Magna Entertainment (MM) (NASDAQ:MECAD)
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AURORA, ON, Aug. 5 /PRNewswire-FirstCall/ -- Magna Entertainment Corp. ("MEC") (NASDAQ: MECAD; TSX: MEC.A) today reported its financial results for the second quarter ended June 30, 2008.
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Three Months Ended Six Months Ended
June 30, June 30,
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2008 2007 2008 2007
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(unaudited) (unaudited)
Revenues(i) $ 166,282 $ 167,406 $ 397,258 $ 421,608
Earnings before interest,
taxes, depreciation and
amortization
("EBITDA")(i)(iii) $ 5,212 $ 3,969 $ 21,071 $ 28,523
Net income (loss)
Continuing
operations(iii) $ (22,990) $ (20,329) $ (35,957) $ (14,619)
Discontinued
operations(ii)(iii) 1,736 (3,108) (31,757) (6,349)
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Net loss $ (21,254) $ (23,437) $ (67,714) $ (20,968)
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Diluted earnings (loss)
per share(iv)
Continuing
operations(iii) $ (3.93) $ (3.77) $ (6.16) $ (2.72)
Discontinued
operations(ii)(iii) 0.29 (0.58) (5.44) (1.18)
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Diluted loss per
share(iv) $ (3.64) $ (4.35) $ (11.60) $ (3.90)
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(i) Revenues and EBITDA for all periods presented are from continuing
operations only.
(ii) Discontinued operations for the three and six months ended
June 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 six months ended June 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 six months ended June 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.
(iv) On July 3, 2008, the Company's Board of Directors approved a
reverse stock split with an effective date of 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 twenty 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 convertible subordinated
notes 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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Frank Stronach, MEC's Chairman and Chief Executive Officer commented: "Despite difficult economic conditions in the U.S., our EBITDA from continuing operations improved by $1.2 million in the second quarter of 2008 compared to the same period last year. This improvement was primarily due to improved results at Gulfstream Park, Santa Anita Park and our real estate operations partially offset by disappointing results at The Maryland Jockey Club. We are also encouraged by the results at XpressBet(R), which increased its handle by 21%, and Remington Park, which increased its slot revenues by 17%, both compared to the same quarter last year. Notwithstanding this modest improvement in EBITDA for the quarter, we recognize the need for further significant improvement in our operating results, as we also focus on dramatically reducing our debt levels."
Blake Tohana, MEC's Executive Vice-President and Chief Financial Officer, commented: "Although we continue to take steps to implement our debt elimination plan, U.S. real estate and credit markets have continued to demonstrate weakness in 2008 and we do not expect to complete our plan on the originally contemplated time schedule. However, we remain firmly committed to reducing debt and interest expense. We closed the sale of Great Lakes Downs in July 2008 and are continuing to pursue other asset sale opportunities."
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 $166.3 million for the three months ended June 30, 2008, a decrease of $1.1 million or 0.7% compared to $167.4 million for the three months ended June 30, 2007. The decreased revenues from continuing operations were primarily due to:
- Maryland revenues below the prior year period by $4.4 million
primarily due to decreased handle and wagering revenues at this
year's Preakness(R), and decreased average daily attendance and
handle during the race meets at both Laurel Park and Pimlico; and
- California revenues below the prior year period by $4.0 million due
to 5 fewer live race days at Golden Gate Fields with a change in the
racing calendar which shifted live race days to the third and fourth
quarters of 2008, partially offset by increased non-wagering revenues
at Santa Anita Park from special events and facility rentals;
partially offset by:
- Florida revenues above the prior year period by $5.5 million
primarily due to increased gross gaming revenues at Gulfstream Park
from improved slot and poker operations, and increased wagering
revenues from the introduction of year round simulcasting at
Gulfstream Park at the end of the 2008 race meet; and
- Real estate and other operations revenues above the prior year period
by $2.3 million due to increased housing unit sales at our European
residential housing development.
Revenues were $397.3 million in the six months ended June 30, 2008, a decrease of $24.4 million or 5.8% compared to $421.6 million for the six months ended June 30, 2007. The decreased revenues in the six months ended June 30, 2008 compared to the prior year period are primarily due to the same factors impacting the three months ended June 30, 2008 as well as California revenues below the prior year period by $21.2 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.
EBITDA from continuing operations was $5.2 million for the three months ended June 30, 2008, an increase of $1.2 million or 31.3% compared to $4.0 million for the three months ended June 30, 2007. The increased EBITDA from continuing operations was primarily due to:
- Florida operations above the prior year period by $2.5 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
- Real estate and other operations above the prior year period by
$2.0 million due to increased revenues at our European residential
housing development as noted above;
partially offset by:
- Maryland operations below the prior year period by $4.2 million due
to decreased revenues at The Maryland Jockey Club as noted above,
combined with increased severance costs and the December 31, 2007
expiry of expense contribution agreements with the
Maryland Thoroughbred Horsemen's Association and the
Maryland Breeders' Association.
