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