued liabilities 37,037 46,124
Income taxes payable 1,159 -
Long-term debt due within one year 10,671 10,654
Due to parent 190,158 137,003
Deferred revenue 2,883 4,339
Liabilities related to assets held for
sale 876 1,047
Discontinued operations 82,748 75,396
-------------------------------------------------------------------------
420,065 389,901
-------------------------------------------------------------------------
Long-term debt 83,497 89,680
Long-term debt due to parent 66,980 67,107
Convertible subordinated notes 223,344 222,527
Other long-term liabilities 15,018 18,255
Future tax liabilities 82,114 80,076
Discontinued operations - 13,617
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891,018 881,163
-------------------------------------------------------------------------
Shareholders' equity:
Class A Subordinate Voting Stock
(Issued: 2008 - 2,929; 2007 - 2,908) 339,446 339,435
Class B Stock
(Convertible into Class A Subordinate
Voting Stock)
(Issued: 2008 and 2007 - 2,923) 394,094 394,094
Contributed surplus 116,287 91,825
Other paid-in-capital 2,277 2,031
Accumulated deficit (626,130) (510,057)
Accumulated other comprehensive income 46,742 45,385
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272,716 362,713
-------------------------------------------------------------------------
$ 1,163,734 $ 1,243,876
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------
(Unaudited)
(All amounts in U.S. dollars unless otherwise noted and all tabular
amounts in thousands, except per share figures)
1. GOING CONCERN
These consolidated financial statements of Magna Entertainment Corp.
("MEC" or the "Company") have been prepared on a going concern basis,
which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable
future. The Company has incurred a net loss of $116.1 million for the
nine months ended September 30, 2008, has incurred net losses of
$113.8 million, $87.4 million and $105.3 million for the years ended
December 31, 2007, 2006 and 2005, respectively, and at September 30,
2008 has an accumulated deficit of $626.1 million and a working
capital deficiency of $195.4 million. At September 30, 2008, the
Company had $255.4 million of debt due to mature in the 12-month
period ending September 30, 2009, including $36.5 million under the
Company's $40.0 million senior secured revolving credit facility with
a Canadian financial institution, which is scheduled to mature on
November 17, 2008, $88.6 million under its bridge loan facility of up
to $125.0 million with a subsidiary of MI Developments Inc. ("MID"),
the Company's controlling shareholder, which is scheduled to mature
on December 1, 2008 and the Company's obligation to repay
$100.0 million of indebtedness under the Gulfstream Park project
financings with a subsidiary of MID by December 1, 2008. Accordingly,
the Company's ability to continue as a going concern is in
substantial doubt and is dependent on the Company generating cash
flows that are adequate to sustain the operations of the business,
renewing or extending current financing arrangements and meeting its
obligations with respect to secured and unsecured creditors, none of
which is assured. If the Company is unable to repay its obligations
when due or satisfy required covenants in debt agreements,
substantially all of the Company's other current and long-term debt
will also become due on demand as a result of cross-default
provisions within loan agreements, unless the Company is able to
obtain waivers, modifications or extensions. On September 12, 2007,
the Company's Board of Directors approved a debt elimination plan
designed to eliminate net debt by December 31, 2008 by generating
funding from the sale of assets, entering into strategic transactions
involving certain of the Company's racing, gaming and technology
operations, and a possible future equity issuance. To address short-
term liquidity concerns and provide sufficient time to implement the
debt elimination plan, the Company arranged $100.0 million of funding
in September 2007, comprised of (i) a $20.0 million private placement
of the Company's Class A Subordinate Voting Stock to Fair Enterprise
Limited ("Fair Enterprise"), a company that forms part of an estate
planning vehicle for the family of Frank Stronach, the Chairman and
Chief Executive Officer of the Company, which was completed in
October 2007; and (ii) a short-term bridge loan facility of up to
$80.0 million with a subsidiary of MID, which was subsequently
increased to $110.0 million on May 23, 2008 and then to
$125.0 million on October 15, 2008. Although the Company continues to
take steps to implement the debt elimination plan, weakness in the
U.S. real estate and credit markets have adversely impacted the
Company's ability to execute the debt elimination plan as market
demand for the Company's assets has been weaker than expected and
financing for potential buyers has become more difficult to obtain
such that the Company does not expect to execute the debt elimination
plan on the time schedule originally contemplated, if at all. As a
result, the Company has needed and will again need to seek extensions
from existing lenders and additional funds in the short-term from one
or more possible sources. The availability of such extensions and
additional funds is not assured and, if available, the terms thereof
are not determinable at this time. These consolidated financial
statements do not give effect to any adjustments to recorded amounts
and their classification, which would be necessary should the Company
be unable to continue as a going concern and, therefore, be required
to realize its assets and discharge its liabilities in other than the
normal course of business and at amounts different from those
reflected in the consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States ("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 interim consolidated
financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the amounts reported in
the interim consolidated financial statements and accompanying notes.
Actual results could differ from these estimates. In the opinion of
management, all adjustments, which consist of normal and recurring
adjustments, necessary for fair presentation have been included. 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, 2007.
Reverse Stock Split
The Company completed a reverse stock split (the "Reverse Stock
Split"), effective July 22, 2008, of the Company's Class A
Subordinate Voting Stock and Class B Stock utilizing a 1:20
consolidation ratio. As a result of the Reverse Stock Split, every 20
shares of the Company's issued and outstanding Class A Subordinate
Voting Stock and Class B Stock were consolidated into one share of
the Company's Class A Subordinate Voting Stock and Class B Stock,
respectively. In addition, the exercise prices of the Company's stock
options and the conversion prices of the Company's convertible
subordinated notes have been adjusted, such that, the number of
shares potentially issuable on the exercise of stock options and/or
conversion of subordinated notes will reflect the 1:20 consolidation
ratio. Accordingly, all of the Company's issued and outstanding
Class A Subordinate Voting Stock and Class B Stock and all
performance share awards, outstanding stock options to purchase
Class A Subordinate Voting Stock and subordinated notes convertible
into Class A Subordinate Voting Stock for all periods presented have
been restated to reflect the Reverse Stock Split.
Seasonality
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.
The Company's racing operations have historically operated at a loss
in the second half of the year, with the third quarter generating the
largest operating loss. This seasonality has resulted in large
quarterly fluctuations in revenues and operating results.
Comparative Amounts
Certain of the comparative amounts have been reclassified to reflect
assets held for sale, discontinued operations and the Reverse Stock
Split.
Impact of Recently Adopted Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard # 157, Fair Value
Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP and
expands disclosures about fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position # 157-2,
Effective Date of FASB Statement # 157, which defers the effective
date of SFAS 157 for non-financial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008. Effective January 1, 2008,
the Company adopted the provisions of SFAS 157 prospectively, except
with respect to certain non-financial assets and liabilities which
have been deferred. The adoption of SFAS 157 did not have a material
effect on the Company's consolidated financial statements.
The following table represents information related to the Company's
financial assets and liabilities measured at fair value on a
recurring basis and the level within the fair value hierarchy in
which the fair value measurements fall at September 30, 2008:
Quoted Prices in Active Significant Significant
Markets for Identical Other Unobservable
Assets or Liabilities Observable Inputs Inputs
(Level 1) (Level 2) (Level 3)
-------------------------------------------------------------------------
Assets carried at
fair value:
Cash equivalents $ 1,000 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities carried
at fair value:
Interest rate swaps $ - $ 1,312 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In February 2007, the FASB issued Statement of Financial Accounting
Standard # 159, The Fair Value Option for Financial Assets and
Liabilities ("SFAS 159"). SFAS 159 allows companies to voluntarily
choose, at specified election dates, to measure certain financial
assets and liabilities, as well as certain non-financial instruments
that are similar to financial instruments, at fair value (the "fair
value option"). The election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an
instrument, SFAS 159 specifies that all subsequent changes in fair
value for that instrument be reported in income. The provisions of
SFAS 159 are effective for fiscal years beginning after November 15,
2007. Effective January 1, 2008, the Company adopted the provisions
of SFAS 159 prospectively. The Company has elected not to measure
certain financial assets and liabilities, as well as certain non-
financial instruments that are similar to financial instruments, as
defined in SFAS 159 under the fair value option. Accordingly, the
adoption of SFAS 159 did not have an effect on the Company's
consolidated financial statements.
Impact of Recently Issued Accounting Standards
In March 2008, the FASB issued Statement of Financial Accounting
Standard # 161, Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement # 133
("SFAS 161"). SFAS 161 requires enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for and (c) how
derivative instruments and related hedged items affect an entity's
financial position, financial performance and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. SFAS 161
encourages, but does not require, comparative disclosures for earlier
periods at initial adoption. The Company is currently reviewing
SFAS 161, but has not yet determined the future impact, if any, on
the Company's consolidated financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standard # 141(R), Business Combinations
("SFAS 141(R)"). SFAS 141(R) changes the accounting model for
business combinations from a cost allocation standard to a standard
that provides, with limited exception, for the recognition of all
identifiable assets and liabilities of the business acquired at fair
value, regardless of whether the acquirer acquires 100% or a lesser
controlling interest of the business. SFAS 141(R) defines the
acquisition date of a business acquisition as the date on which
control is achieved (generally the closing date of the acquisition).
SFAS 141(R) requires recognition of assets and liabilities arising
from contractual contingencies and non-contractual contingencies
meeting a "more-likely-than-not" threshold at fair value at the
acquisition date. SFAS 141(R) also provides for the recognition of
acquisition costs as expenses when incurred and for expanded
disclosures. SFAS 141(R) is effective for acquisitions closing after
December 15, 2008, with earlier adoption prohibited. The Company is
currently reviewing SFAS 141(R), but has not yet determined the
future impact, if any, on the Company's consolidated financial
statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standard # 160, Non-controlling Interests in Consolidated Financial
Statements ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards for non-controlling interests in subsidiaries and
for the deconsolidation of a subsidiary and also amends certain
consolidation procedures for consistency with SFAS 141(R). Under
SFAS 160, non-controlling interests in consolidated subsidiaries
(formerly known as "minority interests") are reported in the
consolidated statement of financial position as a separate component
within shareholders' equity. Net earnings and comprehensive income
attributable to the controlling and non-controlling interests are to
be shown separately in the consolidated statements of earnings and
comprehensive income. Any changes in ownership interests of a
non-controlling interest where the parent retains a controlling
financial interest in the subsidiary are to be reported as equity
transactions. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008, with earlier adoption prohibited. When
adopted, SFAS 160 is to be applied prospectively at the beginning of
the year, except that the presentation and disclosure requirements
are to be applied retrospectively for all periods presented. The
Company is currently reviewing SFAS 160, but has not yet determined
the future impact, if any, on the Company's consolidated financial
statements.