EBITDA of $21.1 million for the six months ended June 30, 2008, decreased $7.5 million from $28.5 million in the six months ended June 30, 2007 primarily due to:
- California operations below the prior year period by $3.9 million for
the reasons noted above which decreased revenues at Santa Anita Park
and Golden Gate Fields;
- Maryland operations below the prior year period by $5.9 million for
the reasons noted above which decreased revenues and EBITDA at
Laurel Park and Pimlico in the three months ended June 30, 2008; and
- 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 six months ended June 30, 2008, which represented the
excess of the carrying value of the asset over the estimated fair
value less selling costs.
During the three months ended June 30, 2008, cash used for operating activities of continuing operations was $22.3 million, which decreased $25.2 million from cash provided from operating activities of continuing operations of $2.9 million in the three months ended June 30, 2007, primarily due to an increase in cash used for non-cash working capital balances. In the three months ended June 30, 2008, cash used for non-cash working capital balances of $11.9 million is primarily due to a decrease in accounts payable and other accrued liabilities, partially offset by a decrease in restricted cash at June 30, 2008 compared to the respective balances at March 31, 2008. Cash provided from investing activities of continuing operations in the three months ended June 30, 2008 was $24.7 million, including $31.5 million of proceeds received on the sale of real estate to a related party, $3.3 million of proceeds on the disposal of fixed assets, partially offset by $5.7 million of other asset additions and $4.4 million of real estate property and fixed asset additions. Cash provided from financing activities of continuing operations during the three months ended June 30, 2008 of $2.7 million includes net borrowings of $11.6 million from our controlling shareholder, partially offset by net repayments of $5.7 million of long-term debt and $3.3 million of bank indebtedness.
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 do not expect that we will be able to complete asset sales at acceptable prices as quickly or for amounts as originally contemplated. Also, given the announcement of the reorganization proposal for MI Developments Inc. ("MID"), our controlling shareholder, and pending determination of whether it will proceed, we are in the process of reconsidering whether to sell certain of the assets that were originally identified for disposition under the debt elimination plan. As a result of these developments, combined with our upcoming debt maturities and our operational funding requirements, we will again need to seek extensions or additional funds in the short-term from one or more possible sources. The availability of such extensions 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 will hold a conference call to discuss our second quarter results on Wednesday August 6, 2008 at 3:00 p.m. EST. The number to use for this call is 1-800-255-2466. Please call 10 minutes prior to the start of the conference call. The dial-in number for overseas callers is 212-676-5399. We will also web cast the conference call at http://www.magnaentertainment.com/. If you have any teleconferencing questions, please call Karen Richardson at 905-726-7465.
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: the current status and the potential impact of the debt elimination plan on our debt reduction efforts, as to which there can be no assurance of success; expectations as to our ability to complete asset sales at the appropriate prices and in a timely manner; the impact of the short-term bridge loan facility with a subsidiary of MID; 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 our debt elimination plan, but not on the originally contemplated time schedule, and comply with the terms of and/or obtain waivers or other concessions from our lenders and refinance or repay upon maturity our existing financing arrangements (including our short-term bridge loan with a subsidiary of MID and our senior secured revolving credit facility with a Canadian financial institution), and there will not be any material adverse changes in: general economic conditions; the popularity of horse racing and other gaming activities; weather and other environmental conditions at our facilities; the regulatory environment; and 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 Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Revenues
Racing and gaming
Pari-mutuel wagering $ 109,043 $ 113,421 $ 291,936 $ 315,759
Gaming 10,867 9,151 24,504 22,816
Non-wagering 43,017 43,776 73,848 80,142
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162,927 166,348 390,288 418,717
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Real estate and other
Sale of real estate - - 1,492 -
Residential development
and other 3,355 1,058 5,478 2,891
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3,355 1,058 6,970 2,891
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166,282 167,406 397,258 421,608
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Costs, expenses and other
income
Racing and gaming
Pari-mutuel purses, awards
and other 65,108 65,624 177,136 192,373
Gaming purses, taxes and
other 7,271 6,221 16,471 15,884
Operating costs 70,337 71,866 143,522 148,321
General and administrative 15,081 17,214 29,061 31,868
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157,797 160,925 366,190 388,446
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Real estate and other
Cost of real estate sold - - 1,492 -
Operating costs 1,017 612 1,896 1,730
General and administrative 131 230 266 409
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1,148 842 3,654 2,139
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Predevelopment and other costs 1,052 867 1,447 1,372
Depreciation and amortization 11,216 9,061 22,272 17,711
Interest expense, net 16,456 11,145 32,493 22,507
Write-down of long-lived
assets - - 5,000 -
Equity loss 1,073 803 1,909 1,128
Recognition of deferred gain
on The Meadows transaction - - (2,013) -
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188,742 183,643 430,952 433,303
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Loss from continuing
operations before income
taxes (22,460) (16,237) (33,694) (11,695)
Income tax expense 530 4,092 2,263 2,924
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Loss from continuing
operations (22,990) (20,329) (35,957) (14,619)
