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Magna Entertainment Corp. announces results for the second quarter ended June 30, 2008
2008-08-05 22:24:00
Magna Entertainment Corp. announces results for the second quarter ended June 30, 2008
AURORA, ON, Aug. 5 /EMWNews/ - Magna Entertainment Corp. ("MEC") (NASDAQ: MECAD; TSX: MEC.A) today reported its financial results for the second quarter ended June 30, 2008.
------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- (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) ------------------------------------------------------------------------- Net loss $ (21,254) $ (23,437) $ (67,714) $ (20,968) ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- Diluted loss per share(iv) $ (3.64) $ (4.35) $ (11.60) $ (3.90) ------------------------------------------------------------------------- (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. ------------------------------------------------------------------------- Frank Stronach, MEC's Chairman and Chief Executive Officer commented: "Despite difficult economic conditions in the U.S., our EBITDA from continuing operations improved by $1.2 million in the second quarter of 2008 compared to the same period last year. This improvement was primarily due to improved results at Gulfstream Park, Santa Anita Park and our real estate operations partially offset by disappointing results at The Maryland Jockey Club. We are also encouraged by the results at XpressBet(R), which increased its handle by 21%, and Remington Park, which increased its slot revenues by 17%, both compared to the same quarter last year. Notwithstanding this modest improvement in EBITDA for the quarter, we recognize the need for further significant improvement in our operating results, as we also focus on dramatically reducing our debt levels." Blake Tohana, MEC's Executive Vice-President and Chief Financial Officer, commented: "Although we continue to take steps to implement our debt elimination plan, U.S. real estate and credit markets have continued to demonstrate weakness in 2008 and we do not expect to complete our plan on the originally contemplated time schedule. However, we remain firmly committed to reducing debt and interest expense. We closed the sale of Great Lakes Downs in July 2008 and are continuing to pursue other asset sale opportunities." Our racetracks operate for prescribed periods each year. As a result, our racing revenues and operating results for any quarter will not be indicative of our racing revenues and operating results for the year. Revenues from continuing operations were $166.3 million for the three months ended June 30, 2008, a decrease of $1.1 million or 0.7% compared to $167.4 million for the three months ended June 30, 2007. The decreased revenues from continuing operations were primarily due to:
- Maryland revenues below the prior year period by $4.4 million primarily due to decreased handle and wagering revenues at this year's Preakness(R), and decreased average daily attendance and handle during the race meets at both Laurel Park and Pimlico; and - California revenues below the prior year period by $4.0 million due to 5 fewer live race days at Golden Gate Fields with a change in the racing calendar which shifted live race days to the third and fourth quarters of 2008, partially offset by increased non-wagering revenues at Santa Anita Park from special events and facility rentals; partially offset by: - Florida revenues above the prior year period by $5.5 million primarily due to increased gross gaming revenues at Gulfstream Park from improved slot and poker operations, and increased wagering revenues from the introduction of year round simulcasting at Gulfstream Park at the end of the 2008 race meet; and - Real estate and other operations revenues above the prior year period by $2.3 million due to increased housing unit sales at our European residential housing development. Revenues were $397.3 million in the six months ended June 30, 2008, a decrease of $24.4 million or 5.8% compared to $421.6 million for the six months ended June 30, 2007. The decreased revenues in the six months ended June 30, 2008 compared to the prior year period are primarily due to the same factors impacting the three months ended June 30, 2008 as well as California revenues below the prior year period by $21.2 million due to the net loss of 8 live race days at Santa Anita Park due to excessive rain and track drainage issues with the new synthetic racing surface that was installed in the fall of 2007. EBITDA from continuing operations was $5.2 million for the three months ended June 30, 2008, an increase of $1.2 million or 31.3% compared to $4.0 million for the three months ended June 30, 2007. The increased EBITDA from continuing operations was primarily due to: - Florida operations above the prior year period by $2.5 million due to increased gaming and simulcasting revenues at Gulfstream Park as noted above, combined with reduced operating costs and improved food and beverage operations; and - Real estate and other operations above the prior year period by $2.0 million due to increased revenues at our European residential housing development as noted above; partially offset by: - Maryland operations below the prior year period by $4.2 million due to decreased revenues at The Maryland Jockey Club as noted above, combined with increased severance costs and the December 31, 2007 expiry of expense contribution agreements with the Maryland Thoroughbred Horsemen's Association and the Maryland Breeders' Association. EBITDA of $21.1 million for the six months ended June 30, 2008, decreased $7.5 million from $28.5 million in the six months ended June 30, 2007 primarily due to: - California operations below the prior year period by $3.9 million for the reasons noted above which decreased revenues at Santa Anita Park and Golden Gate Fields; - Maryland operations below the prior year period by $5.9 million for the reasons noted above which decreased revenues and EBITDA at Laurel Park and Pimlico in the three months ended June 30, 2008; and - A write-down of long-lived assets of $5.0 million relating to an impairment charge related to the Dixon, California real estate property in the six months ended June 30, 2008, which represented the excess of the carrying value of the asset over the estimated fair value less selling costs. During the three months ended June 30, 2008, cash used for operating activities of continuing operations was $22.3 million, which