AURORA, ON, Nov. 5 /CNW/ - Magna Entertainment Corp. ("MEC") (NASDAQ:
MECA; TSX: MEC.A) today reported its financial results for the third quarter
ended September 30, 2008.
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Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
2008 2007 2008 2007
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(unaudited) (unaudited)
Revenues(i) $ 81,577 $ 81,482 $ 478,835 $ 503,090
Earnings (loss) before
interest, taxes,
depreciation and
amortization
("EBITDA")(i)(iii) $ (20,357) $ (23,402) $ 714 $ 5,121
Net income (loss)
Continuing
operations(iii) $ (50,582) $ (44,575) $ (86,539) $ (59,194)
Discontinued
operations(ii)(iii) 2,223 (5,236) (29,534) (11,585)
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Net loss $ (48,359) $ (49,811) $(116,073) $ (70,779)
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Diluted earnings (loss)
per share(iv)
Continuing
operations(iii) $ (8.64) $ (8.28) $ (14.82) $ (11.00)
Discontinued
operations(ii)(iii) 0.38 (0.97) (5.05) (2.15)
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Diluted loss per share(iv) $ (8.26) $ (9.25) $ (19.87) $ (13.15)
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(i) Revenues and EBITDA for all periods presented are from continuing
operations only.
(ii) Discontinued operations for the three and nine months ended
September 30, 2008 and 2007 include the operations of Remington
Park in Oklahoma, Thistledown in Ohio, Portland Meadows in Oregon,
Great Lakes Downs in Michigan and Magna Racino(TM) in Austria.
(iii) EBITDA, net loss and diluted loss per share from continuing
operations for the nine months ended September 30, 2008 include a
write-down of $5.0 million related to the Dixon, California real
estate property.
Net loss and diluted loss per share from discontinued operations
for the nine months ended September 30, 2008 include write-downs
of $29.2 million related to Magna Racino(TM) long-lived assets and
$3.1 million related to Instant Racing terminals and the
associated facility at Portland Meadows.
EBITDA, net loss and diluted loss per share from continuing
operations for the three and nine months ended September 30, 2007
include a write-down of $1.4 million related to the Porter, New
York real estate which was sold in the fourth quarter of 2007 and
the first quarter of 2008.
(iv) The Company completed a reverse stock split, effective July 22,
2008, of the Company's Class A Subordinate Voting Stock ("Class A
Stock") and Class B Stock utilizing a 1:20 consolidation ratio. As
a result of the reverse stock split, every 20 shares of the
Company's issued and outstanding Class A Stock and Class B Stock
were consolidated into one share of the Company's Class A Stock
and Class B Stock, respectively. In addition, the exercise prices
of the Company's stock options and the conversion prices of the
Company's convertible subordinated notes have been adjusted, such
that, the number of shares potentially issuable on the exercise of
stock options and/or conversion of subordinated notes will reflect
the 1:20 consolidation ratio. Accordingly, all of the Company's
issued and outstanding Class A Stock and Class B Stock and all
performance share awards, outstanding stock options to purchase
Class A Stock and all performance share awards, outstanding stock
options to purchase Class A Stock and subordinated notes
convertible into Class A Stock for all periods presented have been
restated to reflect the reverse stock split.
All amounts are reported in U.S. dollars in thousands, except per
share figures.
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MEC also announced that it has engaged Miller Buckfire & Co., LLC
("Miller Buckfire") as its financial advisor and investment banker to review
and evaluate various strategic alternatives including additional asset sales,
financing and balance sheet restructuring opportunities. Miller Buckfire will
also assist MEC in identifying, managing and executing its asset sales program
and possible joint venture transactions.
Frank Stronach, MEC's Chairman and Chief Executive Officer, commented:
"Although MEC has a strong asset base, we remain burdened with far too much
debt and interest expense. Our previously announced debt elimination plan has
been negatively affected by the weak real estate and credit markets, which
have impacted our ability to sell non-core assets. As a result, we are
evaluating MEC's core operations with a view to possibly selling or joint
venturing one or more of MEC's core racetracks in order to strengthen MEC's
balance sheet and liquidity position. Working with Miller Buckfire, we intend
to develop and execute a plan to sell or joint venture certain core assets and
enhance MEC's capital structure. Despite very difficult economic conditions in
the U.S., our EBITDA loss modestly improved in the third quarter of 2008
compared to the same period last year due to improved results at Gulfstream
Park and XpressBet(R). Although the weak economy will continue to present
challenges in the near-term, we are very conscious of the fact that we must
significantly improve our operating results."