3. THE MEADOWS TRANSACTION
On November 14, 2006, the Company completed the sale of all of the
outstanding shares of Washington Trotting Association, Inc., Mountain
Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc. (collectively
"The Meadows"), each a wholly-owned subsidiary of the Company,
through which the Company owned and operated The Meadows, a
standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a company
jointly owned by William Paulos and William Wortman, controlling
shareholders of Millennium Gaming, Inc., and a fund managed by
Oaktree Capital Management, LLC ("Oaktree" and together, with PA
Meadows, LLC, "Millennium-Oaktree"). On closing, the Company received
cash consideration of $171.8 million, net of transaction costs of
$3.2 million, and a holdback agreement, under which $25.0 million is
payable to the Company over a five-year period, subject to offset for
certain indemnification obligations. Under the terms of the holdback
agreement, the Company agreed to release the security requirement for
the holdback amount, defer subordinate payments under the holdback,
defer receipt of holdback payments until the opening of the permanent
casino at The Meadows and defer receipt of holdback payments to the
extent of available cash flows as defined in the holdback agreement,
in exchange for Millennium-Oaktree providing an additional
$25.0 million of equity support for PA Meadows, LLC. The Company also
entered into a racing services agreement whereby the Company pays
$50 thousand per annum and continues to operate, for its own account,
the racing operations at The Meadows for at least five years. On
December 12, 2007, Cannery Casino Resorts, LLC, the parent company of
Millennium-Oaktree, announced it had entered into an agreement to
sell Millennium-Oaktree to Crown Limited. If the deal is consummated,
either party to the racing services agreement will have the option to
terminate the arrangement. The transaction proceeds of $171.8 million
were allocated to the assets of The Meadows as follows:
(i) $7.2 million was allocated to the long-lived assets representing
the fair value of the underlying real estate and fixed assets based
on appraised values; and (ii) $164.6 million was allocated to the
intangible assets representing the fair value of the racing/gaming
licenses based on applying the residual method to determine the fair
value of the intangible assets. On the closing date of the
transaction, the net book value of the long-lived assets was
$18.4 million, resulting in a non-cash impairment loss of
$11.2 million relating to the long-lived assets, and the net book
value of the intangible assets was $32.6 million, resulting in a gain
of $132.0 million on the sale of the intangible assets. This gain was
reduced by $5.6 million, representing the net estimated present value
of the operating losses expected over the term of the racing services
agreement. Accordingly, the net gain recognized by the Company on the
disposition of the intangible assets was $126.4 million for the year
ended December 31, 2006.
Given that the racing services agreement was effectively a lease of
property, plant and equipment and since the amount owing under the
holdback note is to be paid to the extent of available cash flows as
defined in the holdback agreement, the Company was deemed to have
continuing involvement with the long-lived assets for accounting
purposes. As a result, the sale of The Meadows' real estate and fixed
assets was precluded from sales recognition and not accounted for as
a sale-leaseback, but rather using the financing method of accounting
under U.S. GAAP. Accordingly, $12.8 million of the proceeds were
deferred, representing the fair value of long-lived assets of
$7.2 million and the net present value of the operating losses
expected over the term of the racing services agreement of
$5.6 million, and recorded as "other long-term liabilities" on the
consolidated balance sheets at the date of completion of the
transaction. The deferred proceeds are being recognized in the
consolidated statements of operations and comprehensive loss over the
five-year term of the racing services agreement and/or at the point
when the sale-leaseback subsequently qualifies for sales recognition.
For the three and nine months ended September 30, 2008, the Company
recognized $0.6 million and $1.0 million, respectively, and for the
three and nine months ended September 30, 2007, the Company
recognized $0.8 million and $1.2 million, respectively, of the
deferred proceeds in income, which is recorded as an offset to racing
and gaming "general and administrative" expenses on the accompanying
consolidated statements of operations and comprehensive loss.
Effective January 1, 2008, The Meadows entered into an agreement with
The Meadows Standardbred Owners Association, which expires on
December 31, 2009, whereby the horsemen will make contributions to
subsidize backside maintenance and marketing expenses at The Meadows.
As a result, the Company revised its estimate of the operating losses
expected over the remaining term of the racing services agreement,
which resulted in an additional $2.0 million of deferred gain being
recognized in income for the nine months ended September 30, 2008. At
September 30, 2008, the remaining balance of the deferred proceeds is
$8.0 million. With respect to the $25.0 million holdback agreement,
the Company will recognize this consideration upon the settlement of
the indemnification obligations and as payments are received (refer
to Note 14(k)).
4. ASSETS HELD FOR SALE
(a) In November and December 2007, the Company entered into sale
agreements for three parcels of excess real estate comprising
approximately 825 acres in Porter, New York, subject to the
completion of due diligence by the purchasers and customary
closing conditions. The sale of one parcel was completed in
December 2007 for cash consideration of $0.3 million, net of
transaction costs, and the sales of the remaining two parcels
were completed in January 2008 for total cash consideration of
$1.5 million, net of transaction costs. The two parcels of excess
real estate for which the sales were completed in January 2008
have been reflected as "assets held for sale" on the consolidated
balance sheets at December 31, 2007. The net proceeds received on
closing were used to repay a portion of the bridge loan facility
with a subsidiary of MID in January 2008.
(b) On December 21, 2007, the Company entered into an agreement to
sell 225 acres of excess real estate located in Ebreichsdorf,
Austria to a subsidiary of Magna International Inc. ("Magna"), a
related party, for a purchase price of Euros 20.0 million
(U.S. $31.5 million), net of transaction costs. The sale
transaction was completed on April 11, 2008. Of the net proceeds
that were received on closing, Euros 7.5 million was used to
repay a portion of a Euros 15.0 million term loan facility and
the remaining portion of the net proceeds was used to repay a
portion of the bridge loan facility with a subsidiary of MID. The
gain on sale of the excess real estate of approximately
Euros 15.5 million (U.S. $24.3 million), net of tax, has been
reported as a contribution of equity in contributed surplus.
(c) On August 9, 2007, the Company announced its intention to sell a
real estate property located in Dixon, California. In addition,
in March 2008, the Company committed to a plan to sell excess
real estate located in Oberwaltersdorf, Austria. The Company is
actively marketing these properties for sale and has listed the
properties for sale with real estate brokers. Accordingly, at
September 30, 2008 and December 31, 2007, these real estate
properties are classified as "assets held for sale" on the
consolidated balance sheets in accordance with Statement of
Financial Accounting Standard # 144, Accounting for Impairment
or Disposal of Long-Lived Assets ("SFAS 144").
(d) On August 12, 2008, the Company announced that it had entered
into an agreement to sell approximately 489 acres of excess real
estate located in Ocala, Florida to Lincoln Property Company and
Orion Investment Properties, Inc. for a purchase price of
$16.5 million cash, subject to a 90-day due diligence period in
favor of the purchasers. If the purchasers determine that their
due diligence review is satisfactory and do not terminate the
agreement before the end of the 90-day due diligence period, then
the transaction would close 60-days thereafter, subject to the
satisfaction of customary closing conditions (refer to
Note 16(a)). The property forms part of the security for the
Company's bridge loan with a subsidiary of MID, and any net
proceeds received from the sale of the property are contractually
required to be used to make repayments under the bridge loan.
Accordingly, at September 30, 2008 and December 31, 2007, this
real estate property is classified as "assets held for sale" on
the consolidated balance sheets in accordance with SFAS 144.
(e) The Company's assets held for sale and related liabilities at
September 30, 2008 and December 31, 2007 are shown below. All
assets held for sale and related liabilities are classified as
current at September 30, 2008 as the assets and related
liabilities described in sections (a) through (d) above have been
or are expected to be sold within one year from the consolidated
balance sheet date.
September 30, December 31,
2008 2007
---------------------------
ASSETS
---------------------------------------------------------------------
Real estate properties, net
Dixon, California (refer to Note 6) $ 14,139 $ 19,139
Ocala, Florida 8,399 8,407
Oberwaltersdorf, Austria 4,446 -
Ebreichsdorf, Austria - 6,619
Porter, New York - 1,493
---------------------------------------------------------------------
26,984 35,658
Oberwaltersdorf, Austria - 4,482
---------------------------------------------------------------------
$ 26,984 $ 40,140
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES
---------------------------------------------------------------------
Future tax liabilities $ 876 $ 1,047
---------------------------------------------------------------------
---------------------------------------------------------------------
(f) On September 12, 2007, the Company's Board of Directors approved
a debt elimination plan designed to eliminate net debt by
generating funding from the sale of certain assets, entering into
strategic transactions involving the Company's racing, gaming and
technology operations, and a possible future equity issuance. In
addition to the sales of real estate described in sections (a)
through (d) above, the debt elimination plan also contemplates
the sale of real estate properties located in Aventura and
Hallandale, Florida, both adjacent to Gulfstream Park and in Anne
Arundel County, Maryland, adjacent to Laurel Park. The Company
also intends to explore selling its membership interests in the
mixed-use developments at Gulfstream Park in Florida and Santa
Anita Park in California that the Company is pursuing under joint
venture arrangements with Forest City Enterprises, Inc. ("Forest
City") and Caruso Affiliated, respectively. The Company also
intends to sell Thistledown in Ohio and its interest in Portland
Meadows in Oregon and, on July 16, 2008, the Company sold Great
Lakes Downs in Michigan. The Company also intends to explore
other strategic transactions involving other racing, gaming and
technology operations, including: partnerships or joint ventures
in respect of the existing gaming facility at Gulfstream Park;
partnerships or joint ventures in respect of potential
alternative gaming operations at certain of the Company's other
racetracks that currently do not have gaming operations; the sale
of Remington Park, a horse racetrack and gaming facility in
Oklahoma City; and transactions involving the Company's
technology operations, which may include one or more of the
assets that comprise the Company's PariMax business.
For those properties that have not been classified as held for
sale as noted in sections (a) through (d) above, the Company has
determined that they do not meet all of the criteria required in
SFAS 144 for the following reasons and, accordingly, these assets
continue to be classified as held and used at September 30, 2008:
- Real estate properties located in Aventura and Hallandale,
Florida (adjacent to Gulfstream Park): At September 30, 2008,
the Company had not initiated an active program to locate a
buyer for these assets as the properties had not been listed
for sale with an external agent and were not being actively
marketed for sale.
- Real estate property in Anne Arundel County, Maryland
(adjacent to Laurel Park): At September 30, 2008, the Company
had not initiated an active program to locate a buyer for this
asset as the property had not been listed for sale with an
external agent and was not being actively marketed for sale.
In addition, given the near term potential for a legislative
change to permit video lottery terminals at Laurel Park and
the possible effect such legislative change could have on the
Company's development plans for the overall property is such
that at September 30, 2008, the Company does not expect to
complete the sale of this asset within one year.
- Membership interest in the mixed-use development at Gulfstream
Park with Forest City and membership interest in the mixed-use
development at Santa Anita Park with Caruso Affiliated: At
September 30, 2008, the Company was not actively marketing
these assets for sale and does not expect to complete the sale
of these assets within one year.