Income (loss) from
discontinued operations 1,736 (3,108) (31,757) (6,349)
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Net loss (21,254) (23,437) (67,714) (20,968)
Other comprehensive income
(loss)
Foreign currency translation
adjustment (407) 1,264 2,082 2,010
Change in fair value of
interest rate swap 673 5 57 (96)
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Comprehensive loss $ (20,988) $ (22,168) $ (65,575) $ (19,054)
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Earnings (loss) per share for
Class A Subordinate
Voting Stock and Class
B Stock:
Basic and Diluted
Continuing operations $ (3.93) $ (3.77) $ (6.16) $ (2.72)
Discontinued operations 0.29 (0.58) (5.44) (1.18)
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Loss per share $ (3.64) $ (4.35) $ (11.60) $ (3.90)
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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 5,845 5,386 5,838 5,382
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
Three months ended Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Cash provided from (used for):
Operating activities of
continuing operations:
Loss from continuing
operations $ (22,990) $ (20,329) $ (35,957) $ (14,619)
Items not involving current
cash flows 12,588 9,241 29,663 17,623
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(10,402) (11,088) (6,294) 3,004
Changes in non-cash working
capital balances (11,859) 14,034 (19,544) (16,076)
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(22,261) 2,946 (25,838) (13,072)
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Investing activities of
continuing operations:
Real estate property and
fixed asset additions (4,380) (22,512) (14,868) (35,861)
Other asset additions (5,666) (1,434) (7,042) (2,486)
Proceeds on disposal of real
estate properties - - 1,492 -
Proceeds on disposal of
fixed assets 3,291 1,001 5,345 2,641
Proceeds on real estate sold
to parent - 23,663 - 87,909
Proceeds on real estate sold
to a related party 31,460 - 31,460 -
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24,705 718 16,387 52,203
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Financing activities of
continuing operations:
Proceeds from bank
indebtedness 14,619 741 37,746 15,741
Proceeds from indebtedness
and long-term debt with
parent 31,826 6,402 50,900 16,329
Proceeds from long-term debt 5 3,865 2,736 4,140
Repayment of bank
indebtedness (17,875) (15,000) (40,469) (21,515)
Repayment of indebtedness
and long-term debt with
parent (20,217) (473) (22,433) (2,153)
Repayment of long-term debt (5,692) (15,855) (8,878) (29,460)
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2,666 (20,320) 19,602 (16,918)
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Effect of exchange rate
changes on cash and cash
equivalents 21 19 78 (86)
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Net cash flows provided
from (used for) continuing
operations 5,131 (16,637) 10,229 22,127
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Cash provided from (used for)
discontinued operations:
Operating activities of
discontinued operations 2,755 (906) 1,593 (1,356)
Investing activities of
discontinued operations (4,075) (2,552) (4,983) (3,227)
Financing activities of
discontinued operations (13,323) (1,483) (12,655) (21,582)
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Net cash flows used for
discontinued operations (14,643) (4,941) (16,045) (26,165)
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Net decrease in cash and cash
equivalents during the
period (9,512) (21,578) (5,816) (4,038)
Cash and cash equivalents,
beginning of period 47,089 75,831 43,393 58,291
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Cash and cash equivalents,
end of period 37,577 54,253 37,577 54,253
Less: cash and cash
equivalents, end of period
of discontinued operations (8,171) (10,814) (8,171) (10,814)
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Cash and cash equivalents,
end of period of continuing
operations $ 29,406 $ 43,439 $ 29,406 $ 43,439
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
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(REFER TO NOTE 1 - GOING CONCERN)
(Unaudited)
(U.S. dollars and share amounts in thousands)
June 30, December 31,
2008 2007
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ASSETS
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Current assets:
Cash and cash equivalents $ 29,406 $ 34,152
Restricted cash 11,733 28,264
Accounts receivable 36,907 32,157
Due from parent 940 4,463
Income taxes receivable - 1,234
Inventories 6,272 6,351
Prepaid expenses and other 16,487 9,946
Assets held for sale 27,343 35,658
Discontinued operations 115,738 75,455
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244,826 227,680
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Real estate properties, net 701,510 705,069
Fixed assets, net 79,382 85,908
Racing licenses 109,868 109,868
Other assets, net 13,218 10,980
Future tax assets 39,576 39,621
Assets held for sale - 4,482
Discontinued operations - 60,268
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$ 1,188,380 $ 1,243,876
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness $ 36,491 $ 39,214
Accounts payable 46,416 65,351
Accrued salaries and wages 8,481 8,198
Customer deposits 3,029 2,575
Other accrued liabilities 32,123 46,124
Income taxes payable 633 -
Long-term debt due within one year 11,088 10,654
Due to parent 170,215 137,003
Deferred revenue 2,772 4,339
Liabilities related to assets held for sale 876 1,047
Discontinued operations 83,840 75,396
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395,964 389,901
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Long-term debt 83,301 89,680
Long-term debt due to parent 67,299 67,107
Convertible subordinated notes 223,071 222,527
Other long-term liabilities 15,566 18,255
Future tax liabilities 81,471 80,076
Discontinued operations - 13,617
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866,672 881,163
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Shareholders' equity:
Class A Subordinate Voting Stock
(Issued: 2008 - 2,930; 2007 - 2,908) 339,587 339,435
Class B Stock
(Convertible into Class A Subordinate
Voting Stock)
(Issued: 2008 and 2007 - 2,923) 394,094 394,094
Contributed surplus 116,164 91,825
Other paid-in-capital 2,110 2,031
Accumulated deficit (577,771) (510,057)
Accumulated other comprehensive income 47,524 45,385
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321,708 362,713
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$ 1,188,380 $ 1,243,876