Our racetracks operate for prescribed periods each year. As a result, our
racing revenues and operating results for any quarter will not be indicative
of our racing revenues and operating results for the year.
Revenues from continuing operations were $81.6 million for the three
months ended September 30, 2008, an increase of $0.1 million or 0.1% compared
to $81.5 million for the three months ended September 30, 2007. Revenues from
continuing operations were impacted by:
- Maryland operations revenues below the prior year period by
$3.2 million primarily due to decreased average daily attendance and
handle at both Laurel Park and Pimlico;
- Southern U.S. operations revenues below the prior year period by
$1.2 million primarily due to decreased average daily attendance and
handle at Lone Star Park;
- PariMax operations revenues below the prior year period by
$0.6 million primarily due to reduced revenues at AmTote's Australian
operations and reduced tote service revenues with the overall
industry decline in wagering handle, partially offset by increased
wagering at XpressBet(R) with access to new racing content that was
not previously available to XpressBet(R);
- Northern U.S. operations revenues below the prior year period by
$0.5 million primarily due to decreased average daily attendance and
handle at The Meadows;
- California operations revenues above the prior year period by
$3.1 million due to 10 additional live race days at Golden Gate
Fields with a change in the racing calendar and additional awarded
live race days; and
- Florida operations revenues above the prior year period by
$2.6 million primarily due to the offering of simulcasting at
Gulfstream Park after the live race meet ended, which was not
available in the prior year comparative period, and increased slot
revenues at Gulfstream Park.
Revenues were $478.8 million in the nine months ended September 30, 2008,
a decrease of $24.3 million or 4.8% compared to $503.1 million for the nine
months ended September 30, 2007. The decreased revenues in the nine months
ended September 30, 2008 compared to the prior year period are primarily due
to the same factors impacting the three months ended September 30, 2008 as
well as California operations revenues below the prior year period by
$18.1 million due to the net loss of 8 live race days at Santa Anita Park due
to excessive rain and track drainage issues with the new synthetic racing
surface that was installed in the fall of 2007, Maryland operations revenues
below the prior year period by $11.1 million due to 13 fewer live race days at
Laurel Park and decreased handle and wagering on the 2008 Preakness(R) and
real estate and other operations revenues above the prior year period by
$4.3 million due to the sale of real estate and increased housing unit sales
at our European residential housing development.
EBITDA loss from continuing operations was $20.4 million for the three
months ended September 30, 2008, an improvement of $3.0 million or 13.0%
compared to an EBITDA loss of $23.4 million for the three months ended
September 30, 2007. The improved EBITDA loss from continuing operations was
primarily due to:
- Corporate office costs below the prior year period by $2.4 million
primarily due to lower severance in the current year period compared
to the prior year period;
- Florida operations above the prior year period by $1.5 million due to
increased gaming and simulcasting revenues at Gulfstream Park as
noted above, combined with reduced operating costs and improved food
and beverage operations; and
- A write-down of $1.4 million recorded in the prior year period
related to the Porter, New York real estate;
partially offset by:
- Increased predevelopment and other costs of $2.4 million incurred
pursuing alternative gaming opportunities including the November 4,
2008 Maryland gaming referendum, evaluating financing alternatives
and legal costs relating to the protection of our content
distribution rights.
EBITDA of $0.7 million for the nine months ended September 30, 2008,
decreased $4.4 million from $5.1 million in the nine months ended
September 30, 2007 primarily due to the same factors impacting EBITDA for the
three months ended September 30, 2008 as well as:
- Maryland operations below the prior year period by $5.9 million due
to decreased revenues at Laurel Park and Pimlico as noted above,
combined with increased severance costs in the current year period;
- A write-down of long-lived assets of $5.0 million relating to an
impairment charge related to the Dixon, California real estate
property in the nine months ended September 30, 2008, which
represented the excess of the carrying value of the asset over the
estimated fair value less selling costs;
- California operations below the prior year period by $4.0 million for
the reasons noted above which decreased revenues at Santa Anita Park;
partially offset by:
- Residential development and other above the prior year period by
$2.3 million due to the sale of real estate and increased housing
unit sales at our European residential housing development;
- Recognition of $2.0 million of deferred gain on The Meadows
transaction; and
- PariMax operations above the prior year period by $1.8 million for
the reasons noted above which increased revenues at XpressBet(R).