The following assets have met the criteria of SFAS 144 to be
reflected as assets held for sale and also met the requirements
to be reflected as discontinued operations at September 30, 2008
and have been presented accordingly:
- Great Lakes Downs: On July 16, 2008, the Company completed the
sale of Great Lakes Downs in Michigan for cash consideration
of $5.0 million. The proceeds of approximately $4.5 million,
net of transaction costs, were used to repay a portion of the
bridge loan facility with a subsidiary of MID. The gain on
sale of Great Lakes Downs of approximately $0.5 million, net
of tax, has been reported in discontinued operations.
- Thistledown and Remington Park: In September 2007, the Company
engaged a U.S. investment bank to assist in soliciting
potential purchasers and managing the sale process for certain
assets contemplated in the debt elimination plan. In October
2007, the U.S. investment bank initiated an active program to
locate potential buyers and began marketing these assets for
sale. The Company has since taken over the sales process from
the U.S. investment bank and is currently in discussions with
potential buyers for these assets.
- Portland Meadows: In November 2007, the Company initiated an
active program to locate potential buyers and began marketing
this asset for sale. The Company is currently in discussions
with potential buyers for this asset.
- Magna Racino(TM): In March 2008, the Company committed to a
plan to sell Magna Racino(TM). The Company has initiated an
active program to locate potential buyers and began marketing
the assets for sale through a real estate agent.
5. DISCONTINUED OPERATIONS
(a) As part of the debt elimination plan approved by the Board of
Directors (refer to Note 4(f)), the Company intends to sell
Thistledown in Ohio, Portland Meadows in Oregon, Remington Park
in Oklahoma City and Magna Racino(TM) in Ebreichsdorf, Austria
and, on July 16, 2008, the Company sold Great Lakes Downs in
Michigan. Accordingly, at September 30, 2008, these operations
have been classified as discontinued operations.
(b) The Company's results of operations related to discontinued
operations for the three and nine months ended September 30, 2008
and 2007 are as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Results of Operations
Revenues $ 33,438 $ 33,050 $ 99,028 $ 98,679
Costs and expenses 33,769 35,643 96,737 102,106
---------------------------------------------------------------------
(331) (2,593) 2,291 (3,427)
Predevelopment and other
costs 76 58 391 104
Depreciation and
amortization - 1,750 605 5,252
Interest expense, net 1,080 968 2,630 3,129
Write-down of long-lived
assets (refer to Note 6) - - 32,294 -
Equity income - - - (32)
---------------------------------------------------------------------
Loss before gain on
disposition (1,487) (5,369) (33,629) (11,880)
Gain on disposition 536 - 536 -
---------------------------------------------------------------------
Loss before income taxes (951) (5,369) (33,093) (11,880)
Income tax benefit (3,174) (133) (3,559) (295)
---------------------------------------------------------------------
Income (loss) from
discontinued operations $ 2,223 $ (5,236) $ (29,534) $ (11,585)
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company's assets and liabilities related to discontinued
operations at September 30, 2008 and December 31, 2007 are shown
below. All assets and liabilities related to discontinued operations
are classified as current at September 30, 2008 as they are expected
to be sold within one year from the consolidated balance sheet date.
September 30, December 31,
2008 2007
---------------------------
ASSETS
---------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 9,346 $ 9,241
Restricted cash 14,265 7,069
Accounts receivable 4,600 6,602
Inventories 627 426
Prepaid expenses and other 2,621 1,386
Real estate properties, net 55,949 39,094
Fixed assets, net 13,003 11,531
Other assets, net 105 106
Future tax assets 13,547 -
---------------------------------------------------------------------
114,063 75,455
---------------------------------------------------------------------
Real estate properties, net - 41,941
Fixed assets, net - 4,764
Other assets, net - 16
Future tax assets - 13,547
---------------------------------------------------------------------
- 60,268
---------------------------------------------------------------------
$ 114,063 $ 135,723
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES
---------------------------------------------------------------------
Current liabilities:
Accounts payable $ 15,782 $ 9,146
Accrued salaries and wages 1,475 946
Other accrued liabilities 13,224 11,354
Income taxes payable 95 3,182
Long-term debt due within one year 10,946 22,096
Due to parent (refer to Note 13(a)(v)) 414 397
Deferred revenue 947 1,257
Long-term debt - 115
Long-term debt due to parent (refer to
Note 13(a)(v)) 25,325 26,143
Other long-term liabilities 993 760
Future tax liabilities 13,547 -
---------------------------------------------------------------------
82,748 75,396
---------------------------------------------------------------------
Other long-term liabilities - 70
Future tax liabilities - 13,547
---------------------------------------------------------------------
- 13,617
---------------------------------------------------------------------
$ 82,748 $ 89,013
---------------------------------------------------------------------
---------------------------------------------------------------------
6. WRITE-DOWN OF LONG-LIVED ASSETS
When long-lived assets are identified by the Company as available for
sale, if necessary, the carrying value is reduced to the estimated
fair value less selling costs. Fair value less selling costs is
evaluated at each interim reporting period based on discounted future
cash flows of the assets, appraisals and, if appropriate, current
estimated net sales proceeds from pending offers.
Write-downs relating to long-lived assets recognized are as follows:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Assets held for sale
Dixon, California real
estate(i) $ - $ - $ 5,000 $ -
Porter, New York real
estate(ii) - 1,444 - 1,444
---------------------------------------------------------------------
$ - $ 1,444 $ 5,000 $ 1,444
---------------------------------------------------------------------
---------------------------------------------------------------------
Discontinued operations
Magna Racino(TM)(iii) $ - $ - $ 29,195 $ -
Portland Meadows(iv) - - 3,099 -
---------------------------------------------------------------------
$ - $ - $ 32,294 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) As a result of significant weakness in the Northern California
real estate market and the U.S. financial market, the Company
recorded an impairment charge of $5.0 million related to the
Dixon, California real estate property in the nine months ended
September 30, 2008, which represents the excess of the carrying
value of the asset over the estimated fair value less selling
costs. The impairment charge is included in the real estate and
other operations segment.
(ii) In connection with the sales plan relating to the real estate
in Porter, New York, the Company recognized an impairment
charge of $1.4 million in the three and nine months ended
September 30, 2007, which represents the excess of the carrying
value of the asset over the estimated fair value less selling
costs. The impairment charge is included in the real estate and
other operations segment. In the three months ended
December 31, 2007, $0.1 million of this impairment charge was
subsequently reversed based on the actual net proceeds realized
on the disposition of this real estate.
(iii) As a result of the classification of Magna Racino(TM) as
discontinued operations, the Company recorded an impairment
charge of $29.2 million in the nine months ended September 30,
2008, which represents the excess of the carrying value of the
assets over the estimated fair value less selling costs. The
impairment charge is included in discontinued operations on the
consolidated statements of operations and comprehensive loss.
(iv) In June 2003, the Oregon Racing Commission ("ORC") adopted
regulations that permitted wagering through Instant Racing
terminals as a form of pari-mutuel wagering at Portland Meadows
(the "Instant Racing Rules"). In September 2006, the ORC
granted a request by Portland Meadows to offer Instant Racing
under its 2006-2007 race meet license. In June 2007, the ORC,
acting under the advice of the Oregon Attorney General,
temporarily suspended and began proceedings to repeal the
Instant Racing Rules. In September 2007, the ORC denied a
request by Portland Meadows to offer Instant Racing under its
2007-2008 race meet license. In response to this denial, the
Company requested the holding of a contested case hearing,
which took place in January 2008. On February 27, 2008, the
Office of Administrative Hearings released a proposed order in
the Company's favor approving Instant Racing as a legal wager
at Portland Meadows. However, on April 25, 2008, the ORC issued
an order rejecting that recommendation. In May 2008, the
Company filed a petition with the Oregon Court of Appeal for
judicial review of the order of the ORC and a decision is
expected in the first or second quarter of 2009. Based on the
ORC's order to reject the Office of Administrative Hearings'
recommendation, the Company recorded an impairment charge of
$3.1 million related to the Instant Racing terminals and
build-out of the Instant Racing facility in the nine months
ended September 30, 2008, which is included in discontinued
operations on the consolidated statements of operations and
comprehensive loss.
7. INCOME TAXES
In accordance with U.S. GAAP, the Company estimates its annual
effective tax rate at the end of each of the first three quarters of
the year, based on current facts and circumstances. The Company has
estimated a nominal annual effective tax rate for the entire year and
accordingly has applied this effective tax rate to the loss from
continuing operations before income taxes for the three and nine
months ended September 30, 2008 and 2007, resulting in an income tax
expense of $0.7 million and $3.0 million for the three and nine
months ended September 30, 2008, respectively, and an income tax
benefit of $0.6 million and an income tax expense of $2.3 million for
the three and nine months ended September 30, 2007, respectively. The
income tax expense for the nine months ended September 30, 2008
primarily represents valuation allowances recorded against future tax
assets in certain U.S. operations that, effective January 1, 2008,
were included in the Company's U.S. consolidated income tax return.
The income tax expense for the nine months ended September 30, 2007
primarily represents income tax expense recognized from certain of
the Company's U.S. operations that were not included in the Company's
U.S. consolidated income tax return.
A foreign tax audit related to the Company's Austrian operations was
concluded during the three months ended September 30, 2008 and as a
result, the Company has recognized the benefit of certain previously
unrecorded tax benefits in the amount of $3.1 million, which has been
reflected in discontinued operations.
8. BANK INDEBTEDNESS AND LONG-TERM DEBT
(a) Bank Indebtedness
The Company's bank indebtedness consists of the following
short-term bank loans:
September 30, December 31,
2008 2007
-----------------------------------------------------------------
$40.0 million senior secured revolving
credit facility(i) $ 36,491 $ 34,891
$7.5 million revolving loan
facility(ii) 6,758 3,499
$3.0 million revolving credit
facility(iii) - 824
-----------------------------------------------------------------
$ 43,249 $ 39,214
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) The Company has a $40.0 million senior secured revolving
credit facility with a Canadian financial institution, which
was scheduled to mature on October 15, 2008, but was
extended to November 17, 2008 (refer to Note 16(b)). The
credit facility is available by way of U.S. dollar loans and
letters of credit. 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, and are
guaranteed by certain subsidiaries of the Company. At
September 30, 2008, the Company had borrowings of
$36.5 million (December 31, 2007 - $34.9 million) and had
issued letters of credit totalling $3.4 million
(December 31, 2007 - $4.3 million) under the credit
facility, such that $0.1 million was unused and available.
The loans under the facility bear interest at the U.S. base
rate plus 5% or the London Interbank Offered Rate ("LIBOR")
plus 6%. The weighted average interest rate on the loans
outstanding under the credit facility at September 30, 2008
was 8.8% (December 31, 2007 - 11.0%).
