Exhibit 99.1
| Magna Entertainment Corp. 337 Magna Drive Aurora, Ontario, Canada L4G 7K1 Tel (905) 726-2462 Fax (905) 726-2585 |
PRESS RELEASE
MAGNA ENTERTAINMENT CORP.
ANNOUNCES RESULTS FOR THE FIRST QUARTER
ENDED MARCH 31, 2008
May 6, 2008, Aurora, Ontario, Canada......Magna Entertainment Corp. (“MEC”) (NASDAQ: MECA; TSX: MEC.A)
today reported its financial results for the first quarter ended March 31, 2008.
| | Three Months Ended
March 31, | |
| | 2008 | | 2007 | |
| | (unaudited) | |
| | | | | |
Revenues(i) | | $ | 230,976 | | $ | 254,202 | |
| | | | | |
Earnings before interest, taxes, depreciation and amortization (“EBITDA”)(i)(iii) | | $ | 15,859 | | $ | 24,554 | |
| | | | | |
Net income (loss) | | | | | |
Continuing operations(iii) | | $ | (12,967 | ) | $ | 5,710 | |
Discontinued operations(ii)(iii) | | (33,493 | ) | (3,241 | ) |
Net income (loss) | | $ | (46,460 | ) | $ | 2,469 | |
| | | | | |
Diluted earnings (loss) per share | | | | | |
Continuing operations(iii) | | $ | (0.11 | ) | $ | 0.05 | |
Discontinued operations(ii)(iii) | | (0.29 | ) | (0.03 | ) |
Diluted earnings (loss) per share | | $ | (0.40 | ) | $ | 0.02 | |
(i) | Revenues and EBITDA for all periods presented are from continuing operations only. |
| | |
(ii) | Discontinued operations for the three months ended March 31, 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 RacinoTM in Austria. |
| | |
(iii) | EBITDA, net loss and diluted loss per share from continuing operations for the three months ended March 31, 2008 includes 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 three months ended March 31, 2008 includes write-downs of $29.2 million related to Magna RacinoTM long-lived assets and $3.1 million related to Instant Racing terminals and the associated facility at Portland Meadows. |
All amounts are reported in U.S. dollars in thousands, except per share figures.
1
Frank Stronach, MEC’s Chairman and Interim Chief Executive Officer commented: “We are very disappointed with our first quarter operating results, some of which can be attributed to weather and track drainage issues at Santa Anita Park beyond our control, and some of which reflect short-term disruptions as we continue to build out our Gulfstream Park commercial joint venture with Forest City. I remain fully committed to implementing the Company’s previously announced debt elimination plan, and to seeing the operating results dramatically improved. I remain optimistic about MEC’s medium term prospects”.
Blake Tohana, MEC’s Executive Vice-President and Chief Financial Officer, commented: “Although the weak U.S. real estate and credit markets have slowed our progress to date on asset sales, we remain firmly committed to our debt elimination plan. In April 2008, we completed the sale of 225 acres of excess real estate located in Ebreichsdorf, Austria to a subsidiary of Magna International Inc. for a purchase price of Euros 20.0 million (U.S. $31.6 million). In January 2008, we sold our remaining two parcels of excess real estate located in Porter, New York for cash consideration of $1.5 million. The net proceeds received from these transactions were used entirely to repay debt.”
While the first quarter is typically our most profitable quarter because two of our largest racetracks, Santa Anita Park and Gulfstream Park, run live race meets principally during this period, our results for the first quarter of 2008 were negatively impacted by a number of factors, including: a net loss of eight live race days at Santa Anita Park as a result of heavy rains and track drainage issues affecting the new synthetic racetrack surface, underperformance at Gulfstream Park as a result of increased operating costs, decreased attendance and live handle due in part to a perceived parking disruption at the facility and heavy rains which caused the cancellation of turf racing on 21 live race days during the quarter and write-downs of long-lived assets totaling $37.3 million relating to the Dixon, California real estate property, Magna Racino™ and the Portland Meadows Instant Racing terminals and facilities.
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 $231.0 million for the three months ended March 31, 2008, a decrease of $23.2 million or 9.1% compared to $254.2 million for the three months ended March 31, 2007. The decreased revenues from continuing operations were primarily due to:
· California revenues below the prior year period by $17.2 million due to the net loss of eight 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. In addition, Golden Gate Fields ran one less live race day in the three months ended March 31, 2008 compared to the prior year period;
· Maryland revenues below the prior year period by $3.5 million due to 12 fewer live race days and decreased average daily attendance and handle at Laurel Park;
· Florida revenues below the prior year period by $1.5 million primarily due to decreased attendance and live handle at Gulfstream Park due in part to a perceived parking disruption at the facility and heavy rain, which resulted in the cancellation of racing on the turf course on 21 live race days in the three months ended March 31, 2008. Races run on turf courses typically generate higher levels of wagering; and
· Northern U.S. revenues below the prior year period by $1.2 million primarily due to 13 fewer live race days at The Meadows;
partially offset by:
· Real estate and other operations revenues above the prior year period by $1.8 million as the first quarter of 2008 includes $1.5 million of revenues related to the sale of two parcels of land in Porter, New York and increased housing unit sales at our European residential housing development in the three months ended March 31, 2008 compared to the three months ended March 31, 2007.
EBITDA from continuing operations was $15.9 million for the three months ended March 31, 2008, a decrease of $8.7 million or 35.4% compared to $24.6 million for the three months ended March 31, 2007. The decreased EBITDA from continuing operations was primarily due to:
· A write-down of long-lived assets of $5.0 million recognized in the first quarter of 2008 related to our Dixon, California real estate property;
· California operations below the prior year period by $4.2 million for the same reasons noted above which impacted California revenues;
· Florida operations below the prior year period by $1.9 million primarily due to decreased attendance and live handle at Gulfstream Park for the same reasons noted above which impacted revenues at Gulfstream Park and increased marketing costs and property taxes at Gulfstream Park; and
· Maryland operations below the prior year period by $1.6 million for the same reasons noted above which impacted Maryland revenues and the impact related to the expiry of agreements on December 31, 2007 with the Maryland Thoroughbred Horsemen’s Association and the Maryland Breeders’ Association, under which the horsemen and breeders each contributed 4.75% of the costs of simulcasting to The Maryland Jockey Club;
partially offset by:
2
· Recognition of $2.0 million of deferred gain on The Meadows transaction. On closing of the sale of The Meadows in November 2006, we deferred $5.6 million of the transaction gain related to the estimated future operating losses over the term of the racing services agreement that we entered into simultaneously with the closing of the sale transaction. Effective January 1, 2008, The Meadows entered into a new operating agreement with The Meadows Standardbred Owners Association, which expires on December 31, 2009 and is expected to reduce the operating losses at The Meadows over the term of the new agreement. Accordingly, the Company revised its estimate of the operating losses expected over the remaining term of the racing services agreement, which resulted in $2.0 million of previously deferred gain being recognized in income for the three months ended March 31, 2008.
During the three months ended March 31, 2008, cash used in continuing operations was $3.6 million, which improved $12.4 million from cash used in continuing operations of $16.0 million in the three months ended March 31, 2007, primarily due to the increased loss from continuing operations being more than offset by increased depreciation, future tax expense and the write-down of long-lived assets and decreased balances relating to due from parent and other accrued liabilities relative to the prior year period. Cash used for investing activities in the three months ended March 31, 2008 was $8.3 million, including $10.5 million of real estate property and fixed asset additions and $1.4 million of other asset additions, partially offset by $3.5 million of proceeds on the sale of real estate properties and fixed assets. Cash provided from financing activities during the three months ended March 31, 2008 of $16.9 million includes net borrowings of $16.9 million from our controlling shareholder and $0.5 million from bank indebtedness, partially offset by net repayments of $0.5 million of long-term debt. Although we continue to implement our debt elimination plan, the sale of assets under the debt elimination plan is taking longer than originally contemplated and, as a result, we will likely 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 or additional funds is not assured and, if available, the terms thereof are not determinable at this time.