Net loss for the three months ended September 30, 2008 was $48.4 million,
an improvement of $1.5 million or 2.9% compared to the same period last year.
Net loss from continuing operations increased $6.0 million as the improved
EBITDA loss was more than offset by increased interest expense with higher
debt levels this quarter compared to the prior year period. Net income from
discontinued operations increased $7.5 million primarily due to increased
revenues and EBITDA from Remington Park's slot operations as well as the
recognition of certain tax benefits related to our Austrian operations. Net
loss for the nine months ended September 30, 2008 was $116.1 million, an
increase of $45.3 million or 64.0% compared to the same period last year. Net
loss from continuing operations increased $27.3 million with decreased EBITDA,
increased interest expense and increased depreciation and amortization. Net
loss from discontinued operations increased $18.0 million and was positively
impacted by the same factors noted above for the three months ended
September 30, 2008, but these improvements were negatively impacted by a
write-down of long-lived assets of $32.3 million at Magna Racino(TM) and
Portland Meadows.
During the three months ended September 30, 2008, cash used for operating
activities of continuing operations was $26.5 million, which improved
$4.0 million from cash used for operating activities of continuing operations
of $30.5 million in the three months ended September 30, 2007, primarily due
to an increase in cash provided from non-cash working capital balances. In the
three months ended September 30, 2008, cash provided from non-cash working
capital balances of $11.3 million is primarily due to a decrease in accounts
receivable at September 30, 2008 compared to the respective balance at
June 30, 2008. Cash used for investing activities of continuing operations in
the three months ended September 30, 2008 was $7.0 million, including
$9.3 million of expenditures on real estate property and fixed asset additions
and $0.8 million of expenditures on other asset additions, partially offset by
$3.0 million of proceeds received on the disposal of real estate properties
and fixed assets and $0.1 million received on the settlement of a real estate
sale holdback. Cash provided from financing activities of continuing
operations during the three months ended September 30, 2008 of $23.2 million
arising from proceeds from indebtedness and long-term debt with our parent of
$21.7 million, proceeds from bank indebtedness of $11.0 million and proceeds
from long-term debt of $1.6 million, partially offset by repayment of
indebtedness and long-term debt with our parent company of $5.0 million,
repayment of bank indebtedness of $4.2 million and repayment of other
long-term debt of $1.8 million.
Although we continue to take steps to implement our debt elimination
plan, real estate and credit markets have continued to demonstrate weakness to
date in 2008 and we will not be able to complete asset sales as quickly as
originally planned nor do we expect to achieve proceeds of disposition as high
as originally contemplated. Given our upcoming debt maturities and our
operational funding requirements, we will again need to seek extensions and/or
additional funds in the short-term from one or more possible sources to meet
our obligations as they come due. The availability of such extensions and/or
additional funds from existing lenders, including our controlling shareholder,
or from other sources is not assured and, if available, the terms thereof are
not determinable at this time. We expect that we will enter into negotiations
with such existing lenders, including our controlling shareholder, with a view
to extending, restructuring or refinancing such facilities. There is no
assurance that negotiations with our existing lenders will result in a
favorable outcome for us.
MEC, North America's largest owner and operator of horse racetracks,
based on revenue, develops, owns and operates horse racetracks and related
pari-mutuel wagering operations, including off-track betting facilities. MEC
also develops, owns and operates casinos in conjunction with its racetracks
where permitted by law. MEC owns and operates AmTote International, Inc., a
provider of totalisator services to the pari-mutuel industry, XpressBet(R), a
national Internet and telephone account wagering system, as well as
MagnaBet(TM) internationally. Pursuant to joint ventures, MEC has a fifty
percent interest in HorseRacing TV(R), a 24-hour horse racing television
network and TrackNet Media Group, LLC, a content management company formed to
distribute the full breadth of MEC's horse racing content.