(ii) A wholly-owned subsidiary of the Company that owns and
operates Santa Anita Park has a $7.5 million revolving loan
facility under its existing credit facility with a U.S.
financial institution, which matures on October 31, 2012.
The revolving loan facility requires that the aggregate
outstanding principal be fully repaid for a period of 60
consecutive days during each year, is guaranteed by the
Company's wholly-owned subsidiary, the Los Angeles Turf
Club, Incorporated ("LATC") and is secured by a first deed
of trust on Santa Anita Park and the surrounding real
property, an assignment of the lease between LATC, the
racetrack operator, and The Santa Anita Companies, Inc.
("SAC") and a pledge of all of the outstanding capital stock
of LATC and SAC. At September 30, 2008, the Company had
borrowings of $6.8 million (December 31, 2007 -
$3.5 million) under the revolving loan facility. Borrowings
under the revolving loan facility bear interest at the U.S.
prime rate. The weighted average interest rate on the
borrowings outstanding under the revolving loan facility at
September 30, 2008 was 5.0% (December 31, 2007 - 7.3%).
(iii) A wholly-owned subsidiary of the Company, AmTote
International, Inc. ("AmTote"), had a $3.0 million revolving
credit facility with a U.S. financial institution to finance
working capital requirements, which matured on May 31, 2008,
at which time the credit facility was fully repaid and
terminated. Accordingly, at September 30, 2008, the Company
had no borrowings (December 31, 2007 - $0.8 million) under
the credit facility. The weighted average interest rate on
the borrowings outstanding under the credit facility at
September 30, 2008 was not applicable given that the credit
facility was fully repaid and terminated (December 31,
2007 - 7.7%).
(b) Long-Term Debt
(i) One of the Company's subsidiaries, Pimlico Racing
Association, Inc., has a revolving term loan facility with a
U.S. financial institution that permits the prepayment of
outstanding principal without penalty. This facility matures
on December 1, 2013, bears interest at the U.S. prime rate
or LIBOR plus 2.6% per annum and is secured by deeds of
trust on land, buildings and improvements and security
interests in all other assets of the subsidiary and certain
affiliates of The Maryland Jockey Club ("MJC"). On August 5,
2008, the revolving term loan facility was amended to reduce
the maximum undrawn availability from $7.7 million to
$4.5 million. At September 30, 2008, the Company had
borrowings of $1.6 million (December 31, 2007 - nil) under
this revolving term loan facility.
(ii) One of the Company's European wholly-owned subsidiaries had
a bank term loan with a European financial institution of up
to Euros 3.5 million bearing interest at the Euro Overnight
Index Average Rate plus 3.75% per annum. The bank term loan
was fully repaid upon its expiry on July 31, 2008.
Accordingly, at September 30, 2008, the Company had no
borrowings (December 31, 2007 - $3.6 million) under this
bank term loan.
(iii)On April 30, 2008, AmTote entered into an amending credit
agreement with a U.S. financial institution. The principal
amendments related to long-term debt included accelerating
the maturity dates of the $4.2 million term loan from
May 11, 2011 to May 30, 2009 and the $10.0 million equipment
loan from May 11, 2012 to May 30, 2009. At September 30,
2008, the Company had total borrowings of $5.0 million
(December 31, 2007 - $5.3 million) under these term and
equipment loans. As a result of the amendments to the
maturity dates, amounts outstanding under the term and
equipment loans at September 30, 2008 are reflected in
"long-term debt due within one year" on the consolidated
balance sheets.
9. CAPITAL STOCK
(a) Class A Subordinate Voting Stock and Class B Stock outstanding at
September 30, 2008 and December 31, 2007 are shown in the table
below (number of shares and stated value have been rounded to the
nearest thousand) and have been restated to reflect the effect of
the Reverse Stock Split (refer to Note 2).
Class A Subordinate
Voting Stock Class B Stock Total
------------------- ------------------- -------------------
Number Number Number
of Stated of Stated of Stated
Shares Value Shares Value Shares Value
-------------------------------------------------------------------------
Issued and
outstanding
at
December 31,
2007 and
March 31,
2008 2,908 $ 339,435 2,923 $394,094 5,831 $733,529
Issued under
the Long-
term
Incentive
Plan 22 152 - - 22 152
-------------------------------------------------------------------------
Issued and
outstanding
at June 30,
2008 2,930 339,587 2,923 394,094 5,853 733,681
Redemption,
at stated
value, of
fractional
share
capital on
Reverse
Stock Split (1) (141) - - (1) (141)
-------------------------------------------------------------------------
Issued and
outstanding
at
September 30,
2008 2,929 $339,446 2,923 $394,094 5,852 $733,540
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) The following table (number of shares have been rounded to the
nearest thousand) presents the maximum number of shares of Class
A Subordinate Voting Stock and Class B Stock that would be
outstanding if all of the outstanding options and convertible
subordinated notes issued and outstanding at September 30, 2008
were exercised or converted and has been restated to reflect the
effect of the Reverse Stock Split (refer to Note 2):
Number of
Shares
-------------------------------------------------------------------------
Class A Subordinate Voting Stock outstanding 2,929
Class B Stock outstanding 2,923
Options to purchase Class A Subordinate Voting Stock 237
8.55% Convertible Subordinated Notes, convertible at
$141.00 per share 1,064
7.25% Convertible Subordinated Notes, convertible at
$170.00 per share 441
-------------------------------------------------------------------------
7,594
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. LONG-TERM INCENTIVE PLAN
The Company's Long-term Incentive Plan (the "Incentive Plan")
(adopted in 2000 and amended in 2007) allows for the grant of
non-qualified stock options, incentive stock options, stock
appreciation rights, restricted stock, bonus stock and performance
shares to directors, officers, employees, consultants, independent
contractors and agents. Prior to the Reverse Stock Split, a maximum
of 8.8 million shares of Class A Subordinate Voting Stock remained
available to be issued under the Incentive Plan, of which 7.8 million
were available for issuance pursuant to stock options and tandem
stock appreciation rights and 1.0 million were available for issuance
pursuant to any other type of award under the Incentive Plan. As a
result of the Reverse Stock Split, effective July 22, 2008, 440
thousand shares of Class A Subordinate Voting Stock remain available
to be issued under the Incentive Plan, of which 390 thousand are
available for issuance pursuant to stock options and tandem stock
appreciation rights and 50 thousand are available for issuance
pursuant to any other type of award under the Incentive Plan.
Under a 2005 incentive compensation program, the Company awarded
performance shares of Class A Subordinate Voting Stock to certain
officers and key employees. The number of shares of Class A
Subordinate Voting Stock underlying the performance share awards was
based either on a percentage of a guaranteed bonus or a percentage
of total 2005 compensation divided by the market value of the Class A
Subordinate Voting Stock on the date the program was approved by the
Compensation Committee of the Board of Directors of the Company.
These performance shares vested over a six or eight month period to
December 31, 2005 and were distributed, subject to certain
conditions, in two equal installments. The first distribution
occurred in March 2006 and the second distribution occurred in March
2007. For 2006, the Company continued the incentive compensation
program as described above. The program was similar in all respects
except that the 2006 performance shares vested over a 12-month period
to December 31, 2006 and were distributed, subject to certain
conditions, in March 2007. Accordingly, for the nine months ended
September 30, 2007, the Company issued 8,737 of these vested
performance share awards with a stated value of $0.6 million and 324
performance share awards were forfeited. No performance share awards
remain to be issued subsequent to March 2007 under the 2005 and 2006
incentive compensation arrangements and there is no unrecognized
compensation expense related to these performance share award
arrangements.
For the nine months ended September 30, 2008, 21,687 shares were
issued with a stated value of $0.2 million to the Company's directors
in payment of services rendered (for the nine months ended September
30, 2007 - 1,547 shares were issued with a stated value of
$0.1 million).
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 Incentive 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 upon the
occurrence of certain events specified in the stock option agreements
entered into by the Company with each recipient of options.
Information with respect to shares subject to option is as follows
(number of shares subject to option in the following table is
expressed in whole numbers and has not been rounded to the nearest
thousand) and has been restated to reflect the effect of the Reverse
Stock Split (refer to Note 2):
Shares Subject Weighted Average
to Option Exercise Price
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Balance outstanding at
beginning of year 247,500 245,250 $ 116.40 $ 121.60
Forfeited or expired(i) (10,000) (8,300) 111.20 134.80
---------------------------------------------------------------------
Balance outstanding at
March 31 237,500 236,950 116.60 121.20
Forfeited or expired(i) (550) (1,250) 133.20 114.20
---------------------------------------------------------------------
Balance outstanding at
June 30 236,950 235,700 116.55 121.40
Granted - 19,500 - 64.00
Forfeited or expired(i) - (700) - 104.00
---------------------------------------------------------------------
Balance outstanding at
September 30 236,950 254,500 $ 116.55 $ 117.00
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Options forfeited or expired were as a result of employment
contracts being terminated and voluntary employee resignations.
No options that were forfeited were subsequently reissued.
Information regarding stock options outstanding is as follows and has
been restated to reflect the effect of the Reverse Stock Split (refer
to Note 2):
Options Outstanding Options Exercisable
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Number 236,950 254,500 220,802 221,783
Weighted average exercise
price $ 116.55 $ 117.00 $ 118.92 $ 120.40
Weighted average
remaining contractual
life (years) 2.7 4.0 2.3 3.2
---------------------------------------------------------------------
---------------------------------------------------------------------
At September 30, 2008, the 236,950 stock options outstanding had
exercise prices ranging from $55.60 to $140.00 per share. The average
fair value of the stock option grants for the three and nine months
ended September 30, 2008 using the Black-Scholes option valuation
model was not applicable given that there were no options granted
during the respective periods (for the three and nine months ended
September 30, 2007, the 19,500 stock options granted had a
weighted-average fair value of $27.20 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:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Risk free interest rates N/A 4.15% N/A 4.15%
Dividend yields N/A - N/A -
Volatility factor of
expected market price of
Class A Subordinate
Voting Stock N/A 0.559 N/A 0.559
Weighted average expected
life (years) N/A 5.00 N/A 5.00
---------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that require the 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 the Company's stock options.
The Company recognized a nominal amount and $0.1 million of
compensation expense for the three and nine months ended September
30, 2008, respectively (for the three and nine months ended September
30, 2007 - $0.5 million and $0.6 million, respectively) related to
stock options. At September 30, 2008, the total unrecognized
compensation expense related to stock options is $0.2 million, which
is expected to be recognized as an expense over a period of 3.0
years.
For the three and nine months ended September 30, 2008, the Company
recognized a nominal amount and $0.3 million, respectively, of total
compensation expense (for the three and nine months ended
September 30, 2007 - $0.5 million and $0.7 million, respectively)
relating to director compensation and stock options under the
Incentive Plan.
11. OTHER PAID-IN-CAPITAL
Other paid-in-capital consists of accumulated stock option
compensation expense less the fair value of stock options at the date
of grant that have been exercised and reclassified to share capital.