We will hold a conference call to discuss our first quarter results on Tuesday, May 6, 2008 at 3:00 p.m. EST. The number to use for this call is 1-800-732-5617. Please call 10 minutes prior to the start of the conference call. The dial-in number for overseas callers is 212-231-2901. We will also web cast the conference call at www.magnaentertainment.com. If you have any teleconferencing questions, please call Karen Richardson at 905-726-7465.
MEC, North America’s largest owner and operator of horse racetracks, based on revenue, acquires, 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®, a national Internet and telephone account wagering system, as well as MagnaBet™ internationally. Pursuant to joint ventures, MEC has a fifty percent interest in HorseRacing TV®, a 24-hour horse racing television network and TrackNet Media Group, LLC, a content management company formed to distribute the full breadth of MEC’s horse racing content.
This press release contains “forward-looking statements” within the meaning of applicable securities legislation, including Section 27A of the United States Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”) and forward-looking information as defined in the Securities Act (Ontario) (collectively referred to as forward-looking statements). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and the Securities Act (Ontario) and include, among others, statements regarding: the current status and the potential impact of the debt elimination plan on our debt reduction efforts, as to which there can be no assurance of success; expectations as to our ability to complete asset sales at the appropriate prices and in a timely manner; the impact of the bridge loan facility; expectations as to our ability to comply with the bridge loan and other credit facilities; 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.
3
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 able to successfully implement our debt elimination plan and comply with the terms of and/or obtain waivers or other concessions from our lenders and refinance or repay upon maturity our existing financing arrangements (including our short-term bridge loan with a subsidiary of MID and our senior secured revolving credit facility with a Canadian financial institution), and there will not be any material adverse changes in: general economic conditions; the popularity of horse racing and other gaming activities; weather and other environmental conditions at our facilities; the regulatory environment; and our ability to develop, execute or finance our strategies and plans as anticipated.
Forward-looking statements speak only as of the date the statements were made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
For more information contact:
Blake Tohana
Executive Vice-President
and Chief Financial Officer
Magna Entertainment Corp.
337 Magna Drive
Aurora, ON L4G 7K1
Tel: 905-726-7493
4
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
[Unaudited]
[U.S. dollars in thousands, except per share figures]
| | Three months ended | |
| | March 31, | |
| | 2008 | | 2007 | |
| | (restated-note 5) | |
Revenues | | | | | |
Racing and gaming | | | | | |
Pari-mutuel wagering | | $ | 182,893 | | $ | 202,338 | |
Gaming | | 13,637 | | 13,665 | |
Non-wagering | | 30,831 | | 36,366 | |
| | 227,361 | | 252,369 | |
Real estate and other | | | | | |
Sale of real estate | | 1,492 | | — | |
Residential development and other | | 2,123 | | 1,833 | |
| | 3,615 | | 1,833 | |
| | 230,976 | | 254,202 | |
| | | | | |
Costs, expenses and other income | | | | | |
Racing and gaming | | | | | |
Pari-mutuel purses, awards and other | | 112,028 | | 126,749 | |
Gaming purses, taxes and other | | 9,200 | | 9,663 | |
Operating costs | | 73,185 | | 76,455 | |
General and administrative | | 13,980 | | 14,654 | |
| | 208,393 | | 227,521 | |
Real estate and other | | | | | |
Cost of real estate sold | | 1,492 | | — | |
Operating costs | | 879 | | 1,118 | |
General and administrative | | 135 | | 179 | |
| | 2,506 | | 1,297 | |
Predevelopment and other costs | | 395 | | 505 | |
Depreciation and amortization | | 11,056 | | 8,650 | |
Interest expense, net | | 16,037 | | 11,362 | |
Write-down of long-lived assets | | 5,000 | | — | |
Equity loss | | 836 | | 325 | |
Recognition of deferred gain on The Meadows transaction | | (2,013 | ) | — | |
| | 242,210 | | 249,660 | |
Income (loss) from continuing operations before income taxes | | (11,234 | ) | 4,542 | |
Income tax expense (benefit) | | 1,733 | | (1,168 | ) |
Income (loss) from continuing operations | | (12,967 | ) | 5,710 | |
Loss from discontinued operations | | (33,493 | ) | (3,241 | ) |
Net income (loss) | | (46,460 | ) | 2,469 | |
Other comprehensive income (loss) | | | | | |
Foreign currency translation adjustment | | 2,489 | | 746 | |
Change in fair value of interest rate swap | | (616 | ) | (101 | ) |
Comprehensive income (loss) | | $ | (44,587 | ) | $ | 3,114 | |
| | | | | |
Earnings (loss) per share for Class A Subordinate Voting Stock and Class B Stock: | | | | | |
Basic and Diluted | | | | | |
Continuing operations | | $ | (0.11 | ) | $ | 0.05 | |
Discontinued operations | | (0.29 | ) | (0.03 | ) |
Earnings (loss) per share | | $ | (0.40 | ) | $ | 0.02 | |
| | | | | |
Average number of shares of Class A Subordinate Voting Stock and Class B Stock outstanding during the period [in thousands]: | | | | | |
Basic | | 116,625 | | 107,560 | |
Diluted | | 116,625 | | 137,813 | |
See accompanying notes
5
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
[U.S. dollars in thousands]
| | Three months ended | |
| | March 31, | |
| | 2008 | | 2007 | |
| | (restated-note 5) | |
Cash provided from (used for): | | | | | |
| | | | | |
Operating activities of continuing operations: | | | | | |
Income (loss) from continuing operations | | $ | (12,967 | ) | $ | 5,710 | |
Items not involving current cash flows | | 17,075 | | 8,382 | |
| | 4,108 | | 14,092 | |
Changes in non-cash working capital balances | | (7,685 | ) | (30,110 | ) |
| | (3,577 | ) | (16,018 | ) |
| | | | | |
Investing activities of continuing operations: | | | | | |
Real estate property and fixed asset additions | | (10,488 | ) | (13,349 | ) |
Other asset additions | | (1,376 | ) | (1,052 | ) |
Proceeds on disposal of real estate properties | | 1,492 | | — | |
Proceeds on disposal of fixed assets | | 2,054 | | 1,640 | |
Proceeds on real estate sold to parent | | — | | 64,246 | |
| | (8,318 | ) | 51,485 | |
| | | | | |
Financing activities of continuing operations: | | | | | |
Proceeds from bank indebtedness | | 23,127 | | 15,000 | |
Proceeds from indebtedness and long-term debt with parent | | 19,074 | | 9,927 | |
Proceeds from long-term debt | | 2,731 | | 275 | |
Repayment of bank indebtedness | | (22,594 | ) | (6,515 | ) |
Repayment of indebtedness and long-term debt with parent | | (2,216 | ) | (1,680 | ) |
Repayment of long-term debt | | (3,186 | ) | (13,605 | ) |
| | 16,936 | | 3,402 | |
| | | | | |
Effect of exchange rate changes on cash and cash equivalents | | 57 | | (105 | ) |
Net cash flows provided from continuing operations | | 5,098 | | 38,764 | |
| | | | | |
Cash provided from (used for) discontinued operations: | | | | | |
Operating activities of discontinued operations | | (1,162 | ) | (450 | ) |
Investing activities of discontinued operations | | (908 | ) | (675 | ) |
Financing activities of discontinued operations | | 668 | | (20,099 | ) |
Net cash flows used for discontinued operations | | (1,402 | ) | (21,224 | ) |
| | | | | |
Net increase in cash and cash equivalents during the period | | 3,696 | | 17,540 | |
Cash and cash equivalents, beginning of period | | 43,393 | | 58,291 | |
Cash and cash equivalents, end of period | | 47,089 | | 75,831 | |
Less: cash and cash equivalents, end of period of discontinued operations | | (9,631 | ) | (11,777 | ) |
Cash and cash equivalents, end of period of continuing operations | | $ | 37,458 | | $ | 64,054 | |
See accompanying notes
6
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
[REFER TO NOTE 1 – GOING CONCERN]
[Unaudited]
[U.S. dollars and share amounts in thousands]
| | March 31, | | December 31, | |
| | 2008 | | 2007 | |
| | (restated-notes 4 & 5) | |
ASSETS | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 37,458 | | $ | 34,152 | |
Restricted cash | | 25,657 | | 28,264 | |
Accounts receivable | | 56,401 | | 32,157 | |
Due from parent | | 1,173 | | 4,463 | |
Income taxes receivable | | — | | 1,234 | |
Inventories | | 5,682 | | 6,351 | |
Prepaid expenses and other | | 14,828 | | 9,946 | |
Assets held for sale | | 34,482 | | 35,658 | |
Discontinued operations | | 111,197 | | 75,455 | |
| | 286,878 | | 227,680 | |
Real estate properties, net | | 705,949 | | 705,069 | |
Fixed assets, net | | 83,443 | | 85,908 | |
Racing licenses | | 109,868 | | 109,868 | |
Other assets, net | | 7,746 | | 10,980 | |
Future tax assets | | 39,207 | | 39,621 | |
Assets held for sale | | — | | 4,482 | |
Discontinued operations | | — | | 60,268 | |
| | $ | 1,233,091 | | $ | 1,243,876 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
Current liabilities: | | | | | |
Bank indebtedness | | $ | 39,747 | | $ | 39,214 | |
Accounts payable | | 73,120 | | 65,351 | |