This press release contains "forward-looking statements" within the
meaning of applicable securities legislation, including Section 27A of the
United States Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the United States Securities Exchange Act of 1934, as amended
(the "Exchange Act") and forward-looking information as defined in the
Securities Act (Ontario) (collectively referred to as forward-looking
statements). These forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
the Securities Act (Ontario) and include, among others, statements regarding:
our debt reduction plans and efforts, including the current status and the
potential impact of the September 12, 2007 adopted plan to eliminate our debt
(the "Plan"), as to which there can be no assurance of success; expectations
as to our ability to complete asset sales as contemplated by the Plan or
otherwise (including, without limitation, the timing or pricing of such
sales); expectations as to our ability to negotiate and close, on acceptable
terms, one or more core asset sale transactions; the impact of the short-term
bridge loan facility (the "Bridge Loan") of up to $125.0 million with a
subsidiary of MEC's controlling shareholder, MI Developments Inc.;
expectations as to our ability to comply with the Bridge Loan and other credit
facilities; our ability to continue as a going concern; strategies and plans;
expectations as to financing and liquidity requirements and arrangements;
expectations as to operations; expectations as to revenues, costs and
earnings; the time by which certain redevelopment projects, transactions or
other objectives will be achieved; estimates of costs relating to
environmental remediation and restoration; proposed developments, products and
services; expectations as to the timing and receipt of government approvals
and regulatory changes in gaming and other racing laws and regulations;
expectations that claims, lawsuits, environmental costs, commitments,
contingent liabilities, labor negotiations or agreements, or other matters
will not have a material adverse effect on our consolidated financial
position, operating results, prospects or liquidity; projections, predictions,
expectations, estimates, beliefs or forecasts as to our financial and
operating results and future economic performance; and other matters that are
not historical facts.
Forward-looking statements should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or the times at or by which such performance or results will be
achieved. Undue reliance should not be placed on such statements.
Forward-looking statements are based on information available at the time
and/or management's good faith assumptions and analyses made in light of our
perception of historical trends, current conditions and expected future
developments, as well as other factors we believe are appropriate in the
circumstances and are subject to known and unknown risks, uncertainties and
other unpredictable factors, many of which are beyond our control, that could
cause actual events or results to differ materially from such forward-looking
statements. Important factors that could cause actual results to differ
materially from our forward-looking statements include, but may not be limited
to, material adverse changes in: general economic conditions; the popularity
of racing and other gaming activities as recreational activities; the
regulatory environment affecting the horse racing and gaming industries; our
ability to obtain or maintain government and other regulatory approvals
necessary or desirable to proceed with proposed real estate developments;
increased regulation affecting certain of our non-racetrack operations, such
as broadcasting ventures; and our ability to develop, execute or finance our
strategies and plans within expected timelines or budgets. In drawing
conclusions set out in our forward-looking statements above, we have assumed,
among other things, that we will continue with our efforts to implement the
Plan, although not on the originally contemplated time schedule, negotiate and
close, on acceptable terms, one or more core asset sale transactions, comply
with the terms of and/or obtain waivers or other concessions from our lenders,
refinance or repay on maturity our existing financing arrangements (including
our senior secured revolving credit facility with a Canadian financial
institution and the Bridge Loan), possibly obtain additional financing on
acceptable terms to fund our ongoing operations and there will not be any
material further deterioration in general economic conditions or any further
significant decline in the popularity of horse racing and other gaming
activities beyond that which has already occurred in the current economic
downturn; nor any material adverse changes in weather and other environmental
conditions at our facilities, the regulatory environment or our ability to
develop, execute or finance our strategies and plans as anticipated.
Forward-looking statements speak only as of the date the statements were
made. We assume no obligation to update forward-looking statements to reflect
actual results, changes in assumptions or changes in other factors affecting
forward-looking statements. If we update one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect thereto or with respect to other forward-looking statements.
