AURORA, ON , May 6 /PRNewswire-FirstCall/ - Magna Entertainment Corp. ('MEC') (NASDAQ: MECA; TSX: MEC.A) today reported its financial results for the first quarter ended March 31, 2008 .
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Three Months Ended
March 31,
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2008 2007
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(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)
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Net income (loss) $ (46,460) $ 2,469
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Diluted earnings (loss) per share
Continuing operations(iii) $ (0.11) $ 0.05
Discontinued operations(ii)(iii) (0.29) (0.03)
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Diluted earnings (loss) per share $ (0.40) $ 0.02
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(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 Racino(TM) 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 Racino(TM) 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.
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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(TM) 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:
- 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
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(R), a national Internet and telephone account wagering system, as well as MagnaBet(TM) internationally. Pursuant to joint ventures, MEC has a fifty percent interest in HorseRacing TV(R), a 24-hour horse racing television network and TrackNet Media Group, LLC, a content management company formed to distribute the full breadth of MEC's horse racing content.
This press release contains 'forward-looking statements' within the meaning of applicable securities legislation, including Section 27A of the United States Securities Act of 1933, as amended (the 'Securities Act'), and Section 21E of the United States Securities Exchange Act of 1934, as amended (the 'Exchange Act') and forward-looking information as defined in the Securities Act ( Ontario ) (collectively referred to as forward-looking statements). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and the Securities Act ( Ontario ) and include, among others, statements regarding: the current status and the potential impact of the debt elimination plan on our debt reduction efforts, as to which there can be no assurance of success; expectations as to our ability to complete asset sales at the appropriate prices and in a timely manner; the impact of the 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.
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.
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
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(Unaudited)
(U.S. dollars in thousands, except per share figures)
Three months ended
March 31,
--------------------------
2008 2007
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(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
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227,361 252,369
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Real estate and other
Sale of real estate 1,492 -
Residential development and other 2,123 1,833
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3,615 1,833
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230,976 254,202
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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
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208,393 227,521
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Real estate and other
Cost of real estate sold 1,492 -
Operating costs 879 1,118
General and administrative 135 179
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2,506 1,297
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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) -
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242,210 249,660
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Income (loss) from continuing operations
before income taxes (11,234) 4,542
Income tax expense (benefit) 1,733 (1,168)
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Income (loss) from continuing operations (12,967) 5,710
Loss from discontinued operations (33,493) (3,241)
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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)
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Comprehensive income (loss) $ (44,587) $ 3,114
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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)
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Earnings (loss) per share $ (0.40) $ 0.02
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Average number of shares of Class A Subordinate
Voting Stock and Class B Stock outstanding
during the period (in thousands):
Basic 116,625 107,560
Diluted 116,625 137,813
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
(U.S. dollars in thousands, except per share figures)
Three months ended
March 31,
--------------------------
2008 2007
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(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
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4,108 14,092
Changes in non-cash working capital balances (7,685) (30,110)
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(3,577) (16,018)
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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
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(8,318) 51,485
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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)
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16,936 3,402
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Effect of exchange rate changes on cash
and cash equivalents 57 (105)
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Net cash flows provided from continuing operations 5,098 38,764
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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)
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Net cash flows used for discontinued operations (1,402) (21,224)
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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
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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)
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Cash and cash equivalents, end of period of
continuing operations $ 37,458 $ 64,054
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
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(REFER TO NOTE 1 - GOING CONCERN)
(Unaudited)
(U.S. dollars and share amounts in thousands)
March 31, December 31,
2008 2007
--------------------------
(restated-
notes 4 & 5)
ASSETS
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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
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286,878 227,680
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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
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$ 1,233,091 $ 1,243,876
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LIABILITIES AND SHAREHOLDERS' EQUITY
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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
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436,516 389,901
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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
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914,921 881,163
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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
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318,170 362,713
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$ 1,233,091 $ 1,243,876
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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(Unaudited)
(All amounts in U.S. dollars unless otherwise noted and all tabular
amounts in thousands, except per share figures)
1. GOING CONCERN
These consolidated financial statements of Magna Entertainment Corp.