Accrued salaries and wages | | 9,768 | | 8,198 | |
Customer deposits | | 2,923 | | 2,575 | |
Other accrued liabilities | | 43,161 | | 46,124 | |
Income taxes payable | | 559 | | — | |
Long-term debt due within one year | | 9,405 | | 10,654 | |
Due to parent | | 155,851 | | 137,003 | |
Deferred revenue | | 6,683 | | 4,339 | |
Liabilities related to assets held for sale | | 876 | | 1,047 | |
Discontinued operations | | 94,423 | | 75,396 | |
| | 436,516 | | 389,901 | |
Long-term debt | | 90,676 | | 89,680 | |
Long-term debt due to parent | | 67,416 | | 67,107 | |
Convertible subordinated notes | | 222,799 | | 222,527 | |
Other long-term liabilities | | 16,877 | | 18,255 | |
Future tax liabilities | | 80,637 | | 80,076 | |
Discontinued operations | | — | | 13,617 | |
| | 914,921 | | 881,163 | |
| | | | | |
Shareholders’ equity: | | | | | |
Class A Subordinate Voting Stock | | | | | |
(Issued: 2008 and 2007 – 58,159) | | 339,435 | | 339,435 | |
Class B Stock | | | | | |
(Convertible into Class A Subordinate Voting Stock) | | | | | |
(Issued: 2008 and 2007 – 58,466) | | 394,094 | | 394,094 | |
Contributed surplus | | 91,825 | | 91,825 | |
Other paid-in-capital | | 2,075 | | 2,031 | |
Accumulated deficit | | (556,517 | ) | (510,057 | ) |
Accumulated comprehensive income | | 47,258 | | 45,385 | |
| | 318,170 | | 362,713 | |
| | $ | 1,233,091 | | $ | 1,243,876 | |
See accompanying notes
7
MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
[All amounts in U.S. dollars unless otherwise noted and all tabular amounts in thousands, except per share figures]
1. GOING CONCERN
These consolidated financial statements of Magna Entertainment Corp. (“MEC” or the “Company”) have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The Company has incurred a net loss of $46.5 million for the three months ended March 31, 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 March 31, 2008 has an accumulated deficit of $556.5 million and a working capital deficiency of $149.6 million. At March 31, 2008, the Company had $229.1 million of debt due to mature in the 12-month period ending March 31, 2009, including amounts owing under the Company’s $40.0 million senior secured revolving credit facility with a Canadian financial institution, which is scheduled to mature on May 23, 2008, amounts owing under its bridge loan facility of up to $80.0 million with a subsidiary of MI Developments Inc. (“MID”), the Company’s controlling shareholder, which is scheduled to mature on May 31, 2008, and the Company’s obligation to repay $100.0 million of indebtedness under the Gulfstream Park project financings with a subsidiary of MID by May 31, 2008. Accordingly, the Company’s ability to continue as a going concern is in substantial doubt and is dependent on the Company generating cash flows that are adequate to sustain the operations of the business, renewing or extending current financing arrangements and meeting its obligations with respect to secured and unsecured creditors, none of which is assured. If the Company is unable to repay its obligations when due or meet 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 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. The success of the debt elimination plan is not assured. 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 Interim 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. Although the Company continues to implement its debt elimination plan, the sale of assets under the debt elimination plan is taking longer than originally contemplated. As a result, the Company will likely need to seek additional funds in the short-term from one or more possible sources. The availability of such 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.
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.
8
Comparative Amounts
Certain of the comparative amounts have been reclassified to reflect discontinued operations and assets held for sale.
Impact of Recently Adopted Accounting Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 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 No. 157-2, Effective Date of FASB Statement No. 157, which defers the effective date of SFAS 157 for non-financial assets and liabilities, except for items that are recognised or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. Effective January 1, 2008, the Company adopted the provisions of SFAS 157 prospectively, except with respect to certain non-financial assets and liabilities which have been deferred. The adoption of SFAS 157 did not have a material effect on the Company’s consolidated financial statements.
The following table represents information related to the Company’s financial 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 March 31, 2008:
| | Quoted Prices in Active
Markets for Identical
Assets or Liabilities
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable Inputs
(Level 3) | |
Assets carried at fair value: | | | | | | | |
Cash equivalents | | $ | 1,700 | | $ | — | | $ | — | |
| | | | | | | |
Liabilities carried at fair value: | | | | | | | |
Interest rate swaps | | $ | — | | $ | 2,343 | | $ | — | |
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Liabilities (“SFAS 159”). SFAS 159 allows companies to voluntarily choose, at specified election dates, to measure certain financial assets and liabilities, as well as certain non-financial instruments that are similar to financial instruments, at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS 159 specifies that all subsequent changes in fair value for that instrument be reported in income. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. Effective January 1, 2008, the Company adopted the provisions of SFAS 159 prospectively. The Company has elected not to measure certain financial assets and liabilities, as well as certain non-financial instruments that are similar to financial instruments, as defined in SFAS 159 under the fair value option. Accordingly, the adoption of SFAS 159 did not have an effect on the Company’s consolidated financial statements.
Impact of Recently Issued Accounting Standards
In December 2007, the FASB issued Statement of Financial Accounting Standard No. 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 No. 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.
9
3. THE MEADOWS TRANSACTION
On November 14, 2006, the Company completed the sale of all of the outstanding shares of Washington Trotting Association, Inc., Mountain Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc. (collectively “The Meadows”), each a wholly-owned subsidiary of the Company, through which the Company owned and operated The Meadows, a standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc., and a fund managed by Oaktree Capital Management, LLC (“Oaktree” and together, with PA Meadows, LLC, “Millennium-Oaktree”). On closing, the Company received cash consideration of $171.8 million, net of transaction costs of $3.2 million, and a holdback agreement, under which $25.0 million is payable to the Company over a five-year period, subject to offset for certain indemnification obligations. Under the terms of the holdback agreement, the Company agreed to release the security requirement for the holdback amount, defer subordinate payments under the holdback, defer receipt of holdback payments until the opening of the permanent casino at The Meadows and defer receipt of holdback payments to the extent of available cash flows as defined in the holdback agreement, in exchange for Millennium-Oaktree providing an additional $25.0 million of equity support for PA Meadows, LLC. The Company also entered into a racing services agreement whereby the Company pays $50 thousand per annum and continues to operate, for its own account, the racing operations at The Meadows for at least five years. On December 12, 2007, Cannery Casino Resorts, LLC, the parent company of Millennium-Oaktree, announced it had entered into an agreement to sell Millennium-Oaktree to Crown Limited. If the deal is consummated, either party to the racing services agreement will have the option to terminate the arrangement. The transaction proceeds of $171.8 million were allocated to the assets of The Meadows as follows: (i) $7.2 million was allocated to the long-lived assets representing the fair value of the underlying real estate and fixed assets based on appraised values; and (ii) $164.6 million was allocated to the intangible assets representing the fair value of the racing/gaming licenses based on applying the residual method to determine the fair value of the intangible assets. On the closing date of the transaction, the net book value of the long-lived assets was $18.4 million, resulting in a non-cash impairment loss of $11.2 million relating to the long-lived assets, and the net book value of the intangible assets was $32.6 million, resulting in a gain of $132.0 million on the sale of the intangible assets. This gain was reduced by $5.6 million, representing the net estimated present value of the operating losses expected over the term of the racing services agreement. Accordingly, the net gain recognized by the Company on the disposition of the intangible assets was $126.4 million for the year ended December 31, 2006.