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
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(Unaudited)
(U.S. dollars in thousands, except per share figures)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2008 2007 2008 2007
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Revenues
Racing and gaming
Pari-mutuel wagering $ 47,423 $ 44,124 $ 339,359 $ 359,883
Gaming 9,290 9,015 33,794 31,831
Non-wagering 21,917 25,648 95,765 105,790
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78,630 78,787 468,918 497,504
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Real estate and other
Sale of real estate - - 1,492 -
Residential
development and
other 2,947 2,695 8,425 5,586
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2,947 2,695 9,917 5,586
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81,577 81,482 478,835 503,090
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Costs, expenses and
other income
Racing and gaming
Pari-mutuel purses,
awards and other 26,839 23,967 203,975 216,340
Gaming purses, taxes
and other 6,372 6,118 22,843 22,002
Operating costs 50,093 53,290 193,615 201,611
General and
administrative 13,300 17,300 42,361 49,168
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96,604 100,675 462,794 489,121
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Real estate and other
Cost of real estate
sold - - 1,492 -
Operating costs 1,757 1,185 3,653 2,915
General and
administrative 97 152 363 561
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1,854 1,337 5,508 3,476
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Predevelopment and
other costs 2,766 393 4,213 1,765
Depreciation and
amortization 11,362 10,098 33,634 27,809
Interest expense, net 18,115 11,712 50,608 34,219
Write-down of long-lived
assets - 1,444 5,000 1,444
Equity loss 710 1,035 2,619 2,163
Recognition of
deferred gain on
The Meadows transaction - - (2,013) -
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131,411 126,694 562,363 559,997
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Loss from continuing
operations before
income taxes (49,834) (45,212) (83,528) (56,907)
Income tax expense
(benefit) 748 (637) 3,011 2,287
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Loss from continuing
operations (50,582) (44,575) (86,539) (59,194)
Income (loss) from
discontinued
operations 2,223 (5,236) (29,534) (11,585)
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Net loss (48,359) (49,811) (116,073) (70,779)
Other comprehensive
income (loss)
Foreign currency
translation
adjustment (737) 2,112 1,345 4,122
Change in fair value
of interest rate
swap (45) (327) 12 (423)
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Comprehensive loss $ (49,141) $ (48,026) $ (114,716) $ (67,080)
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Earnings (loss) per
share for Class A
Subordinate
Voting Stock and
Class B Stock:
Basic and Diluted
Continuing
operations $ (8.64) $ (8.28) $ (14.82) $ (11.00)
Discontinued
operations 0.38 (0.97) (5.05) (2.15)
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Loss per share $ (8.26) $ (9.25) $ (19.87) $ (13.15)
-------------------------------------------------------------------------
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Average number of
shares of Class A
Subordinate
Voting Stock and
Class B Stock
outstanding during
the period
(in thousands):
Basic and Diluted 5,852 5,386 5,843 5,383
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See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
(U.S. dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided from
(used for):
Operating activities
of continuing
operations:
Loss from continuing
operations $ (50,582) $ (44,575) $ (86,539) $ (59,194)
Items not involving
current cash flows 12,843 11,115 42,506 28,738
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(37,739) (33,460) (44,033) (30,456)
Changes in non-cash
working capital
balances 11,255 2,973 (8,289) (13,103)
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(26,484) (30,487) (52,322) (43,559)
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Investing activities
of continuing
operations:
Real estate property
and fixed asset
additions (9,302) (19,896) (24,170) (55,757)
Other asset additions (831) (692) (7,873) (3,178)
Proceeds on disposal of
real estate properties - - 1,492 -
Proceeds on disposal of
fixed assets 1,817 2,602 7,162 5,243
Proceeds on real estate
sold to parent - 100 - 88,009
Proceeds on real estate
sold to related parties 1,171 - 32,631 -
Proceeds on settlement
of holdback with parent 123 - 123 -
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(7,022) (17,886) 9,365 34,317
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Financing activities of
continuing operations:
Proceeds from bank
indebtedness 10,959 25,199 48,705 40,940
Proceeds from
indebtedness and long-
term debt with parent 21,659 10,189 72,559 26,518
Proceeds from long-term
debt 1,605 205 4,341 4,345
Repayment of bank
indebtedness (4,201) - (44,670) (21,515)
Repayment of
indebtedness and long-
term debt with parent (4,974) (435) (27,407) (2,588)
Repayment of long-term
debt (1,825) (2,207) (10,703) (31,667)
Redemption of fractional
share capital on
Reverse Stock Split (10) - (10) -