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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(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 $67.7 million for the
six months ended June 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 June 30, 2008
has an accumulated deficit of $577.8 million and a working capital
deficiency of $151.1 million. At June 30, 2008, the Company had
$229.8 million of debt due to mature in the 12-month period ending
June 30, 2009, including amounts owing under the Company's $40.0
million senior secured revolving credit facility with a Canadian
financial institution, which is scheduled to mature on August 15,
2008, amounts owing under its amended bridge loan facility of up to
$110.0 million with a subsidiary of MI Developments Inc. ("MID"), the
Company's controlling shareholder, which is scheduled to mature on
August 31, 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 August 31, 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. 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. Further, given the announcement of the MID reorganization
proposal, and pending determination of whether it will proceed, the
Company is in the process of reconsidering whether to sell certain of
the assets that were orignially identified for disposition under the
debt elimination plan. 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
Subsequent to the consolidated balance sheet date, on July 3, 2008,
the Company's Board of Directors approved a reverse stock split (the
"Reverse Stock Split"), with an effective date of 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 twenty 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 convertible
subordinated notes 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 recognised 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 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 June 30, 2008:
Quoted Prices
in Active
Markets for Significant
Identical Other Significant
Assets or Observable Unobservable
Liabilities Inputs Inputs
(Level 1) (Level 2) (Level 3)
---------------------------------------------------------------------
Liabilities carried at
fair value:
Interest rate swaps $ - $ 1,221 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
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 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 sheet 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 six months ended June 30, 2008, the Company
recognized $0.3 million and $0.4 million, respectively, and for the
three and six months ended June 30, 2007, the Company recognized
$0.1 million and $0.4 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 six months ended June 30, 2008. At
June 30, 2008, the remaining balance of the deferred proceeds is
$8.6 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 sheet 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
June 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 9, 2007, the Company also announced its intention to
sell a real estate property located in Ocala, Florida. The
Company is actively marketing this property for sale and is in
negotiations with a potential buyer. Accordingly, at June 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
June 30, 2008 and December 31, 2007 are shown below. All assets
held for sale and related liabilities are classified as current
at June 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.
June 30, December 31,
2008 2007
-------------------------
ASSETS
---------------------------------------------------------------------
Real estate properties, net
Dixon, California (refer to Note 6) $ 14,139 $ 19,139
Ocala, Florida 8,407 8,407
Oberwaltersdorf, Austria 4,797 -
Ebreichsdorf, Austria - 6,619
Porter, New York - 1,493
---------------------------------------------------------------------
27,343 35,658
Oberwaltersdorf, Austria - 4,482
---------------------------------------------------------------------
$ 27,343 $ 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 subsequent to the balance sheet date, on
July 16, 2008, the Company completed the sale of 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 June 30, 2008:
- Real estate properties located in Aventura and Hallandale,
Florida (adjacent to Gulfstream Park): At June 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 June 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 June 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
June 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 June 30, 2008 and
have been presented accordingly:
- Great Lakes Downs: In October 2007, the property was listed
for sale with a real estate broker. The 2007 race meet at
Great Lakes Downs concluded on November 4, 2007 and the
facility was then closed. In order to facilitate the sale of
this property, the Company re-acquired Great Lakes Downs from
Richmond Racing Co., LLC in December 2007 pursuant to a prior
existing option right. Subsequent to the consolidated balance
sheet date, on July 16, 2008, the Company completed the sale
of Great Lakes Downs.
- 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 subsequent to the consolidated balance sheet date, on
July 16, 2008, the Company completed the sale of Great Lakes
Downs in Michigan. Accordingly, at June 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 six months ended June 30, 2008 and
2007 are as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Results of Operations
Revenues $ 35,835 $ 35,657 $ 65,590 $ 65,629
Costs and expenses 33,853 36,178 62,968 66,463
---------------------------------------------------------------------
1,982 (521) 2,622 (834)
Predevelopment and other
costs 161 21 315 46
Depreciation and
amortization - 1,738 605 3,502
Interest expense, net 470 1,022 1,550 2,161
Write-down of long-lived
assets (refer to Note 6) - - 32,294 -
Equity income - (32) - (32)
---------------------------------------------------------------------
Income (loss) from
discontinued operations
before income taxes 1,351 (3,270) (32,142) (6,511)
Income tax benefit (385) (162) (385) (162)
---------------------------------------------------------------------
Income (loss) from
discontinued operations $ 1,736 $ (3,108) $(31,757) $ (6,349)
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company's assets and liabilities related to discontinued
operations at June 30, 2008 and December 31, 2007 are shown below.
All assets and liabilities related to discontinued operations are
classified as current at June 30, 2008 as they are expected to be
sold within one year from the consolidated balance sheet date.