Given that the racing services agreement was effectively a lease of property, plant and equipment and since the amount owing under the holdback note is to be paid to the extent of available cash flows as defined in the holdback agreement, the Company was deemed to have continuing involvement with the long-lived assets for accounting purposes. As a result, the sale of The Meadows’ real estate and fixed assets was precluded from sales recognition and not accounted for as a sale-leaseback, but rather using the financing method of accounting under U.S. GAAP. Accordingly, $12.8 million of the proceeds were deferred, representing the fair value of long-lived assets of $7.2 million and the net present value of the operating losses expected over the term of the racing services agreement of $5.6 million, and recorded as “other long-term liabilities” on the consolidated balance sheet at the date of completion of the transaction. The deferred proceeds are being recognized in the consolidated statements of operations and comprehensive income (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 months ended March 31, 2008 and 2007, the Company recognized $0.1 million and $0.4 million, respectively, of the deferred proceeds in income, which is recorded as an offset to racing and gaming “general and administrative” expenses on the accompanying consolidated statements of operations and comprehensive income (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 three months ended March 31, 2008. At March 31, 2008, the remaining balance of the deferred proceeds is $8.9 million. With respect to the $25.0 million holdback agreement, the Company will recognize this consideration upon the settlement of the indemnification obligations and as payments are received (refer to Note 14[k]).
4. ASSETS HELD FOR SALE
[a] | In November and December 2007, the Company entered into sale agreements for three parcels of excess real estate comprising approximately 825 acres in Porter, New York, subject to the completion of due diligence by the purchasers and customary closing conditions. The sale of one parcel was completed in December 2007 for cash consideration of $0.3 million, net of transaction costs, and the sales of the remaining two parcels were completed in January 2008 for total cash consideration of $1.5 million, net of transaction costs. The two parcels of excess real estate for which the sales were completed in January 2008 have been reflected as “assets held for sale” on the consolidated balance sheet at December 31, 2007. The net proceeds received on closing were used to repay a portion of the bridge loan facility of up to $80.0 million with a subsidiary of MID during the three months ended March 31, 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. $31.6 million). 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 of up to $80.0 million with a subsidiary of MID. |
10
[c] | On August 9, 2007, the Company announced its intention to sell real estate properties located in Dixon, California and Ocala, Florida. In addition, in March 2008, the Company committed to a plan to sell excess real estate located in Oberwaltersdorf, Austria. The Company has initiated an active program to locate potential buyers for these properties and has listed the properties for sale with a real estate broker. Accordingly, at March 31, 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 No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS 144”). In accordance with the terms of the Company’s bridge loan agreement with a subsidiary of MID, the Company is required to use the net proceeds from the sale of these real estate properties to pay down principal amounts outstanding under the bridge loan and the amount of such net proceeds will permanently reduce the committed amount of the bridge loan. |
| |
[d] | The Company’s assets held for sale and related liabilities at March 31, 2008 and December 31, 2007 are shown below. All assets held for sale and related liabilities are classified as current at March 31, 2008 as the assets and related liabilities described in sections [a] through [c] above have been or are expected to be sold within one year from the consolidated balance sheet date. |
| | March 31, | | December 31, | |
| | 2008 | | 2007 | |
ASSETS | |
Real estate properties, net | | | | | |
Dixon, California (refer to Note 6) | | $ | 14,139 | | $ | 19,139 | |
Ocala, Florida | | 8,407 | | 8,407 | |
Ebreichsdorf, Austria | | 7,135 | | 6,619 | |
Oberwaltersdorf, Austria | | 4,801 | | — | |
Porter, New York | | — | | 1,493 | |
| | 34,482 | | 35,658 | |
Oberwaltersdorf, Austria | | — | | 4,482 | |
| | $ | 34,482 | | $ | 40,140 | |
| | | | | |
LIABILITIES | |
Future tax liabilities | | $ | 876 | | $ | 1,047 | |
[e] 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 [c] 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 Great Lakes Downs in Michigan, Thistledown in Ohio, and its interest in Portland Meadows in Oregon. 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 [c] 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 March 31, 2008:
· Real estate properties located in Aventura and Hallandale, Florida (adjacent to Gulfstream Park): At March 31, 2008, the Company had not established a selling price for these properties since it had not completed its market price analysis. Also, 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 March 31, 2008, the Company had not established a selling price for this property since it had not completed its market price analysis. Also, 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 on the Company’s development plans for the overall property is such that at March 31, 2008, the Company does not expect to complete the sale of this asset within one year.
11
· 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 March 31, 2008, the Company had not established a selling price for either of these assets since it had not completed its market analysis and independent appraisal process. As such, these assets were not being actively marketed for sale at a price that is reasonable in relation to their current fair value.
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 March 31, 2008 and have been presented accordingly:
· Great Lakes Downs: In October 2007, the property was listed for sale with a real estate broker. The 2007 race meet at Great Lakes Downs concluded on November 4, 2007 and the facility was then closed. In order to facilitate the sale of this property, the Company re-acquired Great Lakes Downs from Richmond Racing Co., LLC in December 2007 pursuant to a prior existing option right.
· 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.
· Portland Meadows: In November 2007, the Company initiated an active program to locate potential buyers and began marketing this asset for sale.
[f] | The Company owns Magna Racino™, a horse racetrack and associated entertainment facility in Ebreichsdorf, Austria. In March 2008, the Company committed to a plan to sell Magna Racino™. The Company has initiated an active program to locate potential buyers and began marketing the assets for sale. As a result, these assets have met the criteria of SFAS 144 to be reflected as discontinued operations at March 31, 2008 and have been presented accordingly. |
5. DISCONTINUED OPERATIONS
[a] As part of the debt elimination plan approved by the Board of Directors (refer to Note 4[e]), the Company intends to sell Great Lakes Downs in Michigan, Thistledown in Ohio, Portland Meadows in Oregon and Remington Park in Oklahoma City. In addition, the Company intends to sell Magna Racino™ (refer to Note 4[f]). Accordingly, at March 31, 2008, these operations have been classified as discontinued operations.
[b] The Company’s results of operations related to discontinued operations for the three months ended March 31, 2008 and 2007 are as follows:
| | Three months ended | |
| | March 31, | |
| | 2008 | | 2007 | |
Results of Operations | | | | | |
Revenues | | $ | 29,755 | | $ | 29,972 | |
Costs and expenses | | 29,115 | | 30,285 | |
| | 640 | | (313 | ) |
Predevelopment and other costs | | 154 | | 25 | |
Depreciation and amortization | | 605 | | 1,764 | |
Interest expense, net | | 1,080 | | 1,139 | |
Write-down of long-lived assets (refer to Note 6) | | 32,294 | | — | |
Loss from discontinued operations | | $ | (33,493 | ) | $ | (3,241 | ) |
12
The Company’s assets and liabilities related to discontinued operations at March 31, 2008 and December 31, 2007 are shown below. All assets and liabilities related to discontinued operations are classified as current at March 31, 2008 as they are expected to be sold within one year from the consolidated balance sheet date.