decreased $25.2 million from cash provided from operating activities of continuing operations of $2.9 million in the three months ended June 30, 2007, primarily due to an increase in cash used for non-cash working capital balances. In the three months ended June 30, 2008, cash used for non-cash working capital balances of $11.9 million is primarily due to a decrease in accounts payable and other accrued liabilities, partially offset by a decrease in restricted cash at June 30, 2008 compared to the respective balances at March 31, 2008. Cash provided from investing activities of continuing operations in the three months ended June 30, 2008 was $24.7 million, including $31.5 million of proceeds received on the sale of real estate to a related party, $3.3 million of proceeds on the disposal of fixed assets, partially offset by $5.7 million of other asset additions and $4.4 million of real estate property and fixed asset additions. Cash provided from financing activities of continuing operations during the three months ended June 30, 2008 of $2.7 million includes net borrowings of $11.6 million from our controlling shareholder, partially offset by net repayments of $5.7 million of long-term debt and $3.3 million of bank indebtedness. Although we continue to take steps to implement our debt elimination plan, real estate and credit markets have continued to demonstrate weakness to date in 2008 and we do not expect that we will be able to complete asset sales at acceptable prices as quickly or for amounts as originally contemplated. Also, given the announcement of the reorganization proposal for MI Developments Inc. ("MID"), our controlling shareholder, and pending determination of whether it will proceed, we are in the process of reconsidering whether to sell certain of the assets that were originally identified for disposition under the debt elimination plan. As a result of these developments, combined with our upcoming debt maturities and our operational funding requirements, we will again need to seek extensions or additional funds in the short-term from one or more possible sources. The availability of such extensions or additional funds from existing lenders, including our controlling shareholder, or from other sources is not assured and, if available, the terms thereof are not determinable at this time. We will hold a conference call to discuss our second quarter results on Wednesday August 6, 2008 at 3:00 p.m. EST. The number to use for this call is 1-800-255-2466. Please call 10 minutes prior to the start of the conference call. The dial-in number for overseas callers is 212-676-5399. We will also web cast the conference call at http://www.magnaentertainment.com. If you have any teleconferencing questions, please call Karen Richardson at 905-726-7465. MEC, North America's largest owner and operator of horse racetracks, based on revenue, develops, owns and operates horse racetracks and related pari-mutuel wagering operations, including off-track betting facilities. MEC also develops, owns and operates casinos in conjunction with its racetracks where permitted by law. MEC owns and operates AmTote International, Inc., a provider of totalisator services to the pari-mutuel industry, XpressBet(R), a national Internet and telephone account wagering system, as well as MagnaBet(TM) internationally. Pursuant to joint ventures, MEC has a fifty percent interest in HorseRacing TV(R), a 24-hour horse racing television network and TrackNet Media Group, LLC, a content management company formed to distribute the full breadth of MEC's horse racing content. This press release contains "forward-looking statements" within the meaning of applicable securities legislation, including Section 27A of the United States Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the United States Securities Exchange Act of 1934, as amended (the "Exchange Act") and forward-looking information as defined in the Securities Act (Ontario) (collectively referred to as forward-looking statements). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and the Securities Act (Ontario) and include, among others, statements regarding: the current status and the potential impact of the debt elimination plan on our debt reduction efforts, as to which there can be no assurance of success; expectations as to our ability to complete asset sales at the appropriate prices and in a timely manner; the impact of the short-term bridge loan facility with a subsidiary of MID; expectations as to our ability to comply with the bridge loan and other credit facilities; our ability to continue as a going concern; strategies and plans; expectations as to financing and liquidity requirements and arrangements; expectations as to operations; expectations as to revenues, costs and earnings; the time by which certain redevelopment projects, transactions or other objectives will be achieved; estimates of costs relating to environmental remediation and restoration; proposed developments, products and services; expectations as to the timing and receipt of government approvals and regulatory changes in gaming and other racing laws and regulations; expectations that claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated financial position, operating results, prospects or liquidity; projections, predictions, expectations, estimates, beliefs or forecasts as to our financial and operating results and future economic performance; and other matters that are not historical facts. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or the times at or by which such performance or results will be achieved. Undue reliance should not be placed on such statements. Forward-looking statements are based on information available at the time and/or management's good faith assumptions and analyses made in light of our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances and are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control, that could cause actual events or results to differ materially from such forward-looking statements. Important factors that could cause actual results to differ materially from our forward-looking statements include, but may not be limited to, material adverse changes in: general economic conditions; the popularity of racing and other gaming activities as recreational activities; the regulatory environment affecting the horse racing and gaming industries; our ability to obtain or maintain government and other regulatory approvals necessary or desirable to