AURORA, ON , Aug. 5 /PRNewswire-FirstCall/ - Magna Entertainment Corp. ('MEC') (NASDAQ: MECAD; TSX: MEC.A) today reported its financial results for the second quarter ended June 30, 2008 .
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Three Months Ended Six Months Ended
June 30, June 30,
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2008 2007 2008 2007
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(unaudited) (unaudited)
Revenues(i) $ 166,282 $ 167,406 $ 397,258 $ 421,608
Earnings before interest,
taxes, depreciation and
amortization
('EBITDA')(i)(iii) $ 5,212 $ 3,969 $ 21,071 $ 28,523
Net income (loss)
Continuing
operations(iii) $ (22,990) $ (20,329) $ (35,957) $ (14,619)
Discontinued
operations(ii)(iii) 1,736 (3,108) (31,757) (6,349)
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Net loss $ (21,254) $ (23,437) $ (67,714) $ (20,968)
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Diluted earnings (loss)
per share(iv)
Continuing
operations(iii) $ (3.93) $ (3.77) $ (6.16) $ (2.72)
Discontinued
operations(ii)(iii) 0.29 (0.58) (5.44) (1.18)
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Diluted loss per
share(iv) $ (3.64) $ (4.35) $ (11.60) $ (3.90)
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(i) Revenues and EBITDA for all periods presented are from continuing
operations only.
(ii) Discontinued operations for the three and six months ended
June 30, 2008 and 2007 include the operations of Remington Park in
Oklahoma, Thistledown in Ohio, Portland Meadows in Oregon,
Great Lakes Downs in Michigan and Magna Racino(TM) in Austria.
(iii) EBITDA, net loss and diluted loss per share from continuing
operations for the six months ended June 30, 2008 include a
write-down of $5.0 million related to the Dixon, California real
estate property.
Net loss and diluted loss per share from discontinued operations
for the six months ended June 30, 2008 include write-downs of
$29.2 million related to Magna Racino(TM) long-lived assets and
$3.1 million related to Instant Racing terminals and the
associated facility at Portland Meadows.
(iv) On July 3, 2008, the Company's Board of Directors approved a
reverse stock split with an effective date of July 22, 2008, of
the Company's Class A Subordinate Voting Stock ('Class A Stock')
and Class B Stock utilizing a 1:20 consolidation ratio. As a
result of the reverse stock split, every twenty shares of the
Company's issued and outstanding Class A Stock and Class B Stock
were consolidated into one share of the Company's Class A Stock
and Class B Stock, respectively. In addition, the exercise prices
of the Company's stock options and the conversion prices of the
Company's convertible subordinated notes have been adjusted, such
that, the number of shares potentially issuable on the exercise of
stock options and/or conversion of subordinated notes will reflect
the 1:20 consolidation ratio. Accordingly, all of the Company's
issued and outstanding Class A Stock and Class B Stock and all
performance share awards, outstanding stock options to purchase
Class A Stock and all performance share awards, outstanding stock
options to purchase Class A Stock and convertible subordinated
notes into Class A Stock for all periods presented have been
restated to reflect the reverse stock split.
All amounts are reported in U.S. dollars in thousands,
except per share figures.
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Our racetracks operate for prescribed periods each year. As a result, our racing revenues and operating results for any quarter will not be indicative of our racing revenues and operating results for the year.
Revenues from continuing operations were $166.3 million for the three months ended June 30, 2008 , a decrease of $1.1 million or 0.7% compared to $167.4 million for the three months ended June 30, 2007 . The decreased revenues from continuing operations were primarily due to:
- Maryland revenues below the prior year period by $4.4 million
primarily due to decreased handle and wagering revenues at this
year's Preakness(R), and decreased average daily attendance and
handle during the race meets at both Laurel Park and Pimlico; and
- California revenues below the prior year period by $4.0 million due
to 5 fewer live race days at Golden Gate Fields with a change in the
racing calendar which shifted live race days to the third and fourth
quarters of 2008, partially offset by increased non-wagering revenues
at Santa Anita Park from special events and facility rentals;
partially offset by:
- Florida revenues above the prior year period by $5.5 million
primarily due to increased gross gaming revenues at Gulfstream Park
from improved slot and poker operations, and increased wagering
revenues from the introduction of year round simulcasting at
Gulfstream Park at the end of the 2008 race meet; and
- Real estate and other operations revenues above the prior year period
by $2.3 million due to increased housing unit sales at our European
residential housing development.
Revenues were $397.3 million in the six months ended June 30, 2008, a
decrease of $24.4 million or 5.8% compared to $421.6 million for the six
months ended June 30, 2007. The decreased revenues in the six months ended
June 30, 2008 compared to the prior year period are primarily due to the same
factors impacting the three months ended June 30, 2008 as well as California
revenues below the prior year period by $21.2 million due to the net loss of 8
live race days at Santa Anita Park due to excessive rain and track drainage
issues with the new synthetic racing surface that was installed in the fall of
2007.