('MEC' or the 'Company') have been prepared on a going concern basis,
which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable
future. The Company has incurred a net loss of $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.
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 # 157, Fair Value
Measurements ('SFAS 157'). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP and
expands disclosures about fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position # 157-2,
Effective Date of FASB Statement # 157, which defers the effective
date of SFAS 157 for non-financial assets and liabilities, except for
items that are recognised or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008. Effective January 1, 2008,
the Company adopted the provisions of SFAS 157 prospectively, except
with respect to certain non-financial assets and liabilities which
have been deferred. The adoption of SFAS 157 did not have a material
effect on the Company's consolidated financial statements.
The following table represents information related to the Company's
financial 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 Significant
for Identical Other Significant
Assets or Observable Unobservable
Liabilities Inputs Inputs
(Level 1) (Level 2) (Level 3)
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Assets carried at fair value:
Cash equivalents $ 1,700 $ - $ -
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Liabilities carried at
fair value:
Interest rate swaps $ - $ 2,343 $ -
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In February 2007, the FASB issued Statement of Financial Accounting
Standard # 159, The Fair Value Option for Financial Assets and
Liabilities ('SFAS 159'). SFAS 159 allows companies to voluntarily
choose, at specified election dates, to measure certain financial
assets and liabilities, as well as certain non-financial instruments
that are similar to financial instruments, at fair value (the 'fair
value option'). The election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an
instrument, SFAS 159 specifies that all subsequent changes in fair
value for that instrument be reported in income. The provisions of
SFAS 159 are effective for fiscal years beginning after November 15,
2007. Effective January 1, 2008, the Company adopted the provisions
of SFAS 159 prospectively. The Company has elected not to measure
certain financial assets and liabilities, as well as certain non-
financial instruments that are similar to financial instruments, as
defined in SFAS 159 under the fair value option. Accordingly, the
adoption of SFAS 159 did not have an effect on the Company's
consolidated financial statements.
Impact of Recently Issued Accounting Standards
In December 2007, the FASB issued Statement of Financial Accounting
Standard # 141(R), Business Combinations ('SFAS 141(R)'). SFAS
141(R) changes the accounting model for business combinations from a
cost allocation standard to a standard that provides, with limited
exception, for the recognition of all identifiable assets and
liabilities of the business acquired at fair value, regardless of
whether the acquirer acquires 100% or a lesser controlling interest
of the business. SFAS 141(R) defines the acquisition date of a
business acquisition as the date on which control is achieved
(generally the closing date of the acquisition). SFAS 141(R) requires
recognition of assets and liabilities arising from contractual
contingencies and non-contractual contingencies meeting a 'more-
likely-than-not' threshold at fair value at the acquisition date.
SFAS 141(R) also provides for the recognition of acquisition costs as
expenses when incurred and for expanded disclosures. SFAS 141(R) is
effective for acquisitions closing after December 15, 2008, with
earlier adoption prohibited. The Company is currently reviewing SFAS
141(R), but has not yet determined the future impact, if any, on the
Company's consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standard # 160, Non-controlling Interests in Consolidated Financial
Statements ('SFAS 160'). SFAS 160 establishes accounting and
reporting standards for non-controlling interests in subsidiaries and
for the deconsolidation of a subsidiary and also amends certain
consolidation procedures for consistency with SFAS 141(R). Under SFAS
160, non-controlling interests in consolidated subsidiaries (formerly
known as 'minority interests') are reported in the consolidated
statement of financial position as a separate component within
shareholders' equity. Net earnings and comprehensive income
attributable to the controlling and non-controlling interests are to
be shown separately in the consolidated statements of earnings and
comprehensive income. Any changes in ownership interests of a non-
controlling interest where the parent retains a controlling financial
interest in the subsidiary are to be reported as equity transactions.
SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with earlier adoption prohibited. When adopted,
SFAS 160 is to be applied prospectively at the beginning of the year,
except that the presentation and disclosure requirements are to be
applied retrospectively for all periods presented. The Company is
currently reviewing SFAS 160, but has not yet determined the future
impact, if any, on the Company's consolidated financial statements.