Changes in other paid-in-capital for the three and nine months ended
September 30, 2008 and 2007 are shown in the following table:
2008 2007
---------------------------------------------------------------------
Balance at beginning of year $ 2,031 $ 1,410
Stock-based compensation expense 44 73
---------------------------------------------------------------------
Balance at March 31 2,075 1,483
Stock-based compensation expense 35 70
---------------------------------------------------------------------
Balance at June 30 2,110 1,553
Stock-based compensation expense 36 463
Excess of stated value over purchase price on
redemption of fractional share capital on
Reverse Stock Split 131 -
---------------------------------------------------------------------
Balance at September 30 $ 2,277 $ 2,016
---------------------------------------------------------------------
---------------------------------------------------------------------
12. EARNINGS (LOSS) PER SHARE
The following table is a reconciliation of the numerator and
denominator of the basic and diluted earnings (loss) per share
computations (in thousands, except per share amounts) and has been
restated to reflect the effect of the Reverse Stock Split (refer to
Note 2):
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Basic and Basic and Basic and Basic and
Diluted Diluted Diluted Diluted
---------------------------------------------------------------------
Loss from continuing
operations $ (50,582) $ (44,575) $ (86,539) $ (59,194)
Income (loss) from
discontinued operations 2,223 (5,236) (29,534) (11,585)
---------------------------------------------------------------------
Net loss $ (48,359) $ (49,811) $(116,073) $ (70,779)
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number
of shares outstanding:
Class A Subordinate
Voting Stock 2,929 2,463 2,920 2,460
Class B Stock 2,923 2,923 2,923 2,923
---------------------------------------------------------------------
Weighted average number
of shares outstanding 5,852 5,386 5,843 5,383
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings (loss) per share:
Continuing operations $ (8.64) $ (8.28) $ (14.82) $ (11.00)
Discontinued operations 0.38 (0.97) (5.05) (2.15)
---------------------------------------------------------------------
Loss per share $ (8.26) $ (9.25) $ (19.87) $ (13.15)
---------------------------------------------------------------------
---------------------------------------------------------------------
As a result of the net loss for the three and nine months ended
September 30, 2008, options to purchase 236,950 shares and notes
convertible into 1,505,006 shares have been excluded from the
computation of diluted loss per share since their effect is
anti-dilutive.
As a result of the net loss for the three and nine months ended
September 30, 2007, options to purchase 254,500 shares and notes
convertible into 1,505,006 shares have been excluded from the
computation of diluted loss per share since their effect is
anti-dilutive.
13. TRANSACTIONS WITH RELATED PARTIES
(a) The Company's indebtedness and long-term debt due to parent
consists of the following:
September 30, December 31,
2008 2007
-----------------------------------------------------------------
Bridge loan facility (i) $ 88,596 $ 35,889
Gulfstream Park project financing
Tranche 1 (ii) 129,478 130,324
Tranche 2 (iii) 24,542 24,304
Tranche 3 (iv) 14,522 13,593
-----------------------------------------------------------------
257,138 204,110
Less: due within one year (190,158) (137,003)
-----------------------------------------------------------------
$ 66,980 $ 67,107
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) Bridge Loan Facility
On September 12, 2007, the Company entered into a bridge
loan agreement with a subsidiary of MID pursuant to which up
to $80.0 million of financing was made available to the
Company, subject to certain conditions. On May 23, 2008, the
bridge loan agreement was amended, such that: (i) the
maximum commitment available was increased from
$80.0 million to $110.0 million, (ii) the Company is
permitted to redraw amounts that were repaid prior to
May 23, 2008 (approximately $21.5 million) and (iii) the
maturity date was extended from May 31, 2008 to
August 31, 2008. The maturity date of the bridge loan was
extended to September 30, 2008 under an August 13, 2008
amending agreement and, subsequently, from September 30,
2008 to October 31, 2008 under a September 15, 2008 amending
agreement (refer to Note 16(c)). The bridge loan is
non-revolving and bears interest at a rate of LIBOR plus
12.0% per annum. An arrangement fee of $2.4 million was paid
to MID on the September 12, 2007 closing date, an additional
arrangement fee of $0.8 million was paid to MID on
February 29, 2008, which was equal to 1.0% of the maximum
principal amount then available under this facility, and an
amendment fee of $1.1 million was paid to MID on May 23,
2008 in connection with the bridge loan amendments, which
was equal to 1.0% of the increased maximum commitment
available under the facility. An additional arrangement fee
of $1.1 million was paid on August 1, 2008, which was equal
to 1.0% of the then maximum loan commitment, as the MID
reorganization was not approved by that date. In addition,
an amendment fee of $0.5 million was paid on each of
August 13, 2008 and September 15, 2008 in accordance with
the amending agreements providing forth the extensions of
the maturity dates. There is a commitment fee equal to 1.0%
per annum (payable in arrears) on the undrawn portion of the
$110.0 million maximum loan commitment. The bridge loan is
required to be repaid by way of the payment of the net
proceeds of any asset sale, any equity offering (other than
the Fair Enterprise private placement completed in October
2007) or any debt offering, subject to specified amounts
required to be paid to eliminate other prior-ranking
indebtedness. The bridge loan is secured by essentially all
of the assets of the Company and by guarantees provided by
certain subsidiaries of the Company. The guarantees are
secured by charges over the lands owned by Golden Gate
Fields, Santa Anita Park and Thistledown, and charges over
the lands in Dixon, California and Ocala, Florida, as well
as by pledges of the shares of certain of the Company's
subsidiaries. The bridge loan is also cross-defaulted to all
other obligations to MID and to other significant
indebtedness of the Company and certain of its subsidiaries.
For the three and nine months ended September 30, 2008, the
Company received loan advances of $24.0 million and
$75.4 million (for the three and nine months ended
September 30, 2007 - $11.5 million), repaid outstanding
principal of $4.5 million and $26.0 million (for the three
and nine months ended September 30, 2007 - nil), incurred
interest expense and commitment fees of $2.8 million and
$6.6 million (for the three and nine months ended
September 30, 2007 - $0.1 million), and repaid interest and
commitment fees of $2.5 million and $6.0 million (for the
three and nine months ended September 30, 2007 - nil),
respectively, such that at September 30, 2008, $89.2 million
was outstanding under the bridge loan facility, including
$1.0 million of accrued interest and commitment fees
payable. In addition, for the three and nine months ended
September 30, 2008, the Company amortized $2.5 million and
$6.2 million of loan origination costs (for the three and
nine months ended September 30, 2007 - $0.2 million),
respectively, such that at September 30, 2008, $0.6 million
of net loan origination costs have been recorded as a
reduction of the outstanding loan balance. The loan balance
is being accreted to its face value over the term to
maturity. The weighted average interest rate on the
borrowings outstanding under the bridge loan at
September 30, 2008 is 15.7% (December 31, 2007 - 16.2%).
(ii) Gulfstream Park Project Financing - Tranche 1
In December 2004, as amended in September 2007, certain of
the Company's subsidiaries entered into a $115.0 million
project financing arrangement with a subsidiary of MID, for
the reconstruction of facilities at Gulfstream Park. This
project financing arrangement was amended on July 22, 2005
in connection with the Remington Park loan as described in
Note 13(a)(v) below. The project financing was made by way
of progress draw advances to fund reconstruction. The loan
has a ten-year term from the completion date of the
reconstruction project, which was February 1, 2006. Prior to
the completion date, amounts outstanding under the loan bore
interest at a floating rate equal to 2.55% per annum above
MID's notional cost of borrowing under its floating rate
credit facility, compounded monthly. After the completion
date, amounts outstanding under the loan bear interest at a
fixed rate of 10.5% per annum, compounded semi-annually.
Prior to January 1, 2007, interest was capitalized to the
principal balance of the loan. Commencing January 1, 2007,
the Company is required to make monthly blended payments of
principal and interest based on a 25-year amortization
period commencing on the completion date. The loan contains
cross-guarantee, cross-default and cross-collateralization
provisions. The loan is guaranteed by the Company and its
subsidiaries that own and operate Remington Park and the
Palm Meadows Training Center ("Palm Meadows") and is
collateralized principally by security over the lands
forming part of the operations at Gulfstream Park, Remington
Park and Palm Meadows and over all other assets of
Gulfstream Park, Remington Park and Palm Meadows, excluding
licenses and permits.
For the three and nine months ended September 30, 2008, the
Company repaid outstanding principal of $0.4 million and
$1.1 million (for the three and nine months ended
September 30, 2007 - $0.3 million and $2.1 million),
incurred interest expense of $3.4 million and $10.2 million
(for the three and nine months ended September 30, 2007 -
$3.4 million and $10.3 million), and repaid interest of
$3.4 million and $10.2 million (for the three and nine
months ended September 30, 2007 - $3.4 million and
$9.1 million), respectively, such that at September 30,
2008, $132.4 million was outstanding under this project
financing arrangement, including $1.1 million of accrued
interest payable. In addition, for the three and nine months
ended September 30, 2008, the Company amortized $0.1 million
and $0.3 million (for the three and nine months ended
September 30, 2007 - $0.1 million and $0.3 million) of loan
origination costs, respectively, such that at September 30,
2008, $2.9 million of net loan origination costs have been
recorded as a reduction of the outstanding loan balance. The
loan balance is being accreted to its face value over the
term to maturity.
In connection with the May 23, 2008, August 13, 2008 and
September 15, 2008 amendments to the bridge loan as
described in Note 13(a)(i) above, the Company and the lender
also amended the Gulfstream Park and Remington Park project
financings. These amendments included extending the deadline
for repayment of $100.0 million under the Gulfstream Park
project financing from May 31, 2008 to August 31, 2008, then
from August 31, 2008 to September 30, 2008 and then again
from September 30, 2008 to October 31, 2008, during which
time any repayments made under either facility would not be
subject to a make-whole payment (refer to Note 16(c)).
(iii) Gulfstream Park Project Financing - Tranche 2
On July 26, 2006, certain of the Company's subsidiaries that
own and operate Gulfstream Park entered into an amending
agreement relating to the existing Gulfstream Park project
financing arrangement with a subsidiary of MID by adding an
additional tranche of $25.8 million, plus lender costs and
capitalized interest, to fund the design and construction of
phase one of the slots facility to be located in the
existing Gulfstream Park clubhouse building, as well as
related capital expenditures and start-up costs, including
the acquisition and installation of approximately 500 slot
machines. The second tranche of the Gulfstream Park project
financing has a five-year term and bears interest at a fixed
rate of 10.5% per annum, compounded semi-annually. Prior to
January 1, 2007, interest on this tranche was capitalized to
the principal balance of the loan. Beginning January 1,
2007, this tranche requires blended payments of principal
and interest based on a 25-year amortization period
commencing on that date. Advances related to phase one of
the slots facility were made available by way of progress
draw advances and there is no prepayment penalty associated
with this tranche. The Gulfstream Park project financing
facility was further amended to introduce a mandatory annual
cash flow sweep of not less than 75% of Gulfstream Park's
total excess cash flow, after permitted capital expenditures
and debt service, to be used to repay the additional
principal amount being made available under the new tranche.