June 30, December 31,
2008 2007
-------------------------
ASSETS
---------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 8,171 $ 9,241
Restricted cash 13,175 7,069
Accounts receivable 4,505 6,602
Inventories 411 426
Prepaid expenses and other 2,851 1,386
Real estate properties, net 61,037 39,094
Fixed assets, net 11,935 11,531
Other assets, net 106 106
Future tax assets 13,547 -
---------------------------------------------------------------------
115,738 75,455
---------------------------------------------------------------------
Real estate properties, net - 41,941
Fixed assets, net - 4,764
Other assets, net - 16
Future tax assets - 13,547
---------------------------------------------------------------------
- 60,268
---------------------------------------------------------------------
$ 115,738 $ 135,723
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES
---------------------------------------------------------------------
Current liabilities:
Accounts payable $ 13,877 $ 9,146
Accrued salaries and wages 1,100 946
Other accrued liabilities 12,325 11,354
Income taxes payable 3,515 3,182
Long-term debt due within one year 11,632 22,096
Due to parent (refer to Note 13(a)(v)) 409 397
Deferred revenue 1,053 1,257
Long-term debt 91 115
Long-term debt due to parent (refer to
Note 13(a)(v)) 25,337 26,143
Other long-term liabilities 954 760
Future tax liabilities 13,547 -
---------------------------------------------------------------------
83,840 75,396
---------------------------------------------------------------------
Other long-term liabilities - 70
Future tax liabilities - 13,547
---------------------------------------------------------------------
- 13,617
---------------------------------------------------------------------
$ 83,840 $ 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 Six months ended
June 30, June 30,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Assets held for sale
Dixon, California real
estate(i) $ - $ - $ 5,000 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
Discontinued operations
Magna Racino(TM)(ii) $ - $ - $ 29,195 $ -
Portland Meadows(iii) - - 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 six months ended
June 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) 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 six months ended June 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.
(iii) 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. 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 six months ended
June 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 loss from
continuing operations before income taxes for the three and six
months ended June 30, 2008 and 2007, resulting in an income tax
expense of $0.5 million and $2.3 million for the three and six months
ended June 30, 2008 and an income tax expense of $4.1 million and
$2.9 million for the three and six months ended June 30, 2007. The
income tax expense for the three and six months ended June 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 three and six months ended June 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.
8. BANK INDEBTEDNESS AND LONG-TERM DEBT
(a) Bank Indebtedness
The Company's bank indebtedness consists of the following short-
term bank loans:
June 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) - 3,499
$3.0 million revolving credit facility(iii) - 824
---------------------------------------------------------------------
$ 36,491 $ 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 July 30, 2008, but was extended to
August 15, 2008 (refer to Note 16(c)). 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 June 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 June 30, 2008 was 8.5% (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 agreement
under its existing credit facility with a U.S. financial
institution, which matures on October 31, 2012. The revolving
loan agreement 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 June 30, 2008, the Company
had no borrowings (December 31, 2007 - $3.5 million) under the
revolving loan agreement. Borrowings under the revolving loan
agreement bear interest at the U.S. prime rate. The weighted
average interest rate on the borrowings outstanding under the
revolving loan agreement at June 30, 2008 was not applicable
given that there were no outstanding borrowings (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 June 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 June 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) 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. As a
result of the amendments to the maturity dates, amounts
outstanding under the term and equipment loans at June 30,
2008 are reflected in "long-term debt due within one year"
on the consolidated balance sheets.
(ii) The Company's wholly-owned subsidiaries that own and
operate Pimlico Race Course and Laurel Park have borrowings
of $9.0 million outstanding at June 30, 2008 under term
loan credit facilities with a U.S. financial institution.
At June 30, 2008, the Company was not in compliance with
one of the financial covenants contained in these credit
agreements. A waiver was obtained from the lender on
August 5, 2008 for the financial covenant breach at
June 30, 2008 (refer to Note 16(a)).
9. CAPITAL STOCK
(a) Class A Subordinate Voting Stock and Class B Stock at June 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
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 June 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 2,930
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
---------------------------------------------------------------------
7,595
---------------------------------------------------------------------
---------------------------------------------------------------------
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 instalments. 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 six months ended June 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 six months ended June 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 six months ended June 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
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 236,950 235,700 217,902 217,583
Weighted average exercise
price $ 116.55 $ 121.40 $ 119.80 $ 121.40
Weighted average remaining
contractual life (years) 2.9 3.7 2.4 3.3
---------------------------------------------------------------------
---------------------------------------------------------------------
At June 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 six months ended
June 30, 2008 and 2007 using the Black-Scholes option valuation model
was not applicable given that there were no options granted during
the respective periods.
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 of compensation expense for
the three months ended June 30, 2008 and $0.1 million for the six
months ended June 30, 2008 (for the three and six months ended
June 30, 2007 - $0.1 million and $0.2 million, respectively) related
to stock options. At June 30, 2008, the total unrecognized
compensation expense related to stock options is $0.3 million, which
is expected to be recognized as an expense over a period of 3.2
years.