3. THE MEADOWS TRANSACTION
On November 14, 2006, the Company completed the sale of all of the
outstanding shares of Washington Trotting Association, Inc., Mountain
Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc. (collectively
'The Meadows'), each a wholly-owned subsidiary of the Company,
through which the Company owned and operated The Meadows, a
standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a company
jointly owned by William Paulos and William Wortman, controlling
shareholders of Millennium Gaming, Inc., and a fund managed by
Oaktree Capital Management, LLC ('Oaktree' and together, with PA
Meadows, LLC, 'Millennium-Oaktree'). On closing, the Company received
cash consideration of $171.8 million, net of transaction costs of
$3.2 million, and a holdback agreement, under which $25.0 million is
payable to the Company over a five-year period, subject to offset for
certain indemnification obligations. Under the terms of the holdback
agreement, the Company agreed to release the security requirement for
the holdback amount, defer subordinate payments under the holdback,
defer receipt of holdback payments until the opening of the permanent
casino at The Meadows and defer receipt of holdback payments to the
extent of available cash flows as defined in the holdback agreement,
in exchange for Millennium-Oaktree providing an additional
$25.0 million of equity support for PA Meadows, LLC. The Company also
entered into a racing services agreement whereby the Company pays
$50 thousand per annum and continues to operate, for its own account,
the racing operations at The Meadows for at least five years. On
December 12, 2007, Cannery Casino Resorts, LLC, the parent company of
Millennium-Oaktree, announced it had entered into an agreement to
sell Millennium-Oaktree to Crown Limited. If the deal is consummated,
either party to the racing services agreement will have the option to
terminate the arrangement. The transaction proceeds of $171.8 million
were allocated to the assets of The Meadows as follows: (i)
$7.2 million was allocated to the long-lived assets representing
the fair value of the underlying real estate and fixed assets based
on appraised values; and (ii) $164.6 million was allocated to the
intangible assets representing the fair value of the racing/gaming
licenses based on applying the residual method to determine the fair
value of the intangible assets. On the closing date of the
transaction, the net book value of the long-lived assets was
$18.4 million, resulting in a non-cash impairment loss of
$11.2 million relating to the long-lived assets, and the net book
value of the intangible assets was $32.6 million, resulting in a gain
of $132.0 million on the sale of the intangible assets. This gain was
reduced by $5.6 million, representing the net estimated present value
of the operating losses expected over the term of the racing services
agreement. Accordingly, the net gain recognized by the Company on the
disposition of the intangible assets was $126.4 million for the year
ended December 31, 2006.
Given that the racing services agreement was effectively a lease of
property, plant and equipment and since the amount owing under the
holdback note is to be paid to the extent of available cash flows as
defined in the holdback agreement, the Company was deemed to have
continuing involvement with the long-lived assets for accounting
purposes. As a result, the sale of The Meadows' real estate and fixed
assets was precluded from sales recognition and not accounted for as
a sale-leaseback, but rather using the financing method of accounting
under U.S. GAAP. Accordingly, $12.8 million of the proceeds were
deferred, representing the fair value of long-lived assets of
$7.2 million and the net present value of the operating losses
expected over the term of the racing services agreement of
$5.6 million, and recorded as 'other long-term liabilities' on the
consolidated balance sheet at the date of completion of the
transaction. The deferred proceeds are being recognized in the
consolidated statements of operations and comprehensive 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.
(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 # 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
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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
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34,482 35,658
Oberwaltersdorf, Austria - 4,482
-----------------------------------------------------------------
$ 34,482 $ 40,140
-----------------------------------------------------------------
-----------------------------------------------------------------
LIABILITIES
-----------------------------------------------------------------
Future tax liabilities $ 876 $ 1,047
-----------------------------------------------------------------
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(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.
- 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(TM), a horse racetrack and
associated entertainment facility in Ebreichsdorf, Austria. In
March 2008, the Company committed to a plan to sell Magna