A lender fee of $0.3 million (1% of the amount of this
tranche) was added to the principal amount of the loan as
consideration for the amendments on July 26, 2006.
For the three and nine months ended September 30, 2008, the
Company received no loan advances (for the three and nine
months ended September 30, 2007 - $0.7 million and
$5.5 million), repaid outstanding principal of $0.1 million
and $0.2 million (for the three and nine months ended
September 30, 2007 - $0.1 million and $0.3 million),
incurred interest expense of $0.6 million and $1.9 million
(for the three and nine months ended September 30, 2007 -
$0.6 million and $1.8 million), and repaid interest of
$0.6 million and $1.9 million (for the three and nine months
ended September 30, 2007 - $0.6 million and $1.5 million),
respectively, such that at September 30, 2008, $24.5 million
was outstanding under this project financing arrangement,
including $0.2 million of accrued interest payable. In
addition, for the three and nine months ended September 30,
2008, the Company amortized nil and $0.4 million (for the
three and nine months ended September 30, 2007 -
$0.1 million and $0.2 million) of loan origination costs,
respectively, such that at September 30, 2008, no loan
origination costs remained recorded as a reduction of the
outstanding loan balance. The loan balance was accreted to
its face value over the term to maturity.
(iv) Gulfstream Park Project Financing - Tranche 3
On December 22, 2006, certain of the Company's subsidiaries
that own and operate Gulfstream Park entered into an
additional amending agreement relating to the existing
Gulfstream Park project financing arrangement with a
subsidiary of MID by adding an additional tranche of
$21.5 million, plus lender costs and capitalized interest,
to fund the design and construction of phase two of the
slots facility, as well as related capital expenditures and
start-up costs, including the acquisition and installation
of approximately 700 slot machines. This third tranche of
the Gulfstream Park project financing has a five-year term
and bears interest at a fixed rate of 10.5% per annum,
compounded semi-annually. Prior to May 1, 2007, interest on
this tranche was capitalized to the principal balance of the
loan. Beginning May 1, 2007, this tranche requires blended
payments of principal and interest based on a 25-year
amortization period commencing on that date. Advances
related to phase two of the slots facility were made
available by way of progress draw advances and there is no
prepayment penalty associated with this tranche. A lender
fee of $0.2 million (1% of the amount of this tranche) was
added to the principal amount of the loan as consideration
for the amendments on January 19, 2007, when the first
funding advance was made available to the Company.
For the three and nine months ended September 30, 2008, the
Company received no loan advances and loan advances of
$0.7 million (for the three and nine months ended
September 30, 2007 - $1.1 million and $13.1 million), repaid
a nominal amount and $0.1 million of outstanding principal
(for the three and nine months ended September 30, 2007 -
$0.1 million and $0.2 million), incurred interest expense of
$0.4 million and $1.1 million (for the three and nine months
ended September 30, 2007 - $0.3 million and $0.6 million, of
which $0.1 million was capitalized to the principal balance
of the loan), and repaid interest of $0.4 million and
$1.1 million (for the three and nine months ended
September 30, 2007 - $0.3 million and $0.4 million),
respectively, such that at September 30, 2008, $14.5 million
was outstanding under this project financing arrangement,
including $0.1 million of accrued interest payable. In
addition, for the three and nine months ended September 30,
2008, the Company amortized nil and $0.3 million (for the
three and nine months ended September 30, 2007 -
$0.1 million and $0.1 million) of loan origination costs,
respectively, such that at September 30, 2008, no loan
origination costs remained recorded as a reduction of the
outstanding loan balance. The loan balance was accreted to
its face value over the term to maturity.
(v) Remington Park Project Financing
In July 2005, the Company's subsidiary that owns and
operates Remington Park entered into a $34.2 million project
financing arrangement with a subsidiary of MID for the
build-out of the casino facility at Remington Park. Advances
under the loan were made by way of progress draw advances to
fund the capital expenditures relating to the development,
design and construction of the casino facility, including
the purchase and installation of electronic gaming machines.
The loan has a ten-year term from the completion date of the
reconstruction project, which was November 28, 2005. Prior
to the completion date, amounts outstanding under the loan
bore interest at a floating rate equal to 2.55% per annum
above MID's notional cost of LIBOR borrowing under its
floating rate credit facility, compounded monthly. After the
completion date, amounts outstanding under the loan bear
interest at a fixed rate of 10.5% per annum, compounded
semi-annually. Prior to January 1, 2007, interest was
capitalized to the principal balance of the loan. Commencing
January 1, 2007, the Company is required to make monthly
blended payments of principal and interest based on a
25-year amortization period commencing on the completion
date. Certain cash from the operations of Remington Park
must be used to pay deferred interest on the loan plus a
portion of the principal under the loan equal to the
deferred interest on the Gulfstream Park construction loan.
The loan is secured by all assets of Remington Park,
excluding licenses and permits. The loan is also secured by
a charge over the Gulfstream Park lands and a charge over
Palm Meadows and contains cross-guarantee, cross-default and
cross-collateralization provisions.
For the three and nine months ended September 30, 2008, the
Company received no loan advances and loan advances of
$1.0 million (for the three and nine months ended
September 30, 2007 - nil), repaid a nominal amount of
outstanding principal and $1.9 million (for the three and
nine months ended September 30, 2007 - $1.6 million and
$3.5 million), incurred interest expense of $0.7 million and
$2.1 million (for the three and nine months ended
September 30, 2007 - $0.7 million and $2.3 million), and
repaid interest of $0.7 million and $2.1 million (for the
three and nine months ended September 30, 2007 -
$0.8 million and $2.1 million), respectively, such that at
September 30, 2008, $26.8 million was outstanding under this
project financing arrangement, including $0.2 million of
accrued interest payable. In addition, for the three and
nine months ended September 30, 2008 and 2007, the Company
amortized a nominal amount and $0.1 million of loan
origination costs, respectively, such that at September 30,
2008, $1.1 million of net loan origination costs have been
recorded as a reduction of the outstanding loan balance. The
loan balance is being accreted to its face value over the
term to maturity. The Remington Park project financing has
been reflected in discontinued operations (refer to Note 5).
(b) At September 30, 2008, $0.9 million (December 31, 2007 -
$4.5 million) of the funds the Company placed into escrow with
MID remains in escrow.
(c) On April 2, 2008, one of the Company's European wholly-owned
subsidiaries, Fontana Beteiligungs GmbH ("Fontana"), entered into
an agreement to sell real estate with a carrying value of
Euros 0.2 million (U.S. $0.3 million) located in Oberwaltersdorf,
Austria to Fontana Immobilien GmbH, an entity in which Fontana
had a 50% joint venture equity interest, for Euros 0.8 million
(U.S. $1.2 million). The purchase price was originally payable in
instalments according to the sale of apartment units by the joint
venture and, in any event, no later than April 2, 2009. On
August 1, 2008, Fontana sold its 50% joint venture equity
interest in Fontana Immobilien GmbH to a related party. The sale
price included nominal cash consideration equal to Fontana's
initial capital contribution and a future profit participation in
Fontana Immobilien GmbH. Fontana and Fontana Immobilien GmbH also
agreed to amend the real estate sale agreement such that the
payment of the purchase price was accelerated to, and was paid on
August 7, 2008. The gain on sale of the real estate of
approximately Euros 0.6 million (U.S. $0.9 million) has been
reported in the consolidated statements of operations and
comprehensive loss for the three months ended September 30, 2008
in the real estate and other operations segment.
(d) On December 21, 2007, the Company entered into an agreement to
sell 225 acres of excess real estate located in Ebreichsdorf,
Austria to a subsidiary of Magna, a related party, for a purchase
price of Euros 20.0 million (U.S. $31.5 million), net of
transaction costs. The sale transaction was completed on
April 11, 2008. Of the net proceeds that were received on
closing, Euros 7.5 million was used to repay a portion of a
Euros 15.0 million term loan facility and the remaining portion
of the net proceeds was used to repay a portion of the bridge
loan facility with a subsidiary of MID. The gain on sale of the
excess real estate of approximately Euros 15.5 million
(U.S. $24.3 million), net of tax, has been reported as a
contribution of equity in contributed surplus.
(e) On June 7, 2007, the Company sold 205 acres of land and
buildings, located in Bonsall, California, and on which the San
Luis Rey Downs Training Center is situated, to MID for cash
consideration of approximately $24.0 million. In the three and
nine months ended September 30, 2008, an additional $0.1 million
of cash consideration related to environmental holdbacks was
received by the Company. The Company also has entered into a
lease agreement whereby a subsidiary of the Company will lease
the property from MID for a three year period on a triple-net
lease basis, which provides for a nominal annual rent in addition
to operating costs that arise from the use of the property. The
lease is terminable at any time by either party on four months
notice. The gain on sale of the property, net of tax, for the
three and nine months ended September 30, 2008 of approximately
$0.1 million and $0.1 million (for the three and nine months
ended September 30, 2007 - $0.1 million and $17.7 million),
respectively, has been reported as a contribution of equity in
contributed surplus.
(f) On March 28, 2007, the Company sold a 157 acre parcel of excess
land adjacent to Palm Meadows, located in Palm Beach County,
Florida and certain development rights to MID for cash
consideration of $35.0 million. The gain on sale of the excess
land and development rights of approximately $16.7 million, net
of tax, has been reported as a contribution of equity in
contributed surplus.
On February 7, 2007, MID acquired all of the Company's interests
and rights in a 34 acre parcel of residential development land in
Aurora, Ontario, Canada for cash consideration of
Cdn. $12.0 million (U.S. $10.1 million), which was equal to the
carrying value of the land.
On February 7, 2007, MID also acquired a 64 acre parcel of excess
land at Laurel Park in Howard County, Maryland for cash
consideration of $20.0 million. The gain on sale of the excess
land of approximately $15.8 million, net of tax, has been
reported as a contribution of equity in contributed surplus.
The Company has been granted profit participation rights in
respect of each of these three properties under which it is
entitled to receive 15% of the net proceeds from any sale or
development after MID achieves a 15% internal rate of return.
(g) The Company has entered into a consulting agreement with MID,
dated September 12, 2007, under which MID will provide consulting
services to the Company's management and Board of Directors in
connection with the debt elimination plan. The Company is
required to reimburse MID for its expenses, but there are no fees
payable to MID in connection with the consulting agreement. The
consulting agreement may be terminated by either party under
certain circumstances.
(h) For the three and nine months ended September 30, 2008, the
Company incurred $0.8 million and $2.3 million (for the three and
nine months ended September 30, 2007 - $0.3 million and
$2.0 million) of rent for facilities and central shared and other
services to Magna and its subsidiaries. At September 30, 2008,
amounts due to Magna and its subsidiaries totalled $1.5 million
(December 31, 2007 - $2.8 million).