EBITDA from continuing operations was $5.2 million for the three months
ended June 30, 2008, an increase of $1.2 million or 31.3% compared to
$4.0 million for the three months ended June 30, 2007. The increased EBITDA
from continuing operations was primarily due to:
- Florida operations above the prior year period by $2.5 million due to
increased gaming and simulcasting revenues at Gulfstream Park as
noted above, combined with reduced operating costs and improved food
and beverage operations; and
- Real estate and other operations above the prior year period by
$2.0 million due to increased revenues at our European residential
housing development as noted above;
partially offset by:
- Maryland operations below the prior year period by $4.2 million due
to decreased revenues at The Maryland Jockey Club as noted above,
combined with increased severance costs and the December 31, 2007
expiry of expense contribution agreements with the
Maryland Thoroughbred Horsemen's Association and the
Maryland Breeders' Association.
EBITDA of $21.1 million for the six months ended June 30, 2008, decreased
$7.5 million from $28.5 million in the six months ended June 30, 2007
primarily due to:
- California operations below the prior year period by $3.9 million for
the reasons noted above which decreased revenues at Santa Anita Park
and Golden Gate Fields;
- Maryland operations below the prior year period by $5.9 million for
the reasons noted above which decreased revenues and EBITDA at
Laurel Park and Pimlico in the three months ended June 30, 2008; and
- A write-down of long-lived assets of $5.0 million relating to an
impairment charge related to the Dixon, California real estate
property in the six months ended June 30, 2008, which represented the
excess of the carrying value of the asset over the estimated fair
value less selling costs.
During the three months ended June 30, 2008 , cash used for operating activities of continuing operations was $22.3 million , which decreased $25.2 million from cash provided from operating activities of continuing operations of $2.9 million in the three months ended June 30, 2007 , primarily due to an increase in cash used for non-cash working capital balances. In the three months ended June 30, 2008 , cash used for non-cash working capital balances of $11.9 million is primarily due to a decrease in accounts payable and other accrued liabilities, partially offset by a decrease in restricted cash at June 30, 2008 compared to the respective balances at March 31, 2008 . Cash provided from investing activities of continuing operations in the three months ended June 30, 2008 was $24.7 million , including $31.5 million of proceeds received on the sale of real estate to a related party, $3.3 million of proceeds on the disposal of fixed assets, partially offset by $5.7 million of other asset additions and $4.4 million of real estate property and fixed asset additions. Cash provided from financing activities of continuing operations during the three months ended June 30, 2008 of $2.7 million includes net borrowings of $11.6 million from our controlling shareholder, partially offset by net repayments of $5.7 million of long-term debt and $3.3 million of bank indebtedness.
Although we continue to take steps to implement our debt elimination plan, real estate and credit markets have continued to demonstrate weakness to date in 2008 and we do not expect that we will be able to complete asset sales at acceptable prices as quickly or for amounts as originally contemplated. Also, given the announcement of the reorganization proposal for MI Developments Inc. ('MID'), our controlling shareholder, and pending determination of whether it will proceed, we are in the process of reconsidering whether to sell certain of the assets that were originally identified for disposition under the debt elimination plan. As a result of these developments, combined with our upcoming debt maturities and our operational funding requirements, we will again need to seek extensions or additional funds in the short-term from one or more possible sources. The availability of such extensions or additional funds from existing lenders, including our controlling shareholder, or from other sources is not assured and, if available, the terms thereof are not determinable at this time.
We will hold a conference call to discuss our second quarter results on Wednesday August 6, 2008 at 3:00 p.m. EST . The number to use for this call is 1-800-255-2466. Please call 10 minutes prior to the start of the conference call. The dial-in number for overseas callers is 212-676-5399. We will also web cast the conference call at 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, develops, owns and operates horse racetracks and related pari-mutuel wagering operations, including off-track betting facilities. MEC also develops, owns and operates casinos in conjunction with its racetracks where permitted by law. MEC owns and operates AmTote International, Inc., a provider of totalisator services to the pari-mutuel industry, XpressBet(R), a national Internet and telephone account wagering system, as well as MagnaBet(TM) internationally. Pursuant to joint ventures, MEC has a fifty percent interest in HorseRacing TV(R), a 24-hour horse racing television network and TrackNet Media Group, LLC, a content management company formed to distribute the full breadth of MEC's horse racing content.