| | March 31, | | December 31, | |
| | 2008 | | 2007 | |
ASSETS | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 9,631 | | $ | 9,241 | |
Restricted cash | | 12,092 | | 7,069 | |
Accounts receivable | | 3,842 | | 6,602 | |
Inventories | | 440 | | 426 | |
Prepaid expenses and other | | 2,385 | | 1,386 | |
Real estate properties, net | | 58,122 | | 39,094 | |
Fixed assets, net | | 11,032 | | 11,531 | |
Other assets, net | | 106 | | 106 | |
Future tax assets | | 13,547 | | — | |
| | 111,197 | | 75,455 | |
Real estate properties, net | | — | | 41,941 | |
Fixed assets, net | | — | | 4,764 | |
Other assets, net | | — | | 16 | |
Future tax assets | | — | | 13,547 | |
| | — | | 60,268 | |
| | $ | 111,197 | | $ | 135,723 | |
| | | | | |
LIABILITIES | |
Current liabilities: | | | | | |
Accounts payable | | $ | 12,936 | | $ | 9,146 | |
Accrued salaries and wages | | 1,428 | | 946 | |
Other accrued liabilities | | 9,930 | | 11,354 | |
Income taxes payable | | 3,436 | | 3,182 | |
Long-term debt due within one year | | 23,664 | | 22,096 | |
Due to parent (refer to Note 13[a][v]) | | 417 | | 397 | |
Deferred revenue | | 1,209 | | 1,257 | |
Long-term debt | | 91 | | 115 | |
Long-term debt due to parent (refer to Note 13[a][v]) | | 26,857 | | 26,143 | |
Other long-term liabilities | | 908 | | 760 | |
Future tax liabilities | | 13,547 | | — | |
| | 94,423 | | 75,396 | |
Other long-term liabilities | | — | | 70 | |
Future tax liabilities | | — | | 13,547 | |
| | — | | 13,617 | |
| | $ | 94,423 | | $ | 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 | |
| | March 31, | |
| | 2008 | | 2007 | |
Assets held for sale | | | | | |
Dixon, California real estate (i) | | $ | 5,000 | | $ | — | |
| | | | | |
Discontinued operations | | | | | |
Magna Racino™ (ii) | | $ | 29,195 | | $ | — | |
Portland Meadows (iii) | | 3,099 | | — | |
| | $ | 32,294 | | $ | — | |
13
(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 three months ended March 31, 2008, which represents the excess of the carrying value of the asset over the estimated fair value less selling costs. The impairment charge is included in the real estate and other operations segment. |
| |
(ii) | As a result of the classification of Magna Racino™ as discontinued operations at March 31, 2008, the Company recorded an impairment charge of $29.2 million in the three months ended March 31, 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 income (loss). |
| |
(iii) | In June 2003, the Oregon Racing Commission (“ORC”) adopted regulations that permitted wagering through Instant Racing terminals as a form of pari-mutuel wagering at Portland Meadows (the “Instant Racing Rules”). In September 2006, the ORC granted a request by Portland Meadows to offer Instant Racing under its 2006-2007 race meet license. In June 2007, the ORC, acting under the advice of the Oregon Attorney General, temporarily suspended and began proceedings to repeal the Instant Racing Rules. In September 2007, the ORC denied a request by Portland Meadows to offer Instant Racing under its 2007-2008 race meet license. In response to this denial, the Company requested the holding of a contested case hearing, which took place in January 2008. On February 27, 2008, the Office of Administrative Hearings released a proposed order in the Company’s favor approving Instant Racing as a legal wager at Portland Meadows. However, on April 25, 2008, the ORC issued an order rejecting that recommendation. Based on the ORC’s order to reject the Office of Administrative Hearings’ recommendation, the Company recorded an impairment charge of $3.1 million related to the Instant Racing terminals and build-out of the Instant Racing facility in the three months ended March 31, 2008, which is included in discontinued operations on the consolidated statements of operations and comprehensive income (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 income (loss) from continuing operations before income taxes for the three months ended March 31, 2008 and 2007, resulting in an income tax expense of $1.7 million for the three months ended March 31, 2008 and an income tax benefit of $1.2 million for the three months ended March 31, 2007. The income tax expense for the three months ended March 31, 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 benefit for the three months ended March 31, 2007 primarily represents losses benefited in certain U.S. operations that were not included in the Company’s U.S. consolidated income tax return.
8. BANK INDEBTEDNESS
The Company’s bank indebtedness consists of the following short-term bank loans:
| | March 31, | | December 31, | |
| | 2008 | | 2007 | |
$40.0 million senior secured revolving credit facility (i) | | $ | 34,891 | | $ | 34,891 | |
$7.5 million revolving loan facility (ii) | | 2,702 | | 3,499 | |
$3.0 million revolving credit facility (iii) | | 2,154 | | 824 | |
| | $ | 39,747 | | $ | 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 March 31, 2008, but was extended to April 30, 2008 (refer to Note 16[a]). 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 March 31, 2008, the Company had borrowings of $34.9 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 $1.7 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 March 31, 2008 was 8.7% (December 31, 2007 – 11.0%).
At March 31, 2008, the Company was not in compliance with one of the financial covenants contained in the credit agreement. A waiver was obtained from the lender on April 30, 2008 for the financial covenant breach at March 31, 2008.
14
(ii) A wholly-owned subsidiary of the Company that owns and operates Santa Anita Park has a $7.5 million revolving loan agreement under its existing credit facility with a U.S. financial institution, which matures on October 31, 2012. The revolving loan agreement requires that the aggregate outstanding principal be fully repaid for a period of 60 consecutive days during each year, is guaranteed by the Company’s wholly-owned subsidiary, the Los Angeles Turf Club, Incorporated (“LATC”) and is secured by a first deed of trust on Santa Anita Park and the surrounding real property, an assignment of the lease between LATC, the racetrack operator, and The Santa Anita Companies, Inc. (“SAC”) and a pledge of all of the outstanding capital stock of LATC and SAC. At March 31, 2008, the Company had borrowings of $2.7 million (December 31, 2007 – $3.5 million) under the revolving loan agreement. Borrowings under the revolving loan agreement bear interest at the U.S. prime rate. The weighted average interest rate on the borrowings outstanding under the revolving loan agreement at March 31, 2008 was 5.3% (December 31, 2007 – 7.3%).
(iii) A wholly-owned subsidiary of the Company, AmTote International, Inc. (“AmTote”), has a $3.0 million revolving credit facility with a U.S. financial institution to finance working capital requirements, which matures on May 1, 2008 (refer to Note 16[b]). The credit facility is available by way of U.S. dollar loans and letters of credit and bears interest at LIBOR plus 2.75%. Loans under the credit facility are secured by a first charge on the assets and a pledge of stock of AmTote. At March 31, 2008, the Company had borrowings of $2.2 million (December 31, 2007 - $0.8 million) and had issued no letters of credit (December 31, 2007 – nil) under the credit facility. The weighted average interest rate on the loans outstanding under the credit facility at March 31, 2008 was 5.6% (December 31, 2007 - 7.7%).
9. CAPITAL STOCK
[a] Class A Subordinate Voting Stock and Class B Stock at March 31, 2008 and December 31, 2007 are shown in the table below (number of shares and stated value have been rounded to the nearest thousand). For the three months ended March 31, 2008, there were no issuances of the Company’s Class A Subordinate Voting Stock or Class B Stock.
| | Class A Subordinate
Voting Stock | | Class B Stock | | Total | |
| | Number
of Shares | | Stated
Value | | Number
of Shares | | Stated
Value | | Number
of Shares | | Stated
Value | |
Issued and outstanding at December 31, 2007 and March 31, 2008 | | 58,159 | | $ | 339,435 | | 58,466 | | $ | 394,094 | | 116,625 | | $ | 733,529 | |
| | | | | | | | | | | | | | | | |
[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 March 31, 2008 were exercised or converted:
| | Number
of Shares | |
Class A Subordinate Voting Stock outstanding | | 58,159 | |
Class B Stock outstanding | | 58,466 | |
Options to purchase Class A Subordinate Voting Stock | | 4,750 | |
8.55% Convertible Subordinated Notes, convertible at $7.05 per share | | 21,276 | |
7.25% Convertible Subordinated Notes, convertible at $8.50 per share | | 8,824 | |
| | 151,475 | |
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. A maximum of 9.2 million shares of Class A Subordinate Voting Stock remain available to be issued under the Incentive Plan, of which 7.8 million are available for issuance pursuant to stock options and tandem stock appreciation rights and 1.4 million are available for issuance pursuant to any other type of award under the Incentive Plan.