14. COMMITMENTS AND CONTINGENCIES
(a) The Company generates a substantial amount of its revenues from
wagering activities and, therefore, it is subject to the risks
inherent in the ownership and operation of its racetracks. These
include, among others, the risks normally associated with changes
in the general economic climate, trends in the gaming industry,
including competition from other gaming institutions and state
lottery commissions, and changes in tax laws and gaming laws.
(b) In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with, among others,
customers, suppliers and former employees. Management believes
that adequate provisions have been recorded in the accounts where
required. Although it is not possible to accurately estimate the
extent of potential costs and losses, if any, management
believes, but can provide no assurance, that the ultimate
resolution of such contingencies would not have a material
adverse effect on the financial position of the Company.
(c) On May 18, 2007, ODS Technologies, L.P., operating as TVG
Network, filed a summons against the Company, HRTV, LLC and
XpressBet, Inc. seeking an order that the defendants be enjoined
from infringing certain patents relating to interactive wagering
systems and for an award for damages to compensate for the
infringement. An Answer to Complaint, Affirmative Defenses and
Counterclaims have been filed on behalf of the defendants. The
discovery and disposition process is ongoing. At the present
time, the final outcome related to this action cannot be
accurately determined by management.
(d) The Company has letters of credit issued with various financial
institutions of $0.9 million to guarantee various construction
projects related to activity of the Company. These letters of
credit are secured by cash deposits of the Company. The Company
also has letters of credit issued under its senior secured
revolving credit facility of $3.4 million (refer to
Note 8(a)(i)).
(e) The Company has provided indemnities related to surety bonds and
letters of credit issued in the process of obtaining licenses and
permits at certain racetracks and to guarantee various
construction projects related to activity of its subsidiaries. At
September 30, 2008, these indemnities amounted to $6.5 million
with expiration dates through 2009.
(f) Contractual commitments outstanding at September 30, 2008, which
related to construction and development projects, amounted to
approximately $0.2 million.
(g) On March 4, 2007, the Company entered into a series of
customer-focused agreements with Churchill Downs Incorporated
("CDI") in order to enhance wagering integrity and security, to
own and operate HRTV(R), to buy and sell horse racing content,
and to promote the availability of horse racing signals to
customers worldwide. These agreements involved the formation of a
joint venture, TrackNet Media, a reciprocal content swap
agreement and the purchase by CDI from the Company of a 50%
interest in HRTV(R). TrackNet Media is the vehicle through which
the Company and CDI horse racing content is made available to
third parties, including racetracks, off-track betting
facilities, casinos and advance deposit wagering companies.
TrackNet Media purchases horse racing content from third parties
to be made available through the Company's and CDI's respective
outlets. Under the reciprocal content swap agreement, the Company
and CDI exchange their respective horse racing signals. To
facilitate the sale of 50% of HRTV(R) to CDI, on March 4, 2007,
HRTV, LLC was created with an effective date of April 27, 2007.
Both the Company and CDI are required to make quarterly capital
contributions, on an equal basis, until October 2009 to fund the
operations of HRTV, LLC; however, the Company may under certain
circumstances be responsible for additional capital commitments.
As of September 30, 2008, the Company has not made any additional
capital contributions. The Company's share of the required
capital contributions to HRTV, LLC is expected to be
approximately $7.0 million of which $4.3 million has been
contributed to September 30, 2008.
(h) On December 8, 2005, legislation authorizing the operation of
slot machines within existing, licensed Broward County, Florida
pari-mutel facilities that had conducted live racing or games
during each of 2002 and 2003 was passed by the Florida
Legislature. On January 4, 2006, the Governor of Florida signed
the legislation into law and subsequently the Division of
Pari-mutuel Wagering developed the governing rules and
regulations. Prior to the November 15, 2006 opening of the slots
facility at Gulfstream Park, the Company was awarded a gaming
license for slot machine operations at Gulfstream Park in October
2006 despite an August 2006 decision rendered by the Florida
First District Court of Appeals that ruled that a trial is
necessary to determine whether the constitutional amendment
adopting the slots initiative was invalid because the petitions
bringing the initiative forward did not contain the minimum
number of valid signatures. Previously, a lower court decision
had granted summary judgment in favor of "Floridians for a Level
Playing Field" ("FLPF"), a group in which Gulfstream Park is a
member. Though FLPF pursued various procedural options in
response to the Florida First District Court of Appeals decision,
the Florida Supreme Court ruled in late September 2007 that the
matter was not procedurally proper for consideration by the
court. That ruling effectively remanded the matter to the trial
court for a trial on the merits, which will likely take an
additional year or more to fully develop and could take as many
as three years to achieve a full factual record and trial court
ruling for an appellate court to review. The Company believes
that the August 2006 decision rendered by the Florida First
District Court of Appeals is incorrect, and accordingly, the
Company has opened the slots facility. At September 30, 2008, the
carrying value of the fixed assets related to the slots facility
is approximately $25.1 million. If the August 2006 decision
rendered by the Florida First District Court of Appeals is
correct, the Company may incur a write-down of these fixed
assets.
(i) In May 2005, a Limited Liability Company Agreement was entered
into with Forest City concerning the planned development of "The
Village at Gulfstream Park(TM)". That agreement contemplates the
development of a mixed-use project consisting of residential
units, parking, restaurants, hotels, entertainment, retail
outlets and other commercial use projects on a portion of the
Gulfstream Park property. Forest City is required to contribute
up to a maximum of $15.0 million as an initial capital
contribution. The Company is obligated to contribute 50% of any
equity amounts in excess of $15.0 million as and when needed, and
to September 30, 2008 has made equity contributions in the amount
of $4.2 million. At September 30, 2008, approximately
$72.5 million of costs have been incurred by The Village at
Gulfstream Park, LLC, which have been funded by a construction
loan and equity contributions from Forest City and the Company.
The Company has reflected its unpaid share of equity amounts in
excess of $15.0 million, of approximately $2.6 million, as an
obligation which is included in "other accrued liabilities" on
the accompanying consolidated balance sheets. If the Company or
Forest City fails to make required capital contributions when
due, then either party to the agreement may advance such funds to
the Limited Liability Company, equal to the required capital
contributions, as a recourse loan or as a capital contribution
for which the capital accounts of the partners would be adjusted
accordingly. The Limited Liability Company Agreement also
contemplated additional agreements, including a ground lease, a
reciprocal easement agreement, a development agreement, a leasing
agreement and a management agreement which were executed upon
satisfaction of certain conditions. Upon the opening of The
Village at Gulfstream Park(TM), construction of which commenced
in June 2007, annual cash receipts (adjusted for certain
disbursements and reserves) will first be distributed to the
Forest City partner, subject to certain limitations, until such
time as the initial contribution accounts of the partners are
equal. Thereafter, the cash receipts are generally expected to be
distributed to the partners equally, provided they maintain their
equal interest in the partnership. The annual cash payments made
to the Forest City partner to equalize the partners' initial
contribution accounts will not exceed the amount of the annual
ground rent.
(j) On September 28, 2006, certain of the Company's affiliates
entered into definitive operating agreements with certain Caruso
Affiliated affiliates regarding the proposed development of The
Shops at Santa Anita on approximately 51 acres of undeveloped
land surrounding Santa Anita Park. This development project,
first contemplated in an April 2004 Letter of Intent which also
addressed the possibility of developing undeveloped lands
surrounding Golden Gate Fields, contemplates a mixed-use
development with approximately 800,000 square feet of retail,
entertainment and restaurants as well as 4,000 parking spaces.
Westfield Corporation ("Westfield"), a developer of a neighboring
parcel of land, has challenged the manner in which the
entitlement process for the development of the land surrounding
Santa Anita Park has been proceeding. On May 16, 2007, Westfield
commenced civil litigation in the Los Angeles Superior Court in
an attempt to overturn the Arcadia City Council's approval and
granting of entitlements related to the construction of The Shops
at Santa Anita. In addition, on May 21, 2007, Arcadia First!
filed a petition against the City of Arcadia to overturn the
entitlements and named the Company and certain of its
subsidiaries as real parties in interest. The first hearings on
the merits of the petitioners' claims were heard before the trial
judge on May 23, 2008. On July 23, 2008, the court issued a
tentative opinion in favor of the petitioners in part, concluding
that eleven parts of the final environmental impact report were
deficient. On September 29, 2008, the court heard the
respondents' motion to vacate the tentative opinion and to enter
a new and different decision. That motion was denied and the
court declared its tentative opinion to be the court's final
decision. The respondents' are considering whether to amend and
supplement the environmental impact report in an attempt to cure
the eleven defects, or in the alternative, to file notice of
appeal. The last day to file an appeal is December 16, 2008.
Accordingly, development efforts may be delayed or suspended. To
September 30, 2008, the Company has expended approximately
$10.7 million on these initiatives, of which $0.7 million was
paid during the nine months ended September 30, 2008. These
amounts have been recorded as "real estate properties, net" on
the accompanying consolidated balance sheets. Under the terms of
the Letter of Intent, the Company may be responsible to fund
additional costs; however, to September 30, 2008, the Company has
not made any such payments.
(k) Until December 25, 2007, The Meadows participated in a
multi-employer defined benefit pension plan (the "Pension Plan")
for which the Pension Plan's total vested liabilities exceeded
its assets. The New Jersey Sports & Exposition Authority
previously withdrew from the Pension Plan effective November 1,
2007. As the only remaining participant in the Pension Plan, The
Meadows withdrew from the Pension Plan effective December 25,
2007, which constituted a mass withdrawal. An updated actuarial
valuation is in the process of being obtained; however, based on
allocation information currently provided by the Pension Plan,
the estimated withdrawal liability of The Meadows is
approximately $6.2 million. This liability may be satisfied by
annual payments of approximately $0.3 million. As part of the
indemnification obligations under the holdback agreement with
Millennium-Oaktree (refer to Note 3), the mass withdrawal
liability that has been triggered as a result of withdrawal from
the Pension Plan will be offset against the amount owing to the
Company under the holdback agreement.
(l) MJC was party to agreements with the Maryland Thoroughbred
Horsemen's Association ("MTHA") and the Maryland Breeders'
Association, which expired on December 31, 2007, under which the
horsemen and breeders each contributed 4.75% of the costs of
simulcasting to MJC. On August 28, 2008, MJC entered into an
agreement under which the MTHA paid $0.6 million as an expense
contribution towards the costs associated with simulcasting at
MJC. In return, MJC agreed to conduct 65 live racing days during
the period from September 4, 2008 to December 31, 2008, maintain
overnight purses at an average of $160 thousand per day during
the aforementioned period, and maintain stabling facilities at
Laurel Park and the Bowie Training Center during the
aforementioned period.