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23,213 32,951 42,815 16,033
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Effect of exchange rate
changes on cash and
cash equivalents (217) 199 (139) 113
-------------------------------------------------------------------------
Net cash flows provided
from (used for)
continuing operations (10,510) (15,223) (281) 6,904
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Cash provided from
(used for) discontinued
operations:
Operating activities of
discontinued operations 929 (3,262) 2,522 (4,618)
Investing activities of
discontinued operations 2,699 (714) (2,284) (3,941)
Financing activities of
discontinued operations 22 (1,637) (12,633) (23,219)
-------------------------------------------------------------------------
Net cash flows provided
from (used for)
discontinued operations 3,650 (5,613) (12,395) (31,778)
-------------------------------------------------------------------------
Net decrease in cash
and cash equivalents
during the period (6,860) (20,836) (12,676) (24,874)
Cash and cash
equivalents, beginning
of period 37,577 54,253 43,393 58,291
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period 30,717 33,417 30,717 33,417
Less: cash and cash
equivalents, end of
period of discontinued
operations (9,346) (10,463) (9,346) (10,463)
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period of continuing
operations $ 21,371 $ 22,954 $ 21,371 $ 22,954
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-------------------------------------------------------------------------
See accompanying notes
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
(REFER TO NOTE 1 - GOING CONCERN)
(Unaudited)
(U.S. dollars and share amounts in thousands)
September 30, December 31,
2008 2007
-----------------------------
ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 21,371 $ 34,152
Restricted cash 13,358 28,264
Accounts receivable 26,748 32,157
Due from parent 945 4,463
Income taxes receivable - 1,234
Inventories 6,215 6,351
Prepaid expenses and other 14,962 9,946
Assets held for sale 26,984 35,658
Discontinued operations 114,063 75,455
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224,646 227,680
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Real estate properties, net 702,856 705,069
Fixed assets, net 73,924 85,908
Racing licenses 109,868 109,868
Other assets, net 12,465 10,980
Future tax assets 39,975 39,621
Assets held for sale - 4,482
Discontinued operations - 60,268
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$ 1,163,734 $ 1,243,876
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-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Bank indebtedness $ 43,249 $ 39,214
Accounts payable 41,226 65,351
Accrued salaries and wages 7,298 8,198
Customer deposits 2,760 2,575
Other accrued liabilities 37,037 46,124
Income taxes payable 1,159 -
Long-term debt due within one year 10,671 10,654
Due to parent 190,158 137,003
Deferred revenue 2,883 4,339
Liabilities related to assets held for
sale 876 1,047
Discontinued operations 82,748 75,396
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420,065 389,901
-------------------------------------------------------------------------
Long-term debt 83,497 89,680
Long-term debt due to parent 66,980 67,107
Convertible subordinated notes 223,344 222,527
Other long-term liabilities 15,018 18,255
Future tax liabilities 82,114 80,076
Discontinued operations - 13,617
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891,018 881,163
-------------------------------------------------------------------------
Shareholders' equity:
Class A Subordinate Voting Stock
(Issued: 2008 - 2,929; 2007 - 2,908) 339,446 339,435
Class B Stock
(Convertible into Class A Subordinate
Voting Stock)
(Issued: 2008 and 2007 - 2,923) 394,094 394,094
Contributed surplus 116,287 91,825
Other paid-in-capital 2,277 2,031
Accumulated deficit (626,130) (510,057)
Accumulated other comprehensive income 46,742 45,385
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272,716 362,713
-------------------------------------------------------------------------
$ 1,163,734 $ 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 $116.1 million for the
nine months ended September 30, 2008, has incurred net losses of
$113.8 million, $87.4 million and $105.3 million for the years ended
December 31, 2007, 2006 and 2005, respectively, and at September 30,
2008 has an accumulated deficit of $626.1 million and a working
capital deficiency of $195.4 million. At September 30, 2008, the
Company had $255.4 million of debt due to mature in the 12-month
period ending September 30, 2009, including $36.5 million under the
Company's $40.0 million senior secured revolving credit facility with
a Canadian financial institution, which is scheduled to mature on
November 17, 2008, $88.6 million under its bridge loan facility of up
to $125.0 million with a subsidiary of MI Developments Inc. ("MID"),
the Company's controlling shareholder, which is scheduled to mature
on December 1, 2008 and the Company's obligation to repay
$100.0 million of indebtedness under the Gulfstream Park project
financings with a subsidiary of MID by December 1, 2008. Accordingly,
the Company's ability to continue as a going concern is in
substantial doubt and is dependent on the Company generating cash