For the three and six months ended June 30, 2008, the Company
recognized total compensation expense of $0.2 million and
$0.2 million, respectively (for the three and six months ended
June 30, 2007 - $0.1 million and $0.3 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 six months ended
June 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
---------------------------------------------------------------------
---------------------------------------------------------------------
12. EARNINGS (LOSS) PER SHARE
The following table is a reconciliation of the numerator and
denominator of the basic and diluted 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 Six months ended
June 30, June 30,
-------------------------------------------
2008 2007 2008 2007
-------------------------------------------
Basic and Basic and Basic and Basic and
Diluted Diluted Diluted Diluted
---------------------------------------------------------------------
Loss from continuing
operations $ (22,990) $ (20,329) $ (35,957) $ (14,619)
Income (loss) from
discontinued operations 1,736 (3,108) (31,757) (6,349)
---------------------------------------------------------------------
Net loss $ (21,254) $ (23,437) $ (67,714) $ (20,968)
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number
of shares outstanding:
Class A Subordinate
Voting Stock 2,922 2,463 2,915 2,459
Class B Stock 2,923 2,923 2,923 2,923
---------------------------------------------------------------------
Weighted average number
of shares outstanding 5,845 5,386 5,838 5,382
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings (loss) per share:
Continuing operations $ (3.93) $ (3.77) $ (6.16) $ (2.72)
Discontinued operations 0.29 (0.58) (5.44) (1.18)
---------------------------------------------------------------------
Loss per share $ (3.64) $ (4.35) $ (11.60) $ (3.90)
---------------------------------------------------------------------
---------------------------------------------------------------------
As a result of the net loss for the three and six months ended
June 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 six months ended
June 30, 2007, options to purchase 235,700 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:
June 30, December 31,
2008 2007
-----------------------------------------------------------------
Bridge loan facility (i) $ 68,581 $ 35,889
Gulfstream Park project financing
Tranche 1 (ii) 129,770 130,324
Tranche 2 (iii) 24,605 24,304
Tranche 3 (iv) 14,558 13,593
-----------------------------------------------------------------
237,514 204,110
Less: due within one year (170,215) (137,003)
-----------------------------------------------------------------
$ 67,299 $ 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 (subject
to certain acceleration provisions relating to the MID
reorganization proposal, as announced by MID on March 31,
2008, which are no longer applicable). 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. 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 six months ended June 30, 2008, the
Company received loan advances of $32.8 million and
$51.4 million, repaid outstanding principal of
$19.8 million and $21.5 million, incurred interest expense
and commitment fees of $2.0 million and $3.8 million, and
repaid interest and commitment fees of $1.8 million and
$3.5 million, respectively, such that at June 30, 2008,
$69.4 million was outstanding under the bridge loan
facility, including $0.7 million of accrued interest and
commitment fees payable. In addition, for the three and six
months ended June 30, 2008, the Company amortized $2.0
million and $3.7 million of loan origination costs,
respectively, such that at June 30, 2008, $0.8 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 June 30,
2008 is 14.5% (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 six months ended June 30, 2008, the
Company repaid outstanding principal of $0.4 million and
$0.7 million (for the three and six months ended June 30,
2007 - $0.3 million and $1.8 million), incurred interest
expense of $3.4 million and $6.8 million (for the three and
six months ended June 30, 2007 - $3.4 million and $6.9
million), and repaid interest of $3.4 million and $6.8
million (for the three and six months ended June 30, 2007 -
$3.4 million and $5.7 million), respectively, such that at
June 30, 2008, $132.8 million was outstanding under this
project financing arrangement, including $1.1 million of
accrued interest payable. In addition, for the three and
six months ended June 30, 2008, the Company amortized $0.1
million and $0.2 million (for the three and six months
ended June 30, 2007 - $0.1 million and $0.2 million) of
loan origination costs, respectively, such that at June 30,
2008, $3.0 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 amendments to the bridge loan on May
23, 2008 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, during which time any
repayments made under either facility will not be subject
to a make-whole payment.
(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 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 six months ended June 30, 2008, the
Company received no loan advances (for the three and six
months ended June 30, 2007 - $2.5 million and $4.8
million), repaid outstanding principal of $0.1 million and
$0.1 million (for the three and six months ended June 30,
2007 - $0.1 million and $0.3 million), incurred interest
expense of $0.6 million and $1.3 million (for the three and
six months ended June 30, 2007 - $0.6 million and $1.1
million), and repaid interest of $0.6 million and $1.3
million (for the three and six months ended June 30, 2007 -
$0.6 million and $0.9 million), respectively, such that at
June 30, 2008, $24.6 million was outstanding under this
project financing arrangement, including $0.2 million of
accrued interest payable. In addition, for the three and
six months ended June 30, 2008, the Company amortized $0.2
million and $0.4 million (for the three and six months
ended June 30, 2007 - nominal amount and $0.1 million) of
loan origination costs, respectively, such that at June 30,
2008, no net 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 financing has a five-year term and
bears interest at a 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 six months ended June 30, 2008, the
Company received loan advances of $0.3 million and $0.7
million (for the three and six months ended June 30, 2007 -
$3.9 million and $11.9 million), repaid a nominal amount
and $0.1 million of outstanding principal (for the three
and six months ended June 30, 2007 - $0.1 million and $0.1
million), incurred interest expense of $0.4 million and
$0.7 million (for the three and six months ended June 30,
2007 - $0.2 million and $0.3 million, of which $0.1 million
was capitalized to the principal balance of the loan), and
repaid interest of $0.4 million and $0.7 million (for the
three and six months ended June 30, 2007 - $0.1 million and
$0.1 million), respectively, such that at June 30, 2008,
$14.6 million was outstanding under this project financing
arrangement, including $0.1 million of accrued interest
payable. In addition, for the three and six months ended
June 30, 2008, the Company amortized $0.1 million and $0.3
million (for the three and six months ended June 30, 2007 -
a nominal amount and $0.1 million) of loan origination
costs, respectively, such that at June 30, 2008, no net
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 six months ended June 30, 2008, the
Company received no loan advances and loan advances of $1.0
million (for the three and six months ended June 30, 2007 -
nil), repaid outstanding principal of $1.6 million and
$1.8 million (for the three and six months ended June 30,
2007 - $1.5 million and $1.9 million), incurred interest
expense of $0.7 million and $1.4 million (for the three and
six months ended June 30, 2007 - $0.8 million and $1.6
million), and repaid interest of $0.7 million and
$1.4 million (for the three and six months ended June 30,
2007 - $0.8 million and $1.3 million), respectively, such
that at June 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
six months ended June 30, 2008 and 2007, the Company
amortized a nominal amount and $0.1 million of loan
origination costs, respectively, such that at June 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 June 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
has a 50% joint venture equity interest, for Euros 0.8 million
(U.S. $1.2 million). The purchase price is payable in instalments
according to the sale of apartment units by the joint venture
and, in any event, is due no later than April 2, 2009. The
Company will recognize this consideration as payments are
received from the joint venture (refer to Note 16(b)).