This press release contains 'forward-looking statements' within the meaning of applicable securities legislation, including Section 27A of the United States Securities Act of 1933, as amended (the 'Securities Act'), and Section 21E of the United States Securities Exchange Act of 1934, as amended (the 'Exchange Act') and forward-looking information as defined in the Securities Act ( Ontario ) (collectively referred to as forward-looking statements). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and the Securities Act ( Ontario ) and include, among others, statements regarding: the current status and the potential impact of the debt elimination plan on our debt reduction efforts, as to which there can be no assurance of success; expectations as to our ability to complete asset sales at the appropriate prices and in a timely manner; the impact of the short-term bridge loan facility with a subsidiary of MID; expectations as to our ability to comply with the bridge loan and other credit facilities; our ability to continue as a going concern; strategies and plans; expectations as to financing and liquidity requirements and arrangements; expectations as to operations; expectations as to revenues, costs and earnings; the time by which certain redevelopment projects, transactions or other objectives will be achieved; estimates of costs relating to environmental remediation and restoration; proposed developments, products and services; expectations as to the timing and receipt of government approvals and regulatory changes in gaming and other racing laws and regulations; expectations that claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated financial position, operating results, prospects or liquidity; projections, predictions, expectations, estimates, beliefs or forecasts as to our financial and operating results and future economic performance; and other matters that are not historical facts.
Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or the times at or by which such performance or results will be achieved. Undue reliance should not be placed on such statements. Forward-looking statements are based on information available at the time and/or management's good faith assumptions and analyses made in light of our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances and are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control, that could cause actual events or results to differ materially from such forward-looking statements. Important factors that could cause actual results to differ materially from our forward-looking statements include, but may not be limited to, material adverse changes in: general economic conditions; the popularity of racing and other gaming activities as recreational activities; the regulatory environment affecting the horse racing and gaming industries; our ability to obtain or maintain government and other regulatory approvals necessary or desirable to proceed with proposed real estate developments; increased regulation affecting certain of our non-racetrack operations, such as broadcasting ventures; and our ability to develop, execute or finance our strategies and plans within expected timelines or budgets. In drawing conclusions set out in our forward-looking statements above, we have assumed, among other things, that we will continue with our efforts to implement our debt elimination plan, but not on the originally contemplated time schedule, and comply with the terms of and/or obtain waivers or other concessions from our lenders and refinance or repay upon maturity our existing financing arrangements (including our short-term bridge loan with a subsidiary of MID and our senior secured revolving credit facility with a Canadian financial institution), and there will not be any material adverse changes in: general economic conditions; the popularity of horse racing and other gaming activities; weather and other environmental conditions at our facilities; the regulatory environment; and our ability to develop, execute or finance our strategies and plans as anticipated.
Forward-looking statements speak only as of the date the statements were made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
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(Unaudited)
(U.S. dollars in thousands, except per share figures)
Three months ended Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Revenues
Racing and gaming
Pari-mutuel wagering $ 109,043 $ 113,421 $ 291,936 $ 315,759
Gaming 10,867 9,151 24,504 22,816
Non-wagering 43,017 43,776 73,848 80,142
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162,927 166,348 390,288 418,717
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Real estate and other
Sale of real estate - - 1,492 -
Residential development
and other 3,355 1,058 5,478 2,891
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3,355 1,058 6,970 2,891
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166,282 167,406 397,258 421,608
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Costs, expenses and other
income
Racing and gaming
Pari-mutuel purses, awards
and other 65,108 65,624 177,136 192,373
Gaming purses, taxes and
other 7,271 6,221 16,471 15,884
Operating costs 70,337 71,866 143,522 148,321
General and administrative 15,081 17,214 29,061 31,868
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157,797 160,925 366,190 388,446
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Real estate and other
Cost of real estate sold - - 1,492 -
Operating costs 1,017 612 1,896 1,730
General and administrative 131 230 266 409
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1,148 842 3,654 2,139
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Predevelopment and other costs 1,052 867 1,447 1,372
Depreciation and amortization 11,216 9,061 22,272 17,711
Interest expense, net 16,456 11,145 32,493 22,507
Write-down of long-lived
assets - - 5,000 -
Equity loss 1,073 803 1,909 1,128
Recognition of deferred gain
on The Meadows transaction - - (2,013) -
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188,742 183,643 430,952 433,303
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Loss from continuing
operations before income
taxes (22,460) (16,237) (33,694) (11,695)
Income tax expense 530 4,092 2,263 2,924
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Loss from continuing
operations (22,990) (20,329) (35,957) (14,619)
Income (loss) from
discontinued operations 1,736 (3,108) (31,757) (6,349)
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Net loss (21,254) (23,437) (67,714) (20,968)
Other comprehensive income
(loss)
Foreign currency translation