15
Under a 2005 incentive compensation program, the Company awarded performance shares of Class A Subordinate Voting Stock to certain officers and key employees. The number of shares of Class A Subordinate Voting Stock underlying the performance share awards was based either on a percentage of a guaranteed bonus or a percentage of total 2005 compensation divided by the market value of the Class A Subordinate Voting Stock on the date the program was approved by the Compensation Committee of the Board of Directors of the Company. These performance shares vested over a six or eight month period to December 31, 2005 and were distributed, subject to certain conditions, in two equal instalments. The first distribution occurred in March 2006 and the second distribution occurred in March 2007. For 2006, the Company continued the incentive compensation program as described above. The program was similar in all respects except that the 2006 performance shares vested over a 12-month period to December 31, 2006 and were distributed, subject to certain conditions, in March 2007. Accordingly, for the three months ended March 31, 2007, the Company issued 174,749 of these vested performance share awards with a stated value of $0.6 million and 6,477 performance share awards were forfeited. No performance share awards remain to be issued subsequent to March 31, 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 three months ended March 31, 2008, no shares were issued to the Company’s directors in payment of services rendered (for the three months ended March 31, 2007 - 30,941 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):
| | Shares Subject
to Option | | Weighted Average
Exercise Price | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Balance outstanding at beginning of year | | 4,950,000 | | 4,905,000 | | $ | 5.82 | | $ | 6.08 | |
Forfeited or expired(i) | | (200,000 | ) | (166,000 | ) | 5.56 | | 6.74 | |
Balance outstanding at March 31 | | 4,750,000 | | 4,739,000 | | $ | 5.83 | | $ | 6.06 | |
(i) For the three months ended March 31, 2008 and 2007, 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:
| | Options Outstanding | | Options Exercisable | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Number | | 4,750,000 | | 4,739,000 | | 4,348,334 | | 4,290,968 | |
Weighted average exercise price | | $ | 5.83 | | $ | 6.06 | | $ | 5.99 | | $ | 6.06 | |
Weighted average remaining contractual life (years) | | 3.2 | | 4.0 | | 2.7 | | 3.5 | |
| | | | | | | | | | | | | |
At March 31, 2008, the 4,750,000 stock options outstanding had exercise prices ranging from $2.78 to $7.00 per share. The average fair value of the stock option grants for the three months ended March 31, 2008 and 2007 using the Black-Scholes option valuation model was not applicable given that there were no options granted during the respective periods.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
The Company recognized nominal compensation expense for the three months ended March 31, 2008 (for the three months ended March 31, 2007 – $0.1 million) related to stock options. At March 31, 2008, the total unrecognized compensation expense related to stock options is $0.3 million, which is expected to be recognized as an expense over a period of 3.5 years.
For the three months ended March 31, 2008, the Company recognized nominal total compensation expense (for the three months ended March 31, 2007 – $0.2 million) relating to director compensation and stock options under the Incentive Plan.
16
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 months ended March 31, 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 | |
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):
| | Three months ended
March 31, | |
| | 2008 | | 2007 | |
| | Basic and
Diluted | | Basic | | Diluted | |
Income (loss) from continuing operations | | $ | (12,967 | ) | $ | 5,710 | | $ | 5,710 | |
Loss from discontinued operations | | (33,493 | ) | (3,241 | ) | (3,241 | ) |
Net income (loss) | | (46,460 | ) | 2,469 | | 2,469 | |
Interest, net of related tax on convertible subordinated notes | | — | | — | | 4,616 | |
| | $ | (46,460 | ) | $ | 2,469 | | $ | 7,085 | |
| | | | | | | |
Weighted average number of shares outstanding: | | | | | | | |
Class A Subordinate Voting Stock | | 58,159 | | 49,094 | | 79,347 | |
Class B Stock | | 58,466 | | 58,466 | | 58,466 | |
Weighted average number of shares outstanding | | 116,625 | | 107,560 | | 137,813 | |
| | | | | | | |
Earnings (loss) per share: | | | | | | | |
Continuing operations | | $ | (0.11 | ) | $ | 0.05 | | $ | 0.05 | |
Discontinued operations | | (0.29 | ) | (0.03 | ) | (0.03 | ) |
Earning (loss) per share | | $ | (0.40 | ) | $ | 0.02 | | $ | 0.02 | |
As a result of the net loss for the three months ended March 31, 2008, options to purchase 4,750,000 shares and notes convertible into 30,100,124 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:
| | March 31,
2008 | | December 31,
2007 | |
Bridge loan facility (i) | | $ | 54,536 | | $ | 35,889 | |
Gulfstream Park project financing | | | | | |
Tranche 1 (ii) | | 130,052 | | 130,324 | |
Tranche 2 (iii) | | 24,495 | | 24,304 | |
Tranche 3 (iv) | | 14,184 | | 13,593 | |
| | 223,267 | | 204,110 | |
Less: due within one year | | (155,851 | ) | (137,003 | ) |
| | $ | 67,416 | | $ | 67,107 | |
17
(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 is being made available to the Company, subject to certain conditions. The bridge loan matures on May 31, 2008, 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 September 12, 2007, which was the closing date of the bridge loan facility, and an additional arrangement fee of $0.8 million was charged by MID on February 29, 2008, which was equal to 1.0% of the maximum principal amount then available under this facility. There is a commitment fee equal to 1.0% per annum (payable in arrears) on the undrawn portion of the $80.0 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 which was completed on October 29, 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 months ended March 31, 2008, the Company received loan advances of $18.6 million, repaid outstanding principal of $1.8 million, incurred interest expense and commitment fees of $1.8 million, and repaid interest and commitment fees of $1.7 million, such that at March 31, 2008, $56.1 million was outstanding under the bridge loan facility, including $0.4 million of accrued interest and commitment fees payable. In addition, for the three months ended March 31, 2008, the Company amortized $1.7 million of loan origination costs, such that at March 31, 2008, $1.5 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 March 31, 2008 is 15.1%.
(ii) Gulfstream Park Project Financing – Tranche 1
In December 2004, 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’s 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 months ended March 31, 2008, the Company repaid outstanding principal of $0.4 million (for the three months ended March 31, 2007 – $1.5 million), incurred interest expense of $3.4 million (for the three months ended March 31, 2007 – $3.4 million), and repaid interest of $3.4 million (for the three months ended March 31, 2007 - $2.3 million), such that at March 31, 2008, $133.1 million was outstanding under this project financing arrangement, including $1.1 million of accrued interest payable. In addition, for the three months ended March 31, 2008, the Company amortized $0.1 million (for the three months ended March 31, 2007 - $0.1 million) of loan origination costs, such that at March 31, 2008, $3.1 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.
On September 12, 2007, certain amendments were made to the Gulfstream Park and Remington Park project financings. In return for the lender agreeing to waive any applicable make-whole payments for repayments made under either of the project financings prior to May 31, 2008, the required amendments provide, among other things, that under the Gulfstream Park project financing arrangement: (i) Gulfstream Park’s obligations are now guaranteed by the Company; and (ii) $100.0 million of indebtedness under the Gulfstream Park project financings must be repaid by May 31, 2008.