(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. 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 of
approximately $17.7 million, net of tax, 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 six months ended June 30, 2008, the Company
incurred $0.7 million and $1.5 million (for the three and six
months ended June 30, 2007 - $0.9 million and $1.6 million) of
rent for facilities and central shared and other services to
Magna and its subsidiaries. At June 30, 2008, amounts due to
Magna and its subsidiaries totalled $1.2 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 $1.1 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 June 30, 2008, these indemnities amounted to $6.8 million with
expiration dates through 2009.
(f) Contractual commitments outstanding at June 30, 2008, which
related to construction and development projects, amounted to
approximately $1.2 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. The Company's
share of the required capital contributions to HRTV, LLC is
expected to be approximately $7.0 million of which $3.6 million
has been contributed to June 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 June 30, 2008, the carrying value of the fixed
assets related to the slots facility is approximately $27.0
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 June 30, 2008 has made equity contributions in the amount of
$4.2 million. At June 30, 2008, approximately $55.0 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 $3.0 million, as an obligation which is
included in "other accrued liabilities" on the accompanying
consolidated balance sheets. If the Company or Forest City fail
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 favour of the petitioners in part,
concluding that eleven parts of the final environmental impact
report were deficient. The Company and Caruso Affiliated are
working with the City of Arcadia to determine how to resolve the
deficiencies in the final environmental impact report.
Accordingly, development efforts may be delayed or suspended. To
June 30, 2008, the Company has expended approximately $10.2
million on these initiatives, of which $0.3 million was paid
during the six months ended June 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 June 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) The Maryland Jockey Club ("MJC") was party to agreements with the
Maryland Thoroughbred Horsemen's Association 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. Without arrangements similar in
effect to these agreements, costs are expected to increase by
approximately $2.0 million for the year ending December 31, 2008.
At this time, the Company is uncertain as to the renewal of these
agreements on comparable terms.
(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 have been served with the complaint.
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 six months ended June 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 Six months ended
June 30, June 30,
-------------------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Revenues
California operations $ 44,904 $ 48,908 $ 138,518 $ 159,746
Florida operations 26,568 21,096 102,547 98,556
Maryland operations 38,868 43,226 61,707 69,569
Southern U.S. operations 23,479 24,086 33,365 33,951
Northern U.S. operations 9,268 10,464 18,242 20,647
European operations 361 284 698 594
PariMax operations 22,199 22,597 43,171 44,500
---------------------------------------------------------------------
165,647 170,661 398,248 427,563
Corporate and other 76 56 139 106
Eliminations (2,796) (4,369) (8,099) (8,952)
---------------------------------------------------------------------
Total racing and gaming
operations 162,927 166,348 390,288 418,717
---------------------------------------------------------------------
Sale of real estate - - 1,492 -
Residential development
and other 3,355 1,058 5,478 2,891
---------------------------------------------------------------------
Total real estate and
other operations 3,355 1,058 6,970 2,891
---------------------------------------------------------------------
Total revenues $ 166,282 $ 167,406 $ 397,258 $ 421,608
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Earnings (loss) before
interest, income taxes,
depreciation and
amortization ("EBITDA")
California operations $ 3,539 $ 3,244 $ 16,192 $ 20,063
Florida operations (3,780) (6,275) 5,909 5,283
Maryland operations 5,594 9,829 3,938 9,791
Southern U.S. operations 3,625 3,515 3,115 3,130
Northern U.S. operations (261) (228) 725 (4)
European operations (45) (15) (68) (14)
PariMax operations 1,871 1,304 3,628 2,751
---------------------------------------------------------------------
10,543 11,374 33,439 41,000
Corporate and other (6,486) (6,754) (11,250) (11,857)
Predevelopment and other
costs (1,052) (867) (1,447) (1,372)
Recognition of deferred
gain on The Meadows
transaction - - 2,013 -
---------------------------------------------------------------------
Total racing and
gaming operations 3,005 3,753 22,755 27,771
---------------------------------------------------------------------
Residential development
and other 2,207 216 3,316 752
Write-down of
long-lived assets - - (5,000) -
---------------------------------------------------------------------
Total real estate and
other operations 2,207 216 (1,684) 752
---------------------------------------------------------------------
Total EBITDA $ 5,212 $ 3,969 $ 21,071 $ 28,523
---------------------------------------------------------------------
---------------------------------------------------------------------
Reconciliation of EBITDA to Net Loss
Three months ended June 30, 2008
---------------------------------------------------------------------
Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA from continuing
operations $ 3,005 $ 2,207 $ 5,212
Interest expense, net (16,448) (8) (16,456)
Depreciation and amortization (11,209) (7) (11,216)
---------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ (24,652) $ 2,192 (22,460)
Income tax expense 530
---------------------------------------------------------------------