adjustment (407) 1,264 2,082 2,010
Change in fair value of
interest rate swap 673 5 57 (96)
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Comprehensive loss $ (20,988) $ (22,168) $ (65,575) $ (19,054)
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Earnings (loss) per share for
Class A Subordinate
Voting Stock and Class
B Stock:
Basic and Diluted
Continuing operations $ (3.93) $ (3.77) $ (6.16) $ (2.72)
Discontinued operations 0.29 (0.58) (5.44) (1.18)
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Loss per share $ (3.64) $ (4.35) $ (11.60) $ (3.90)
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Average number of shares of
Class A Subordinate
Voting Stock and Class B
Stock outstanding
during the period (in
thousands):
Basic and Diluted 5,845 5,386 5,838 5,382
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
Three months ended Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Cash provided from (used for):
Operating activities of
continuing operations:
Loss from continuing
operations $ (22,990) $ (20,329) $ (35,957) $ (14,619)
Items not involving current
cash flows 12,588 9,241 29,663 17,623
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(10,402) (11,088) (6,294) 3,004
Changes in non-cash working
capital balances (11,859) 14,034 (19,544) (16,076)
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(22,261) 2,946 (25,838) (13,072)
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Investing activities of
continuing operations:
Real estate property and
fixed asset additions (4,380) (22,512) (14,868) (35,861)
Other asset additions (5,666) (1,434) (7,042) (2,486)
Proceeds on disposal of real
estate properties - - 1,492 -
Proceeds on disposal of
fixed assets 3,291 1,001 5,345 2,641
Proceeds on real estate sold
to parent - 23,663 - 87,909
Proceeds on real estate sold
to a related party 31,460 - 31,460 -
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24,705 718 16,387 52,203
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Financing activities of
continuing operations:
Proceeds from bank
indebtedness 14,619 741 37,746 15,741
Proceeds from indebtedness
and long-term debt with
parent 31,826 6,402 50,900 16,329
Proceeds from long-term debt 5 3,865 2,736 4,140
Repayment of bank
indebtedness (17,875) (15,000) (40,469) (21,515)
Repayment of indebtedness
and long-term debt with
parent (20,217) (473) (22,433) (2,153)
Repayment of long-term debt (5,692) (15,855) (8,878) (29,460)
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2,666 (20,320) 19,602 (16,918)
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Effect of exchange rate
changes on cash and cash
equivalents 21 19 78 (86)
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Net cash flows provided
from (used for) continuing
operations 5,131 (16,637) 10,229 22,127
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Cash provided from (used for)
discontinued operations:
Operating activities of
discontinued operations 2,755 (906) 1,593 (1,356)
Investing activities of
discontinued operations (4,075) (2,552) (4,983) (3,227)
Financing activities of
discontinued operations (13,323) (1,483) (12,655) (21,582)
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Net cash flows used for
discontinued operations (14,643) (4,941) (16,045) (26,165)
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Net decrease in cash and cash
equivalents during the
period (9,512) (21,578) (5,816) (4,038)
Cash and cash equivalents,
beginning of period 47,089 75,831 43,393 58,291
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Cash and cash equivalents,
end of period 37,577 54,253 37,577 54,253
Less: cash and cash
equivalents, end of period
of discontinued operations (8,171) (10,814) (8,171) (10,814)
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Cash and cash equivalents,
end of period of continuing
operations $ 29,406 $ 43,439 $ 29,406 $ 43,439
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
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(REFER TO NOTE 1 - GOING CONCERN)
(Unaudited)
(U.S. dollars and share amounts in thousands)
June 30, December 31,
2008 2007
-------------------------
ASSETS
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Current assets:
Cash and cash equivalents $ 29,406 $ 34,152
Restricted cash 11,733 28,264
Accounts receivable 36,907 32,157
Due from parent 940 4,463
Income taxes receivable - 1,234
Inventories 6,272 6,351
Prepaid expenses and other 16,487 9,946
Assets held for sale 27,343 35,658
Discontinued operations 115,738 75,455
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244,826 227,680
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Real estate properties, net 701,510 705,069
Fixed assets, net 79,382 85,908
Racing licenses 109,868 109,868
Other assets, net 13,218 10,980
Future tax assets 39,576 39,621
Assets held for sale - 4,482
Discontinued operations - 60,268
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$ 1,188,380 $ 1,243,876
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness $ 36,491 $ 39,214
Accounts payable 46,416 65,351
Accrued salaries and wages 8,481 8,198
Customer deposits 3,029 2,575
Other accrued liabilities 32,123 46,124
Income taxes payable 633 -
Long-term debt due within one year 11,088 10,654
Due to parent 170,215 137,003
Deferred revenue 2,772 4,339
Liabilities related to assets held for sale 876 1,047
Discontinued operations 83,840 75,396
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395,964 389,901
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Long-term debt 83,301 89,680
Long-term debt due to parent 67,299 67,107
Convertible subordinated notes 223,071 222,527
Other long-term liabilities 15,566 18,255
Future tax liabilities 81,471 80,076
Discontinued operations - 13,617
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866,672 881,163
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Shareholders' equity:
Class A Subordinate Voting Stock
(Issued: 2008 - 2,930; 2007 - 2,908) 339,587 339,435
Class B Stock
(Convertible into Class A Subordinate
Voting Stock)
(Issued: 2008 and 2007 - 2,923) 394,094 394,094
Contributed surplus 116,164 91,825
Other paid-in-capital 2,110 2,031
Accumulated deficit (577,771) (510,057)
Accumulated other comprehensive income 47,524 45,385
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321,708 362,713
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$ 1,188,380 $ 1,243,876
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------
(Unaudited)
(All amounts in U.S. dollars unless otherwise noted and all tabular
amounts in thousands, except per share figures)
1. GOING CONCERN
These consolidated financial statements of Magna Entertainment Corp.