(m) On May 8, 2008, one of the Company's wholly-owned subsidiaries,
LATC, commenced civil litigation in the District Court in Los
Angeles for breach of contract. It is seeking damages in excess
of $8.4 million from Cushion Track Footing USA, LLC and other
defendants for failure to install a racing surface at Santa Anita
Park suitable for the purpose for which it was intended. The
defendants were served with the complaint and filed a motion to
dismiss the action for lack of personal jurisdiction. On
October 20, 2008, the presiding judge denied the defendant's
motions, such that they are now required to file answers to the
complaint within 20 days of the judge's decision.
15. SEGMENT INFORMATION
Operating Segments
The Company's reportable segments reflect how the Company is
organized and managed by senior management. The Company has two
principal operating segments: racing and gaming operations and real
estate and other operations. The racing and gaming segment has been
further segmented to reflect geographical and other operations as
follows: (1) California operations include Santa Anita Park, Golden
Gate Fields and San Luis Rey Downs; (2) Florida operations include
Gulfstream Park's racing and gaming operations and Palm Meadows;
(3) Maryland operations include Laurel Park, Pimlico Race Course,
Bowie Training Center and the Maryland off-track betting network;
(4) Southern U.S. operations include Lone Star Park; (5) Northern
U.S. operations include The Meadows and its off-track betting network
and the North American production and sales operations for
StreuFex(TM); (6) European operations include the European production
and sales operations for StreuFex(TM); (7) PariMax operations include
XpressBet(R), HRTV(R) to April 27, 2007, MagnaBet(TM), RaceONTV(TM),
AmTote and the Company's equity investments in Racing World Limited,
TrackNet Media and HRTV, LLC from April 28, 2007; and (8) Corporate
and other operations includes costs related to the Company's
corporate head office, cash and other corporate office assets and
investments in racing related real estate held for development.
Eliminations reflect the elimination of revenues between business
units. The real estate and other operations segment includes the sale
of excess real estate and the Company's residential housing
development. Comparative amounts reflected in segment information for
the three and nine months ended September 30, 2007 have been
reclassified to reflect the operations of Remington Park's racing and
gaming operations and its off-track betting network, Thistledown,
Great Lakes Downs, Portland Meadows and the Oregon off-track betting
network, and Magna Racino(TM) as discontinued operations.
The Company uses revenues and earnings (loss) before interest, income
taxes, depreciation and amortization ("EBITDA") as key performance
measures of results of operations for purposes of evaluating
operating and financial performance internally. Management believes
that the use of these measures enables management and investors to
evaluate and compare, from period to period, operating and financial
performance of companies within the horse racing industry in a
meaningful and consistent manner as EBITDA eliminates the effects of
financing and capital structures, which vary between companies.
Because the Company uses EBITDA as a key measure of financial
performance, the Company is required by U.S. GAAP to provide the
information in this note concerning EBITDA. However, these measures
should not be considered as an alternative to, or more meaningful
than, net income (loss) as a measure of the Company's operating
results or cash flows, or as a measure of liquidity.
The accounting policies of each segment are the same as those
described in the "Summary of Significant Accounting Policies"
sections of the Company's annual report on Form 10-K for the year
ended December 31, 2007. The following summary presents key
information by operating segment:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Revenues
California operations $ 11,095 $ 8,010 $ 149,613 $ 167,756
Florida operations 13,730 11,129 116,277 109,685
Maryland operations 15,721 18,961 77,428 88,530
Southern U.S. operations 13,702 14,880 47,067 48,831
Northern U.S. operations 7,794 8,289 26,036 28,936
European operations 361 247 1,059 841
PariMax operations 17,755 18,307 60,926 62,807
---------------------------------------------------------------------
80,158 79,823 478,406 507,386
Corporate and other 65 151 204 257
Eliminations (1,593) (1,187) (9,692) (10,139)
---------------------------------------------------------------------
Total racing and gaming
operations 78,630 78,787 468,918 497,504
---------------------------------------------------------------------
Sale of real estate - - 1,492 -
Residential development
and other 2,947 2,695 8,425 5,586
---------------------------------------------------------------------
Total real estate and
other operations 2,947 2,695 9,917 5,586
---------------------------------------------------------------------
Total revenues $ 81,577 $ 81,482 $ 478,835 $ 503,090
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Earnings (loss) before
interest, income taxes,
depreciation and
amortization ("EBITDA")
California operations $ (6,600) $ (6,436) $ 9,592 $ 13,627
Florida operations (6,959) (8,500) (1,050) (3,217)
Maryland operations (1,818) (1,767) 2,120 8,024
Southern U.S. operations 889 1,256 4,004 4,386
Northern U.S. operations (164) (96) 561 (100)
European operations (8) (31) (76) (45)
PariMax operations 1,383 473 5,011 3,224
---------------------------------------------------------------------
(13,277) (15,101) 20,162 25,899
Corporate and other (5,407) (7,822) (16,657) (19,679)
Predevelopment and
other costs (2,766) (393) (4,213) (1,765)
Recognition of deferred
gain on The Meadows
transaction - - 2,013 -
---------------------------------------------------------------------
Total racing and gaming
operations (21,450) (23,316) 1,305 4,455
---------------------------------------------------------------------
Residential development
and other 1,093 1,358 4,409 2,110
Write-down of long-lived
assets - (1,444) (5,000) (1,444)
---------------------------------------------------------------------
Total real estate and
other operations 1,093 (86) (591) 666
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Total EBITDA (loss) $ (20,357) $ (23,402) $ 714 $ 5,121
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---------------------------------------------------------------------
Reconciliation of EBITDA to Net Loss
Three months ended September 30, 2008
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Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA (loss) from continuing
operations $ (21,450) $ 1,093 $ (20,357)
Interest (expense) income, net (18,143) 28 (18,115)
Depreciation and amortization (11,352) (10) (11,362)
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Income (loss) from continuing
operations before income taxes $ (50,945) $ 1,111 (49,834)
Income tax expense 748
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Loss from continuing operations (50,582)
Income from discontinued
operations 2,223
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Net loss $ (48,359)
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---------------------------------------------------------------------
Three months ended September 30, 2007
---------------------------------------------------------------------
Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA (loss) from continuing
operations $ (23,316) $ (86) $ (23,402)
Interest expense, net (11,644) (68) (11,712)
Depreciation and amortization (10,090) (8) (10,098)
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Loss from continuing operations
before income taxes $ (45,050) $ (162) (45,212)
Income tax benefit (637)
---------------------------------------------------------------------
Loss from continuing operations (44,575)
Loss from discontinued operations (5,236)
---------------------------------------------------------------------
Net loss $ (49,811)
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---------------------------------------------------------------------
Nine months ended September 30, 2008
---------------------------------------------------------------------
Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA (loss) from continuing
operations $ 1,305 $ (591) $ 714
Interest (expense) income, net (50,621) 13 (50,608)
Depreciation and amortization (33,610) (24) (33,634)
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Loss from continuing operations
before income taxes $ (82,926) $ (602) (83,528)
Income tax expense 3,011
---------------------------------------------------------------------
Loss from continuing operations (86,539)
Loss from discontinued operations (29,534)
---------------------------------------------------------------------
Net loss $(116,073)
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended September 30, 2007
---------------------------------------------------------------------
Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA from continuing
operations $ 4,455 $ 666 $ 5,121
Interest expense, net (34,074) (145) (34,219)
Depreciation and amortization (27,785) (24) (27,809)
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Income (loss) from continuing
operations before income taxes $ (57,404) $ 497 (56,907)
Income tax expense 2,287
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Loss from continuing operations (59,194)
Loss from discontinued operations (11,585)
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Net loss $ (70,779)
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--------------------------------------------------------------------
September 30, December 31,
2008 2007
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Total Assets
California operations $ 295,807 $ 320,781
Florida operations 352,517 358,907
Maryland operations 159,818 162,606
Southern U.S. operations 96,181 97,228
Northern U.S. operations 19,039 18,502
European operations 1,430 1,468
PariMax operations 38,492 43,717
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963,284 1,003,209
Corporate and other 53,527 59,590
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Total racing and gaming operations 1,016,811 1,062,799
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Residential development and other 5,876 5,214
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Total real estate and other operations 5,876 5,214
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Total assets from continuing operations 1,022,687 1,068,013
Total assets held for sale 26,984 40,140
Total assets of discontinued operations 114,063 135,723
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Total assets $ 1,163,734 $ 1,243,876
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16. SUBSEQUENT EVENTS
(a) On November 3, 2008, the Company announced that its agreement to
sell approximately 489 acres of excess real estate located in
Ocala, Florida to Lincoln Property Company and Orion Investment
Properties, Inc. for a purchase price of $16.5 million cash was
terminated by the prospective purchasers. The Company still
intends to sell the Ocala property and will re-initiate its
marketing efforts (refer to Note 4(d)).
(b) On October 15, 2008, the Company's $40.0 million senior secured
revolving credit facility with a Canadian financial institution
was extended from October 15, 2008 to November 17, 2008. The
Company incurred a fee of $0.4 million in connection with this
credit facility (refer to Note 8(a)(i)).
(c) As a result of October 15, 2008 changes to the Company's bridge
loan agreement with a subsidiary of MID, (i) the maximum
commitment available was increased from $110.0 million to
$125.0 million and the Company is also now permitted to redraw
amounts that it repaid in July 2008 (approximately $4.5 million),
such that the amount available to the Company under the bridge
loan was increased by approximately $19.5 million and (ii) the
bridge loan maturity date was extended from October 31, 2008 to
December 1, 2008 (or such later date or dates as may be
determined from time to time by the bridge loan lender in its
sole discretion, with such later date or dates being subject to
such conditions as may be determined by the lender in its sole
discretion). Further draws under the bridge loan will not be
permitted after November 17, 2008 unless the Company's $40.0
million senior secured revolving credit facility is further
extended or replaced (refer to Note 13(a)(i)).
In connection with the above changes to the bridge loan, the
repayment deadline for $100.0 million under the Gulfstream Park
project financing facility with a subsidiary of MID was extended
from October 31, 2008 to December 1, 2008 (or such later date or
dates as may be determined from time to time by the bridge loan
lender in its sole discretion, with such later date or dates
being subject to such conditions as may be determined by the
lender in its sole discretion), during which time any
repayments made under the Gulfstream Park facility or the
Remington Park facility will not be subject to a make-whole
payment (refer to Note 13 (a)(ii)).
The Company incurred a fee of $1.25 million in connection with
the changes to the bridge loan and a fee of $1.0 million in
connection with the extension of the $100.0 million repayment
requirement under the Gulfstream Park facility.
SOURCE Magna Entertainment Corp.
CONTACT: Blake Tohana, Executive Vice-President and Chief Financial
Officer, Magna Entertainment Corp., 337 Magna Drive, Aurora, ON, L4G 7K1, Tel:
(905) 726-7493
(MECA MEC.A.)