Loss from continuing operations (22,990)
Income from discontinued operations 1,736
---------------------------------------------------------------------
Net loss $ (21,254)
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended June 30, 2007
---------------------------------------------------------------------
Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA from continuing
operations $ 3,753 $ 216 $ 3,969
Interest expense, net (11,096) (49) (11,145)
Depreciation and amortization (9,053) (8) (9,061)
---------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ (16,396) $ 159 (16,237)
Income tax expense 4,092
---------------------------------------------------------------------
Loss from continuing operations (20,329)
Loss from discontinued operations (3,108)
---------------------------------------------------------------------
Net loss $ (23,437)
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended June 30, 2008
---------------------------------------------------------------------
Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA (loss) from continuing
operations $ 22,755 $ (1,684) $ 21,071
Interest expense, net (32,478) (15) (32,493)
Depreciation and amortization (22,258) (14) (22,272)
---------------------------------------------------------------------
Loss from continuing operations
before income taxes $ (31,981) $ (1,713) (33,694)
Income tax expense 2,263
---------------------------------------------------------------------
Loss from continuing operations (35,957)
Loss from discontinued operations (31,757)
---------------------------------------------------------------------
Net loss $ (67,714)
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended June 30, 2007
---------------------------------------------------------------------
Racing and Real Estate
Gaming and Other
Operations Operations Total
---------------------------------------------------------------------
EBITDA from continuing
operations $ 27,771 $ 752 $ 28,523
Interest expense, net (22,430) (77) (22,507)
Depreciation and amortization (17,695) (16) (17,711)
---------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ (12,354) $ 659 (11,695)
Income tax expense 2,924
---------------------------------------------------------------------
Loss from continuing operations (14,619)
Loss from discontinued operations (6,349)
---------------------------------------------------------------------
Net loss $ (20,968)
---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, December 31,
2008 2007
---------------------------------------------------------------------
Total Assets
California operations $ 296,816 $ 320,781
Florida operations 365,631 358,907
Maryland operations 159,613 162,606
Southern U.S. operations 99,307 97,228
Northern U.S. operations 18,462 18,502
European operations 1,534 1,468
PariMax operations 41,727 43,717
---------------------------------------------------------------------
983,090 1,003,209
Corporate and other 56,164 59,590
---------------------------------------------------------------------
Total racing and gaming operations 1,039,254 1,062,799
---------------------------------------------------------------------
Residential development and other 6,045 5,214
---------------------------------------------------------------------
Total real estate and other operations 6,045 5,214
---------------------------------------------------------------------
Total assets from continuing operations 1,045,299 1,068,013
Total assets held for sale 27,343 40,140
Total assets of discontinued operations 115,738 135,723
---------------------------------------------------------------------
Total assets $ 1,188,380 $ 1,243,876
---------------------------------------------------------------------
---------------------------------------------------------------------
16. SUBSEQUENT EVENTS
(a) 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 either 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 MJC. At June 30, 2008, there
were no drawings on this facility. 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.
Also, in connection with the financial covenant breach at
June 30, 2008 relating to the term loan credit facilities with
the same U.S. financial institution (refer to Note 8(b)(ii)), a
waiver was obtained from the lender on August 5, 2008 for the
financial covenant breach at June 30, 2008 and the loan
facilities were amended to temporarily modify this financial
covenant at September 30, 2008.
(b) On August 1, 2008, one of the Company's European wholly-owned
subsidiaries, Fontana, completed the sale of 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 (refer to Note 13(c)) such that the purchase price
of Euros 0.8 million (U.S. $1.2 million) was accelerated and
becomes due and payable to Fontana on August 7, 2008.
(c) On July 30, 2008, the Company's $40.0 million senior secured
revolving credit facility with a Canadian financial institution
was extended from July 30, 2008 to August 15, 2008 (refer to Note
8(a)(i)).
(d) On July 16, 2008, the Company completed the sale of Great Lakes
Downs in Michigan to The Little River Band of Ottawa Indians for
$5.0 million cash less customary closing adjustments. The net
sale proceeds of approximately $4.5 million were used to repay a
portion of the bridge loan facility with a subsidiary of MID.
(e) On July 3, 2008, the Company's Board of Directors approved the
Reverse Stock Split, with an effective date of 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 twenty shares of
the Company's Class A Subordinate Voting Stock and Class B Stock
were consolidated into one share of Class A Subordinate Voting
Stock and Class B Stock, respectively. The Reverse Stock Split
affects all the Company's shares of common stock, stock options
and convertible securities outstanding prior to the effective
time of the Reverse Stock Split.
(f) 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 (7.8% at June 30, 2008). At
June 30, 2008, there was a nominal amount outstanding under this
bank term loan facility, which was fully repaid upon its expiry
on July 31, 2008.
DATASOURCE: 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