('MEC' or the 'Company') have been prepared on a going concern basis,
which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable
future. The Company has incurred a net loss of $67.7 million for the
six months ended June 30, 2008, has incurred net losses of
$113.8 million, $87.4 million and $105.3 million for the years ended
December 31, 2007, 2006 and 2005, respectively, and at June 30, 2008
has an accumulated deficit of $577.8 million and a working capital
deficiency of $151.1 million. At June 30, 2008, the Company had
$229.8 million of debt due to mature in the 12-month period ending
June 30, 2009, including amounts owing under the Company's $40.0
million senior secured revolving credit facility with a Canadian
financial institution, which is scheduled to mature on August 15,
2008, amounts owing under its amended bridge loan facility of up to
$110.0 million with a subsidiary of MI Developments Inc. ('MID'), the
Company's controlling shareholder, which is scheduled to mature on
August 31, 2008 and the Company's obligation to repay $100.0 million
of indebtedness under the Gulfstream Park project financings with a
subsidiary of MID by August 31, 2008. Accordingly, the Company's
ability to continue as a going concern is in substantial doubt and is
dependent on the Company generating cash flows that are adequate to
sustain the operations of the business, renewing or extending current
financing arrangements and meeting its obligations with respect to
secured and unsecured creditors, none of which is assured. If the
Company is unable to repay its obligations when due or satisfy
required covenants in debt agreements, substantially all of the
Company's other current and long-term debt will also become due on
demand as a result of cross-default provisions within loan
agreements, unless the Company is able to obtain waivers,
modifications or extensions. On September 12, 2007, the Company's
Board of Directors approved a debt elimination plan designed to
eliminate net debt by December 31, 2008 by generating funding from
the sale of assets, entering into strategic transactions involving
certain of the Company's racing, gaming and technology operations,
and a possible future equity issuance. To address short-term
liquidity concerns and provide sufficient time to implement the debt
elimination plan, the Company arranged $100.0 million of funding in
September 2007, comprised of (i) a $20.0 million private placement of
the Company's Class A Subordinate Voting Stock to Fair Enterprise
Limited ('Fair Enterprise'), a company that forms part of an estate
planning vehicle for the family of Frank Stronach, the Chairman and
Chief Executive Officer of the Company, which was completed in
October 2007; and (ii) a short-term bridge loan facility of up to
$80.0 million with a subsidiary of MID, which was subsequently
increased to $110.0 million on May 23, 2008. Although the Company
continues to take steps to implement the debt elimination plan,
weakness in the U.S. real estate and credit markets have adversely
impacted the Company's ability to execute the debt elimination plan
as market demand for the Company's assets has been weaker than
expected and financing for potential buyers has become more difficult
to obtain such that the Company does not expect to execute the debt
elimination plan on the time schedule originally contemplated, if at
all. Further, given the announcement of the MID reorganization
proposal, and pending determination of whether it will proceed, the
Company is in the process of reconsidering whether to sell certain of
the assets that were orignially identified for disposition under the
debt elimination plan. As a result, the Company has needed and will
again need to seek extensions from existing lenders and additional
funds in the short-term from one or more possible sources. The
availability of such extensions and additional funds is not assured
and, if available, the terms thereof are not determinable at this
time. These consolidated financial statements do not give effect to
any adjustments to recorded amounts and their classification, which
would be necessary should the Company be unable to continue as a
going concern and, therefore, be required to realize its assets and
discharge its liabilities in other than the normal course of business
and at amounts different from those reflected in the consolidated
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States ('U.S. GAAP') for interim financial
information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete
financial statements. The preparation of the interim consolidated
financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the amounts reported in
the interim consolidated financial statements and accompanying notes.
Actual results could differ from these estimates. In the opinion of
management, all adjustments, which consist of normal and recurring
adjustments, necessary for fair presentation have been included. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 2007.
Reverse Stock Split
Subsequent to the consolidated balance sheet date, on July 3, 2008,
the Company's Board of Directors approved a reverse stock split (the
'Reverse Stock Split'), with an effective date of July 22, 2008, of
the Company's Class A Subordinate Voting Stock and Class B Stock
utilizing a 1:20 consolidation ratio. As a result of the Reverse
Stock Split, every twenty shares of the Company's issued and
outstanding Class A Subordinate Voting Stock and Class B Stock were
consolidated into one share of the Company's Class A Subordinate
Voting Stock and Class B Stock, respectively. In addition, the
exercise prices of the Company's stock options and the conversion
prices of the Company's convertible subordinated notes have been
adjusted, such that, the number of shares potentially issuable on the
exercise of stock options and/or conversion of subordinated notes
will reflect the 1:20 consolidation ratio. Accordingly, all of the
Company's issued and outstanding Class A Subordinate Voting Stock and
Class B Stock and all performance share awards, outstanding stock
options to purchase Class A Subordinate Voting Stock and convertible
subordinated notes into Class A Subordinate Voting Stock for all
periods presented have been restated to reflect the Reverse Stock
Split.