flows that are adequate to sustain the operations of the business,
renewing or extending current financing arrangements and meeting its
obligations with respect to secured and unsecured creditors, none of
which is assured. If the Company is unable to repay its obligations
when due or satisfy required covenants in debt agreements,
substantially all of the Company's other current and long-term debt
will also become due on demand as a result of cross-default
provisions within loan agreements, unless the Company is able to
obtain waivers, modifications or extensions. On September 12, 2007,
the Company's Board of Directors approved a debt elimination plan
designed to eliminate net debt by December 31, 2008 by generating
funding from the sale of assets, entering into strategic transactions
involving certain of the Company's racing, gaming and technology
operations, and a possible future equity issuance. To address short-
term liquidity concerns and provide sufficient time to implement the
debt elimination plan, the Company arranged $100.0 million of funding
in September 2007, comprised of (i) a $20.0 million private placement
of the Company's Class A Subordinate Voting Stock to Fair Enterprise
Limited ("Fair Enterprise"), a company that forms part of an estate
planning vehicle for the family of Frank Stronach, the Chairman and
Chief Executive Officer of the Company, which was completed in
October 2007; and (ii) a short-term bridge loan facility of up to
$80.0 million with a subsidiary of MID, which was subsequently
increased to $110.0 million on May 23, 2008 and then to
$125.0 million on October 15, 2008. Although the Company continues to
take steps to implement the debt elimination plan, weakness in the
U.S. real estate and credit markets have adversely impacted the
Company's ability to execute the debt elimination plan as market
demand for the Company's assets has been weaker than expected and
financing for potential buyers has become more difficult to obtain
such that the Company does not expect to execute the debt elimination
plan on the time schedule originally contemplated, if at all. As a
result, the Company has needed and will again need to seek extensions
from existing lenders and additional funds in the short-term from one
or more possible sources. The availability of such extensions and
additional funds is not assured and, if available, the terms thereof
are not determinable at this time. These consolidated financial
statements do not give effect to any adjustments to recorded amounts
and their classification, which would be necessary should the Company
be unable to continue as a going concern and, therefore, be required
to realize its assets and discharge its liabilities in other than the
normal course of business and at amounts different from those
reflected in the consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States ("U.S. GAAP") for interim financial
information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete
financial statements. The preparation of the interim consolidated
financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the amounts reported in
the interim consolidated financial statements and accompanying notes.
Actual results could differ from these estimates. In the opinion of
management, all adjustments, which consist of normal and recurring
adjustments, necessary for fair presentation have been included. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 2007.
Reverse Stock Split
The Company completed a reverse stock split (the "Reverse Stock
Split"), effective July 22, 2008, of the Company's Class A
Subordinate Voting Stock and Class B Stock utilizing a 1:20
consolidation ratio. As a result of the Reverse Stock Split, every 20
shares of the Company's issued and outstanding Class A Subordinate
Voting Stock and Class B Stock were consolidated into one share of
the Company's Class A Subordinate Voting Stock and Class B Stock,
respectively. In addition, the exercise prices of the Company's stock
options and the conversion prices of the Company's convertible
subordinated notes have been adjusted, such that, the number of
shares potentially issuable on the exercise of stock options and/or
conversion of subordinated notes will reflect the 1:20 consolidation
ratio. Accordingly, all of the Company's issued and outstanding
Class A Subordinate Voting Stock and Class B Stock and all
performance share awards, outstanding stock options to purchase
Class A Subordinate Voting Stock and subordinated notes convertible
into Class A Subordinate Voting Stock for all periods presented have
been restated to reflect the Reverse Stock Split.
Seasonality
The Company's racing business is seasonal in nature. The Company's
racing revenues and operating results for any quarter will not be
indicative of the racing revenues and operating results for the year.
The Company's racing operations have historically operated at a loss
in the second half of the year, with the third quarter generating the
largest operating loss. This seasonality has resulted in large
quarterly fluctuations in revenues and operating results.
Comparative Amounts
Certain of the comparative amounts have been reclassified to reflect
assets held for sale, discontinued operations and the Reverse Stock
Split.