proceed with proposed real estate developments; increased regulation affecting certain of our non-racetrack operations, such as broadcasting ventures; and our ability to develop, execute or finance our strategies and plans within expected timelines or budgets. In drawing conclusions set out in our forward-looking statements above, we have assumed, among other things, that we will continue with our efforts to implement our debt elimination plan, but not on the originally contemplated time schedule, and comply with the terms of and/or obtain waivers or other concessions from our lenders and refinance or repay upon maturity our existing financing arrangements (including our short-term bridge loan with a subsidiary of MID and our senior secured revolving credit facility with a Canadian financial institution), and there will not be any material adverse changes in: general economic conditions; the popularity of horse racing and other gaming activities; weather and other environmental conditions at our facilities; the regulatory environment; and our ability to develop, execute or finance our strategies and plans as anticipated. Forward-looking statements speak only as of the date the statements were made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
MAGNA ENTERTAINMENT CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS ------------------------------------------------------------------------- (Unaudited) (U.S. dollars in thousands, except per share figures) Three months ended Six months ended June 30, June 30, --------------------- --------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 162,927 166,348 390,288 418,717 ------------------------------------------------------------------------- Real estate and other Sale of real estate - - 1,492 - Residential development and other 3,355 1,058 5,478 2,891 ------------------------------------------------------------------------- 3,355 1,058 6,970 2,891 ------------------------------------------------------------------------- 166,282 167,406 397,258 421,608 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 157,797 160,925 366,190 388,446 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 1,148 842 3,654 2,139 ------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------- 188,742 183,643 430,952 433,303 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- Loss from continuing operations (22,990) (20,329) (35,957) (14,619) Income (loss) from discontinued operations 1,736 (3,108) (31,757) (6,349) ------------------------------------------------------------------------- Net loss (21,254) (23,437) (67,714) (20,968) 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) ------------------------------------------------------------------------- Comprehensive loss $ (20,988) $ (22,168) $ (65,575) $ (19,054) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- Loss per share $ (3.64) $ (4.35) $ (11.60) $ (3.90) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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, --------------------- --------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- (10,402) (11,088) (6,294) 3,004 Changes in non-cash working capital balances (11,859) 14,034 (19,544) (16,076) ------------------------------------------------------------------------- (22,261) 2,946 (25,838) (13,072) ------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------- 24,705 718 16,387 52,203 ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- 2,666 (20,320) 19,602 (16,918) ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 21 19 78 (86) ------------------------------------------------------------------------- Net cash flows provided from (used for) continuing operations 5,131 (16,637) 10,229 22,127 ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- Net cash flows used for discontinued operations (14,643) (4,941) (16,045) (26,165) ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- Cash and cash equivalents, end of period of continuing operations $ 29,406 $ 43,439 $ 29,406 $ 43,439 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes MAGNA ENTERTAINMENT CORP. CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------- (REFER TO NOTE 1 - GOING CONCERN) (Unaudited) (U.S. dollars and share amounts in thousands) June 30, December 31, 2008 2007 ------------------------- ASSETS ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 244,826 227,680 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- $ 1,188,380 $ 1,243,876 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 395,964 389,901 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 866,672 881,163 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 321,708 362,713 ------------------------------------------------------------------------- $ 1,188,380 $ 1,243,876 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 --------------------------------------------------------------------- --------------------------------------------------------------------- LIABILITIES --------------------------------------------------------------------- Future tax liabilities $ 876 $ 1,047 --------------------------------------------------------------------- --------------------------------------------------------------------- (f) On September 12, 2007, the Company's Board of Directors approved a debt elimination plan designed to eliminate net debt by generating funding from the sale of certain assets, entering into strategic transactions involving the Company's racing, gaming and technology operations, and a possible future equity issuance. In addition to the sales of real estate described in sections (a) through (d) above, the debt elimination plan also contemplates the sale of real estate properties located in Aventura and Hallandale, Florida, both adjacent to Gulfstream Park and in Anne Arundel County, Maryland, adjacent to Laurel Park. The Company also intends to explore selling its membership interests in the mixed-use developments at Gulfstream Park in Florida and Santa Anita Park in California that the Company is pursuing under joint venture arrangements with Forest City Enterprises, Inc. ("Forest City") and Caruso Affiliated, respectively. The Company also intends to sell Thistledown in Ohio and its interest in Portland Meadows in Oregon and subsequent to the balance sheet date, on July 16, 2008, the Company completed the sale of Great Lakes Downs in Michigan. The Company also intends to explore other strategic transactions involving o
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