Seasonality
The Company's racing business is seasonal in nature. The Company's
racing revenues and operating results for any quarter will not be
indicative of the racing revenues and operating results for the year.
The Company's racing operations have historically operated at a loss
in the second half of the year, with the third quarter generating the
largest operating loss. This seasonality has resulted in large
quarterly fluctuations in revenues and operating results.
Comparative Amounts
Certain of the comparative amounts have been reclassified to reflect
assets held for sale, discontinued operations and the Reverse Stock
Split.
Impact of Recently Adopted Accounting Standards
In September 2006, the Financial Accounting Standards Board ('FASB')
issued Statement of Financial Accounting Standard # 157, Fair Value
Measurements ('SFAS 157'). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP and
expands disclosures about fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position # 157-2,
Effective Date of FASB Statement # 157, which defers the effective
date of SFAS 157 for non-financial assets and liabilities, except for
items that are recognised or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008. Effective January 1, 2008,
the Company adopted the provisions of SFAS 157 prospectively, except
with respect to certain non-financial assets and liabilities which
have been deferred. The adoption of SFAS 157 did not have a material
effect on the Company's consolidated financial statements.
The following table represents information related to the Company's
financial liabilities measured at fair value on a recurring basis and
the level within the fair value hierarchy in which the fair value
measurements fall at June 30, 2008:
Quoted Prices
in Active
Markets for Significant
Identical Other Significant
Assets or Observable Unobservable
Liabilities Inputs Inputs
(Level 1) (Level 2) (Level 3)
---------------------------------------------------------------------
Liabilities carried at
fair value:
Interest rate swaps $ - $ 1,221 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
In February 2007, the FASB issued Statement of Financial Accounting
Standard # 159, The Fair Value Option for Financial Assets and
Liabilities ('SFAS 159'). SFAS 159 allows companies to voluntarily
choose, at specified election dates, to measure certain financial
assets and liabilities, as well as certain non-financial instruments
that are similar to financial instruments, at fair value (the 'fair
value option'). The election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an
instrument, SFAS 159 specifies that all subsequent changes in fair
value for that instrument be reported in income. The provisions of
SFAS 159 are effective for fiscal years beginning after November 15,
2007. Effective January 1, 2008, the Company adopted the provisions
of SFAS 159 prospectively. The Company has elected not to measure
certain financial assets and liabilities, as well as certain non-
financial instruments that are similar to financial instruments, as
defined in SFAS 159 under the fair value option. Accordingly, the
adoption of SFAS 159 did not have an effect on the Company's
consolidated financial statements.
Impact of Recently Issued Accounting Standards
In December 2007, the FASB issued Statement of Financial Accounting
Standard # 141(R), Business Combinations ('SFAS 141(R)'). SFAS
141(R) changes the accounting model for business combinations from a
cost allocation standard to a standard that provides, with limited
exception, for the recognition of all identifiable assets and
liabilities of the business acquired at fair value, regardless of
whether the acquirer acquires 100% or a lesser controlling interest
of the business. SFAS 141(R) defines the acquisition date of a
business acquisition as the date on which control is achieved
(generally the closing date of the acquisition). SFAS 141(R) requires
recognition of assets and liabilities arising from contractual
contingencies and non-contractual contingencies meeting a 'more-
likely-than-not' threshold at fair value at the acquisition date.
SFAS 141(R) also provides for the recognition of acquisition costs as
expenses when incurred and for expanded disclosures. SFAS 141(R) is
effective for acquisitions closing after December 15, 2008, with
earlier adoption prohibited. The Company is currently reviewing SFAS
141(R), but has not yet determined the future impact, if any, on the
Company's consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standard # 160, Non-controlling Interests in Consolidated Financial
Statements ('SFAS 160'). SFAS 160 establishes accounting and
reporting standards for non-controlling interests in subsidiaries and
for the deconsolidation of a subsidiary and also amends certain
consolidation procedures for consistency with SFAS 141(R). Under SFAS
160, non-controlling interests in consolidated subsidiaries (formerly
known as 'minority interests') are reported in the consolidated
statement of financial position as a separate component within
shareholders' equity. Net earnings and comprehensive income
attributable to the controlling and non-controlling interests are to
be shown separately in the consolidated statements of earnings and
comprehensive income. Any changes in ownership interests of a non-
controlling interest where the parent retains a controlling financial
interest in the subsidiary are to be reported as equity transactions.
SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with earlier adoption prohibited. When adopted,
SFAS 160 is to be applied prospectively at the beginning of the year,
except that the presentation and disclosure requirements are to be
applied retrospectively for all periods presented. The Company is
currently reviewing SFAS 160, but has not yet determined the future
impact, if any, on the Company's consolidated financial statements.
3. THE MEADOWS TRANSACTION
On November 14, 2006, the Company completed the sale of all of the
outstanding shares of Washington Trotting Association, Inc., Mountain
Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc. (collectively
'The Meadows'), each a wholly-owned subsidiary of the Company,
through which the Company owned and operated The Meadows, a
standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a company
jointly owned by William Paulos and William Wortman, controlling
shareholders of Millennium Gaming, Inc., and a fund managed by
Oaktree Capital Management, LLC ('Oaktree' and together, with PA
Meadows, LLC, 'Millennium-Oaktree'). On closing, the Company received
cash consideration of $171.8 million, net of transaction costs of
$3.2 million, and a holdback agreement, under which $25.0 million is
payable to the Company over a five-year period, subject to offset for
certain indemnification obligations. Under the terms of the holdback
agreement, the Company agreed to release the security requirement for
the holdback amount, defer subordinate payments under the holdback,
defer receipt of holdback payments until the opening of the permanent
casino at The Meadows and defer receipt of holdback payments to the
extent of available cash flows as defined in the holdback agreement,
in exchange for Millennium-Oaktree providing an additional $25.0
million of equity support for PA Meadows, LLC. The Company also
entered into a racing services agreement whereby the Company pays
$50 thousand per annum and continues to operate, for its own account,
the racing operations at The Meadows for at least five years. On
December 12, 2007, Cannery Casino Resorts, LLC, the parent company of
Millennium-Oaktree, announced it had entered into an agreement to
sell Millennium-Oaktree to Crown Limited. If the deal is consummated,
either party to the racing services agreement will have the option to
terminate the arrangement. The transaction proceeds of $171.8 million
were allocated to the assets of The Meadows as follows: (i) $7.2
million was allocated to the long-lived assets representing the fair
value of the underlying real estate and fixed assets based on
appraised values; and (ii) $164.6 million was allocated to the
intangible assets representing the fair value of the racing/gaming
licenses based on applying the residual method to determine the fair
value of the intangible assets. On the closing date of the
transaction, the net book value of the long-lived assets was $18.4
million, resulting in a non-cash impairment loss of $11.2 million
relating to the long-lived assets, and the net book value of the
intangible assets was $32.6 million, resulting in a gain of $132.0
million on the sale of the intangible assets. This gain was reduced
by $5.6 million, representing the net estimated present value of the
operating losses expected over the term of the racing services
agreement. Accordingly, the net gain recognized by the Company on the
disposition of the intangible assets was $126.4 million for the year
ended December 31, 2006.
Given that the racing services agreement was effectively a lease of
property, plant and equipment and since the amount owing under the
holdback note is to be paid to the extent of available cash flows as
defined in the holdback agreement, the Company was deemed to have
continuing involvement with the long-lived assets for accounting
purposes. As a result, the sale of The Meadows' real estate and fixed
assets was precluded from sales recognition and not accounted for as
a sale-leaseback, but rather using the financing method of accounting
under U.S. GAAP. Accordingly, $12.8 million of the proceeds were
deferred, representing the fair value of long-lived assets of
$7.2 million and the net present value of the operating losses
expected over the term of the racing services agreement of $5.6
million, and recorded as 'other long-term liabilities' on the
consolidated balance sheet at the date of completion of the
transaction. The deferred proceeds are being recognized in the
consolidated statements of operations and comprehensive loss over the
five-year term of the racing services agreement and/or at the point
when the sale-leaseback subsequently qualifies for sales recognition.
For the three and six months ended June 30, 2008, the Company
recognized $0.3 million and $0.4 million, respectively, and for the
three and six months ended June 30, 2007, the Company recognized
$0.1 million and $0.4 million, respectively, of the deferred proceeds
in income, which is recorded as an offset to racing and gaming
'general and administrative' expenses on the accompanying
consolidated statements of operations and comprehensive loss.
Effective January 1, 2008, The Meadows entered into an agreement with
The Meadows Standardbred Owners Association, which expires on
December 31, 2009, whereby the horsemen will make contributions to
subsidize backside maintenance and marketing expenses at The Meadows.
As a result, the Company revised its estimate of the operating losses
expected over the remaining term of the racing services agreement,
which resulted in an additional $2.0 million of deferred gain being
recognized in income for the six months ended June 30, 2008. At
June 30, 2008, the remaining balance of the deferred proceeds is
$8.6 million. With respect to the $25.0 million holdback agreement,
the Company will recognize this consideration upon the settlement of
the indemnification obligations and as payments are received (refer
to Note 14(k)).