Impact of Recently Adopted Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 157, Fair Value
Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP and
expands disclosures about fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position No. 157-2,
Effective Date of FASB Statement No. 157, which defers the effective
date of SFAS 157 for non-financial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008. Effective January 1, 2008,
the Company adopted the provisions of SFAS 157 prospectively, except
with respect to certain non-financial assets and liabilities which
have been deferred. The adoption of SFAS 157 did not have a material
effect on the Company's consolidated financial statements.
The following table represents information related to the Company's
financial assets and liabilities measured at fair value on a
recurring basis and the level within the fair value hierarchy in
which the fair value measurements fall at September 30, 2008:
Quoted Prices in Active Significant Significant
Markets for Identical Other Unobservable
Assets or Liabilities Observable Inputs Inputs
(Level 1) (Level 2) (Level 3)
-------------------------------------------------------------------------
Assets carried at
fair value:
Cash equivalents $ 1,000 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities carried
at fair value:
Interest rate swaps $ - $ 1,312 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In February 2007, the FASB issued Statement of Financial Accounting
Standard No. 159, The Fair Value Option for Financial Assets and
Liabilities ("SFAS 159"). SFAS 159 allows companies to voluntarily
choose, at specified election dates, to measure certain financial
assets and liabilities, as well as certain non-financial instruments
that are similar to financial instruments, at fair value (the "fair
value option"). The election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an
instrument, SFAS 159 specifies that all subsequent changes in fair
value for that instrument be reported in income. The provisions of
SFAS 159 are effective for fiscal years beginning after November 15,
2007. Effective January 1, 2008, the Company adopted the provisions
of SFAS 159 prospectively. The Company has elected not to measure
certain financial assets and liabilities, as well as certain non-
financial instruments that are similar to financial instruments, as
defined in SFAS 159 under the fair value option. Accordingly, the
adoption of SFAS 159 did not have an effect on the Company's
consolidated financial statements.
Impact of Recently Issued Accounting Standards
In March 2008, the FASB issued Statement of Financial Accounting
Standard No. 161, Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133
("SFAS 161"). SFAS 161 requires enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for and (c) how
derivative instruments and related hedged items affect an entity's
financial position, financial performance and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. SFAS 161
encourages, but does not require, comparative disclosures for earlier
periods at initial adoption. The Company is currently reviewing
SFAS 161, but has not yet determined the future impact, if any, on
the Company's consolidated financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standard No. 141(R), Business Combinations
("SFAS 141(R)"). SFAS 141(R) changes the accounting model for
business combinations from a cost allocation standard to a standard
that provides, with limited exception, for the recognition of all
identifiable assets and liabilities of the business acquired at fair
value, regardless of whether the acquirer acquires 100% or a lesser
controlling interest of the business. SFAS 141(R) defines the
acquisition date of a business acquisition as the date on which
control is achieved (generally the closing date of the acquisition).
SFAS 141(R) requires recognition of assets and liabilities arising
from contractual contingencies and non-contractual contingencies
meeting a "more-likely-than-not" threshold at fair value at the
acquisition date. SFAS 141(R) also provides for the recognition of
acquisition costs as expenses when incurred and for expanded
disclosures. SFAS 141(R) is effective for acquisitions closing after
December 15, 2008, with earlier adoption prohibited. The Company is
currently reviewing SFAS 141(R), but has not yet determined the
future impact, if any, on the Company's consolidated financial
statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standard No. 160, Non-controlling Interests in Consolidated Financial
Statements ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards for non-controlling interests in subsidiaries and
for the deconsolidation of a subsidiary and also amends certain
consolidation procedures for consistency with SFAS 141(R). Under
SFAS 160, non-controlling interests in consolidated subsidiaries
(formerly known as "minority interests") are reported in the
consolidated statement of financial position as a separate component
within shareholders' equity. Net earnings and comprehensive income
attributable to the controlling and non-controlling interests are to
be shown separately in the consolidated statements of earnings and
comprehensive income. Any changes in ownership interests of a
non-controlling interest where the parent retains a controlling
financial interest in the subsidiary are to be reported as equity
transactions. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008, with earlier adoption prohibited. When
adopted, SFAS 160 is to be applied prospectively at the beginning of
the year, except that the presentation and disclosure requirements
are to be applied retrospectively for all periods presented. The
Company is currently reviewing SFAS 160, but has not yet determined
the future impact, if any, on the Company's consolidated financial
statements.
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.