18
(iii) Gulfstream Park Project Financing – Tranche 2
On July 26, 2006, certain of the Company’s subsidiaries that own and operate Gulfstream Park entered into an amending agreement relating to the existing Gulfstream Park project financing arrangement with a subsidiary of MID by adding an additional tranche of $25.8 million, plus lender costs and capitalized interest, to fund the design and construction of phase one of the slots facility to be located in the existing Gulfstream Park clubhouse building, as well as related capital expenditures and start-up costs, including the acquisition and installation of approximately 500 slot machines. The second tranche of the Gulfstream Park financing has a five-year term and bears interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, interest on this tranche was capitalized to the principal balance of the loan. Beginning January 1, 2007, this tranche requires blended payments of principal and interest based on a 25-year amortization period commencing on that date. Advances related to phase one of the slots facility were made available by way of progress draw advances and there is no prepayment penalty associated with this tranche. The Gulfstream Park project financing facility was further amended to introduce a mandatory annual cash flow sweep of not less than 75% of Gulfstream Park’s total excess cash flow, after permitted capital expenditures and debt service, to be used to repay the additional principal amount being made available under the new tranche. A lender fee of $0.3 million (1% of the amount of this tranche) was added to the principal amount of the loan as consideration for the amendments on July 26, 2006.
For the three months ended March 31, 2008, the Company received no loan advances (for the three months ended March 31, 2007 - $2.3 million), repaid outstanding principal of $0.1 million (for the three months ended March 31, 2007 – $0.2 million), incurred interest expense of $0.6 million (for the three months ended March 31, 2007 – $0.5 million), and repaid interest of $0.6 million (for the three months ended March 31, 2007 - $0.3 million), such that at March 31, 2008, $24.7 million was outstanding under this project financing arrangement, including $0.2 million of accrued interest payable. In addition, for the three months ended March 31, 2008, the Company amortized $0.3 million (for the three months ended March 31, 2007 - $0.1 million) of loan origination costs, such that at March 31, 2008, $0.2 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.
(iv) Gulfstream Park Project Financing – Tranche 3
On December 22, 2006, certain of the Company’s subsidiaries that own and operate Gulfstream Park entered into an additional amending agreement relating to the existing Gulfstream Park project financing arrangement with a subsidiary of MID by adding an additional tranche of $21.5 million, plus lender costs and capitalized interest, to fund the design and construction of phase two of the slots facility, as well as related capital expenditures and start-up costs, including the acquisition and installation of approximately 700 slot machines. This third tranche of the Gulfstream Park financing has a five-year term and bears interest at a rate of 10.5% per annum, compounded semi-annually. Prior to May 1, 2007, interest on this tranche was capitalized to the principal balance of the loan. Beginning May 1, 2007, this tranche requires blended payments of principal and interest based on a 25-year amortization period commencing on that date. Advances related to phase two of the slots facility were made available by way of progress draw advances and there is no prepayment penalty associated with this tranche. A lender fee of $0.2 million (1% of the amount of this tranche) was added to the principal amount of the loan as consideration for the amendments on January 19, 2007, when the first funding advance was made available to the Company.
For the three months ended March 31, 2008, the Company received loan advances of $0.4 million (for the three months ended March 31, 2007 - $8.0 million), repaid a nominal amount of outstanding principal (for the three months ended March 31, 2007 – nil), incurred interest expense of $0.4 million (for the three months ended March 31, 2007 – $0.1 million, which was capitalized to the principal balance of the loan), and repaid interest of $0.4 million (for the three months ended March 31, 2007 - nil), such that at March 31, 2008, $14.3 million was outstanding under this project financing arrangement, including $0.1 million of accrued interest payable. In addition, for the three months ended March 31, 2008, the Company amortized $0.2 million (for the three months ended March 31, 2007 - $0.1 million) of loan origination costs, such that at March 31, 2008, $0.1 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.
19
(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 months ended March 31, 2008, the Company received loan advances of $1.0 million (for the three months ended March 31, 2007 - nil), repaid outstanding principal of $0.3 million (for the three months ended March 31, 2007 – $0.4 million), incurred interest expense of $0.7 million (for the three months ended March 31, 2007 – $0.8 million), and repaid interest of $0.7 million (for the three months ended March 31, 2007 - $0.5 million), such that at March 31, 2008, $28.4 million was outstanding under this project financing arrangement, including $0.2 million of accrued interest payable. In addition, for the three months ended March 31, 2008 and 2007, the Company amortized a nominal amount of loan origination costs, such that at March 31, 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 March 31, 2008, $1.2 million (December 31, 2007 – $4.5 million) of the funds the Company placed into escrow with MID remains in escrow.
[c] 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 for a purchase price of Euros 20.0 million (U.S. $31.6 million). 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 of up to $80.0 million with a subsidiary of MID.
[d] 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.
[e] 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.
[f] For the three months ended March 31, 2008, the Company incurred $0.9 million (for the three months ended March 31, 2007 – $0.8 million) of rent for facilities and central shared and other services to Magna and its subsidiaries. At March 31, 2008, amounts due to Magna and its subsidiaries totaled $3.5 million (December 31, 2007 – $2.8 million).
20
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., doing business 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. At the present time, the final outcome related to this action cannot be accurately determined by management.
[d] The Company has letters of credit issued with various financial institutions of $1.1 million to guarantee various construction projects related to activity of the Company. These letters of credit are secured by cash deposits of the Company. The Company also has letters of credit issued under its senior secured revolving credit facility of $3.4 million (refer to Note 8[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 March 31, 2008, these indemnities amounted to $7.4 million with expiration dates through 2009.
[f] Contractual commitments outstanding at March 31, 2008, which related to construction and development projects, amounted to approximately $2.5 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®, 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®. 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® to CDI, on March 4, 2007, HRTV, LLC was created with an effective date of April 27, 2007. Both the Company and CDI are required to make quarterly capital contributions, on an equal basis, until October 2009 to fund the operations of HRTV, LLC; however, the Company may under certain circumstances be responsible for additional capital commitments. The Company’s share of the required capital contributions to HRTV, LLC is expected to be approximately $7.0 million of which $2.6 million has been contributed to March 31, 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 March 31, 2008, the carrying value of the fixed assets related to the slots facility is approximately $28.7 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.
21
[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™”. 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; however, to March 31, 2008, the Company has not made any such contributions. At March 31, 2008, approximately $40.1 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. The Company has reflected its share of equity amounts in excess of $15.0 million, of approximately $2.1 million, as an obligation which is included in “other accrued liabilities” on the accompanying consolidated balance sheets. If the Company or Forest City fail to make required capital contributions when due, then either party to the agreement may advance such funds to the Limited Liability Company, equal to the required capital contributions, as a recourse loan or as a capital contribution for which the capital accounts of the partners would be adjusted accordingly. The Limited Liability Company Agreement also contemplated additional agreements, including a ground lease, a reciprocal easement agreement, a development agreement, a leasing agreement and a management agreement which were executed upon satisfaction of certain conditions. Upon the opening of The Village at Gulfstream Park™, 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 lands 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. If either Westfield or Arcadia First! is ultimately successful in its challenge, development efforts could potentially be delayed or suspended. The first hearings on the merits of the petitioners’ claims are scheduled to be heard before the trial judge on May 23, 2008. To March 31, 2008, the Company has expended approximately $10.1 million on these initiatives, of which $0.2 million was paid during the three months ended March 31, 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 March 31, 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 exceed its assets. The New Jersey Sports & Exposition Authority previously withdrew from the Pension Plan effective November 1, 2007. As the only remaining participant in the Pension Plan, The Meadows withdrew from the Pension Plan effective December 25, 2007, which constituted a mass withdrawal. An updated actuarial valuation is in the process of being obtained; however, based on allocation information currently provided by the Pension Plan, the estimated withdrawal liability of The Meadows is approximately $6.2 million. This liability may be satisfied by annual payments of approximately $0.3 million. As part of the indemnification obligations under the holdback agreement with Millennium-Oaktree (refer to Note 3), the mass withdrawal liability that has been triggered as a result of withdrawal from the Pension Plan will be offset against the amount owing to the Company under the holdback agreement.
[l] The Maryland Jockey Club (“MJC”) was party to agreements with the Maryland Thoroughbred Horsemen’s Association and the Maryland Breeders’ Association, which expired on December 31, 2007, under which the horsemen and breeders each contributed 4.75% of the costs of simulcasting to MJC. Without arrangements similar in effect to these agreements, costs are expected to increase by approximately $2.0 million for the year ending December 31, 2008. At this time, the Company is uncertain as to the renewal of these agreements on comparable terms.