4. ASSETS HELD FOR SALE
(a) In November and December 2007, the Company entered into sale
agreements for three parcels of excess real estate comprising
approximately 825 acres in Porter, New York, subject to the
completion of due diligence by the purchasers and customary
closing conditions. The sale of one parcel was completed in
December 2007 for cash consideration of $0.3 million, net of
transaction costs, and the sales of the remaining two parcels
were completed in January 2008 for total cash consideration of
$1.5 million, net of transaction costs. The two parcels of excess
real estate for which the sales were completed in January 2008
have been reflected as 'assets held for sale' on the consolidated
balance sheet at December 31, 2007. The net proceeds received on
closing were used to repay a portion of the bridge loan facility
with a subsidiary of MID in January 2008.
(b) On December 21, 2007, the Company entered into an agreement to
sell 225 acres of excess real estate located in Ebreichsdorf,
Austria to a subsidiary of Magna International Inc. ('Magna'), a
related party, for a purchase price of Euros 20.0 million (U.S.
$31.5 million), net of transaction costs. The sale transaction
was completed on April 11, 2008. Of the net proceeds that were
received on closing, Euros 7.5 million was used to repay a
portion of a Euros 15.0 million term loan facility and the
remaining portion of the net proceeds was used to repay a portion
of the bridge loan facility with a subsidiary of MID. The gain on
sale of the excess real estate of approximately Euros 15.5
million (U.S. $24.3 million), net of tax, has been reported as a
contribution of equity in contributed surplus.
(c) On August 9, 2007, the Company announced its intention to sell a
real estate property located in Dixon, California. In addition,
in March 2008, the Company committed to a plan to sell excess
real estate located in Oberwaltersdorf, Austria. The Company is
actively marketing these properties for sale and has listed the
properties for sale with real estate brokers. Accordingly, at
June 30, 2008 and December 31, 2007, these real estate properties
are classified as 'assets held for sale' on the consolidated
balance sheets in accordance with Statement of Financial
Accounting Standard #144, Accounting for Impairment or Disposal
of Long-Lived Assets ('SFAS 144').
(d) On August 9, 2007, the Company also announced its intention to
sell a real estate property located in Ocala, Florida. The
Company is actively marketing this property for sale and is in
negotiations with a potential buyer. Accordingly, at June 30,
2008 and December 31, 2007, this real estate property is
classified as 'assets held for sale' on the consolidated balance
sheets in accordance with SFAS 144.
(e) The Company's assets held for sale and related liabilities at
June 30, 2008 and December 31, 2007 are shown below. All assets
held for sale and related liabilities are classified as current
at June 30, 2008 as the assets and related liabilities described
in sections (a) through (d) above have been or are expected to be
sold within one year from the consolidated balance sheet date.
June 30, December 31,
2008 2007
-------------------------
ASSETS
---------------------------------------------------------------------
Real estate properties, net
Dixon, California (refer to Note 6) $ 14,139 $ 19,139
Ocala, Florida 8,407 8,407
Oberwaltersdorf, Austria 4,797 -
Ebreichsdorf, Austria - 6,619
Porter, New York - 1,493
---------------------------------------------------------------------
27,343 35,658
Oberwaltersdorf, Austria - 4,482
---------------------------------------------------------------------
$ 27,343 $ 40,140
---------------------------------------------------------------------
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LIABILITIES
---------------------------------------------------------------------
Future tax liabilities $ 876 $ 1,047
---------------------------------------------------------------------
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(f) On September 12, 2007, the Company's Board of Directors approved
a debt elimination plan designed to eliminate net debt by
generating funding from the sale of certain assets, entering into
strategic transactions involving the Company's racing, gaming and
technology operations, and a possible future equity issuance. In
addition to the sales of real estate described in sections (a)
through (d) above, the debt elimination plan also contemplates
the sale of real estate properties located in Aventura and
Hallandale, Florida, both adjacent to Gulfstream Park and in Anne
Arundel County, Maryland, adjacent to Laurel Park. The Company
also intends to explore selling its membership interests in the
mixed-use developments at Gulfstream Park in Florida and Santa
Anita Park in California that the Company is pursuing under joint
venture arrangements with Forest City Enterprises, Inc. ('Forest
City') and Caruso Affiliated, respectively. The Company also
intends to sell Thistledown in Ohio and its interest in Portland
Meadows in Oregon and subsequent to the balance sheet date, on
July 16, 2008, the Company completed the sale of Great Lakes
Downs in Michigan. The Company also intends to explore other
strategic transactions involving other racing, gaming and
technology operations, including: partnerships or joint ventures
in respect of the existing gaming facility at Gulfstream Park;
partnerships or joint ventures in respect of potential
alternative gaming operations at certain of the Company's other
racetracks that currently do not have gaming operations; the sale
of Remington Park, a horse racetrack and gaming facility in
Oklahoma City; and transactions involving