22
[m] As a result of the bid price of the Company’s publicly held Class A Subordinate Voting Stock closing below the $1.00 per share minimum for 30 consecutive business days, on February 12, 2008, the Company received notice from the Nasdaq Stock Market (“Nasdaq”) advising that in accordance with Nasdaq Marketplace Rule 4450(e)(2), the Company has until August 11, 2008 (or such later date as may be permitted by Nasdaq) to regain compliance with the minimum bid price for the Company’s publicly held Class A Subordinate Voting Stock required for continued listing on the Nasdaq Global Market. The notice further stated that the Company will receive further notification from Nasdaq staff (i) stating that the Company has regained compliance, in the event the bid price of the Company’s Class A Subordinate Voting Stock on the Nasdaq Global Market closes at $1.00 per share or more for a minimum of 10 consecutive trading days or (ii) indicating that the Company’s Class A Subordinate Voting Stock will be delisted, in the event the minimum bid price requirement is not satisfied.
During this 180 calendar day period, the Company’s Class A Subordinate Voting Stock will continue to trade on the Nasdaq Global Market. This Nasdaq notice has no effect on the listing of the Company’s Class A Subordinate Voting Stock on the Toronto Stock Exchange.
In order to provide the Company with flexibility in addressing market-related issues affecting the Company’s capitalization and to address the Nasdaq continuous listing requirements, the Company’s Board of Directors has adopted a resolution, subject to the approval of the Company’s stockholders, to amend the Company’s Certificate of Incorporation to permit a reverse stock split of the Company’s Class A Subordinate Voting Stock and Class B Stock. If approved by the stockholders, the Board of Directors would have discretion to implement the reverse stock split for one time only, prior to May 6, 2009, in any whole number consolidated ratio from 1:10 to 1:20. Because the reverse stock split would apply to all issued shares of the Company’s Class A Subordinate Voting Stock and Class B Stock, the proposed reverse stock split would not alter the relative rights and preferences of existing stockholders nor affect any stockholder’s proportionate equity or voting interest in the Company, except to the extent their reverse stock split would result in fractional shares that are cashed out.
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™; (6) European operations include the European production and sales operations for StreuFex™; (7) PariMax operations include XpressBet®, HRTV® to April 27, 2007, MagnaBet™, RaceONTV™, 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 months ended March 31, 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™ 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.
23
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 | |
| | March 31, | |
| | 2008 | | 2007 | |
Revenues | | | | | |
California operations | | $ | 93,614 | | $ | 110,838 | |
Florida operations | | 75,979 | | 77,460 | |
Maryland operations | | 22,839 | | 26,343 | |
Southern U.S. operations | | 9,886 | | 9,865 | |
Northern U.S. operations | | 8,974 | | 10,183 | |
European operations | | 337 | | 310 | |
PariMax operations | | 20,972 | | 21,903 | |
| | 232,601 | | 256,902 | |
Corporate and other | | 63 | | 50 | |
Eliminations | | (5,303 | ) | (4,583 | ) |
Total racing and gaming operations | | 227,361 | | 252,369 | |
| | | | | |
Sale of real estate | | 1,492 | | — | |
Residential development and other | | 2,123 | | 1,833 | |
Total real estate and other operations | | 3,615 | | 1,833 | |
| | | | | |
Total revenues | | $ | 230,976 | | $ | 254,202 | |
| | Three months ended | |
| | March 31, | |
| | 2008 | | 2007 | |
Earnings (loss) before interest, income taxes, depreciation and amortization (“EBITDA”) | | | | | |
California operations | | $ | 12,653 | | $ | 16,819 | |
Florida operations | | 9,689 | | 11,558 | |
Maryland operations | | (1,656 | ) | (38 | ) |
Southern U.S. operations | | (510 | ) | (385 | ) |
Northern U.S. operations | | 986 | | 224 | |
European operations | | (23 | ) | 1 | |
PariMax operations | | 1,757 | | 1,447 | |
| | 22,896 | | 29,626 | |
Corporate and other | | (4,764 | ) | (5,103 | ) |
Predevelopment and other costs | | (395 | ) | (505 | ) |
Recognition of deferred gain on The Meadows transaction | | 2,013 | | — | |
Total racing and gaming operations | | 19,750 | | 24,018 | |
| | | | | |
Residential development and other | | 1,109 | | 536 | |
Write-down of long-lived assets | | (5,000 | ) | — | |
Total real estate and other operations | | (3,891 | ) | 536 | |
| | | | | |
Total EBITDA | | $ | 15,859 | | $ | 24,554 | |
24
Reconciliation of EBITDA to Net Loss
| | Three months ended March 31, 2008 | |
| | Racing and
Gaming
Operations | | Real Estate
and Other
Operations | | Total | |
EBITDA from continuing operations | | $ | 19,750 | | $ | (3,891 | ) | $ | 15,859 | |
Interest expense, net | | (16,030 | ) | (7 | ) | (16,037 | ) |
Depreciation and amortization | | (11,049 | ) | (7 | ) | (11,056 | ) |
Loss from continuing operations before income taxes | | $ | (7,329 | ) | $ | (3,905 | ) | (11,234 | ) |
Income tax expense | | | | | | 1,733 | |
Loss from continuing operations | | | | | | (12,967 | ) |
Loss from discontinued operations | | | | | | (33,493 | ) |
Net loss | | | | | | $ | (46,460 | ) |
| | Three months ended March 31, 2007 | |
| | Racing and
Gaming
Operations | | Real Estate
and Other
Operations | | Total | |
EBITDA from continuing operations | | $ | 24,018 | | $ | 536 | | $ | 24,554 | |
Interest expense, net | | (11,335 | ) | (27 | ) | (11,362 | ) |
Depreciation and amortization | | (8,642 | ) | (8 | ) | (8,650 | ) |
Income from continuing operations before income taxes | | $ | 4,041 | | $ | 501 | | 4,542 | |
Income tax benefit | | | | | | (1,168 | ) |
Income from continuing operations | | | | | | 5,710 | |
Loss from discontinued operations | | | | | | (3,241 | ) |
Net income | | | | | | $ | 2,469 | |
| | March 31,
2008 | | December 31,
2007 | |
Total Assets | | | | | |
California operations | | $ | 322,186 | | $ | 320,781 | |
Florida operations | | 377,625 | | 358,907 | |
Maryland operations | | 160,840 | | 162,606 | |
Southern U.S. operations | | 99,455 | | 97,228 | |
Northern U.S. operations | | 21,194 | | 18,502 | |
European operations | | 1,466 | | 1,468 | |
PariMax operations | | 44,798 | | 43,717 | |
| | 1,027,564 | | 1,003,209 | |
Corporate and other | | 54,657 | | 59,590 | |
Total racing and gaming operations | | 1,082,221 | | 1,062,799 | |
| | | | | |
Residential development and other | | 5,191 | | 5,214 | |
Total real estate and other operations | | 5,191 | | 5,214 | |
| | | | | |
Total assets from continuing operations | | 1,087,412 | | 1,068,013 | |
Total assets held for sale | | 34,482 | | 40,140 | |
Total assets of discontinued operations | | 111,197 | | 135,723 | |
Total assets | | $ | 1,233,091 | | $ | 1,243,876 | |
16. SUBSEQUENT EVENTS
[a] On April 30, 2008, the Company’s $40.0 million senior secured revolving credit facility with a Canadian financial institution was extended to May 23, 2008 (refer to Note 8[i]).
[b] On April 30, 2008, AmTote entered into an amending credit agreement with a U.S. financial institution. The principal amendments included: (i) extending the maturity date of the $3.0 million revolving credit facility from May 1, 2008 to May 30, 2008 and (ii) accelerating the maturity date 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.
[c] On April 11, 2008, the Company completed the sale of 225 acres of excess real estate located in Ebreichsdorf, Austria to a subsidiary of Magna, for a purchase price of Euros 20.0 million (U.S. $31.6 million). Of the net proceeds, 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 of up to $80.0 million with a subsidiary of MID (refer to Note 4[b]).
25
