AURORA, ON, Nov. 2 /PRNewswire-FirstCall/ -- Magna Entertainment Corp. ("MEC") (NASDAQ: MECA; TSX: MEC.A) today reported its financial results for the third quarter ended September 30, 2006.
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Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
---- ---- ---- ----
(unaudited)
Revenues(1) $ 113,676 $ 78,812 $ 573,503 $ 486,466
Earnings (loss) before
interest, taxes,
depreciation and
amortization
("EBITDA")(1) $ (21,078) $ (26,693) $ 5,376 $ (14,134)
Net income (loss)
Continuing operations $ (48,236) $ (43,389) $ (74,010) $ (66,233)
Discontinued operations(2) (2,506) 8,853 (858) 673
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Net loss $ (50,742) $ (34,536) $ (74,868) $ (65,560)
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Diluted earnings (loss)
per share
Continuing operations $ (0.45) $ (0.40) $ (0.69) $ (0.62)
Discontinued operations(2) (0.02) 0.08 (0.01) 0.01
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Diluted loss per share $ (0.47) $ (0.32) $ (0.70) $ (0.61)
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All amounts are reported in U.S. dollars in thousands,
except per share figures.
(1) Revenues and EBITDA for all periods presented are from continuing
operations only.
(2) Discontinued operations for the three and nine months ended September
30, 2006 include the Magna Golf Club, the sale of which was completed
on August 25, 2006 and the operations of a restaurant and related
real estate in the United States, the sale of which was completed on
May 26, 2006. Results for the three and nine months ended September
30, 2005 have been reclassified to reflect only continuing
operations, reporting the Magna Golf Club and the operations of the
restaurant and related real estate in the United States as noted
above, Flamboro Downs, the sale of which was completed on October 19,
2005, and Maryland-Virginia Racing Circuit, Inc., the sale of which
was completed on September 30, 2005, as discontinued operations.
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In announcing these results, Frank Stronach, Chairman and Interim Chief Executive Officer of MEC, remarked: "Our investments in AmTote International Inc. and Remington Park's casino facility contributed to a 44% increase in revenues from continuing operations this quarter. Given the seasonality of our business, the third quarter has traditionally been our least profitable quarter but we are encouraged that we have been able to improve EBITDA from continuing operations by $5.6 million this quarter. However, we remain burdened with too much debt and interest expense, which contributed to an increased net loss from continuing operations compared to the third quarter of 2005. While we made some progress on debt reduction in the third quarter with the sale of Magna Golf Club, we remain focused on reducing debt further. We expect that our balance sheet will be much stronger by year end as we reduce debt with proceeds from the sale of Fontana Golf Club and collection of the $175.0 million note from the sale of The Meadows, which is expected to occur by November 14, 2006."
MEC also today announced that it has sold its interest in the entity that owns and operates the Fontana Golf Club located in Oberwaltersdorf, Austria to a subsidiary of Magna International Inc. for a sale value of euro 30.0 million (U.S. $38.3 million). MEC will receive cash proceeds of approximately euro 13.2 million (U.S. $16.9 million) and approximately euro 16.8 million (U.S. $21.4 million) of debt has been assumed by the purchaser. In addition, a subsidiary of MI Developments Inc. will receive from MEC a fee of 1% of the net sale proceeds as consideration for waiving repayment rights under the MEC bridge loan agreement between MEC and a subsidiary of MI Developments Inc., made as of July 22, 2005, as amended. The sale was supervised by the Special Committee of MEC's board of directors, consisting of Jerry D. Campbell (Chairman), Louis E. Lataif and William J. Menear. The transaction was approved by MEC's board after a favorable recommendation of the Special Committee.
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.
Our financial results for the three and nine months ended September 30, 2006 reflect the full quarter's operations for all of MEC's racetracks and related pari-mutuel wagering operations. Discontinued operations for the three and nine months ended September 30, 2006 include the Magna Golf Club, the sale of which was completed on August 25, 2006 and the operations of a restaurant and related real estate in the United States, the sale of which was completed on May 26, 2006. Discontinued operations for the three and nine months ended September 30, 2005 include the Magna Golf Club and the operations of the restaurant and related real estate in the United States as noted above, as well as Flamboro Downs, the sale of which was completed on October 19, 2005, and Maryland-Virginia Racing Circuit, Inc., the sale of which was completed on September 30, 2005.
Revenues were $113.7 million in the three months ended September 30, 2006, compared to $78.8 million in the three months ended September 30, 2005, an increase of $34.9 million or 44.2%. The increased revenues were primarily a result of:
- Southern U.S. operations revenues above the prior year period by
$14.5 million primarily due to gaming revenues at the Remington Park
casino facility, which opened in November 2005;
- California operations revenues above the prior year period by
$13.1 million due to a change in the racing calendar at Golden Gate
Fields, whereby there were 29 live race days in the three months
ended September 30, 2006 compared to no live race days in the three
months ended September 30, 2005;
- Technology revenues above the prior year period by $7.0 million as a
result of the acquisition of the remaining 70% equity investment in
AmTote International Inc. in July 2006, the operations of which are
now being consolidated into the Technology operations;
- Maryland operations revenues above the prior year period by
$1.2 million due to increased food and beverage revenues from
Maryland Turf Caterers, the food and beverage operations at Laurel
Park and Pimlico, which was acquired in September 2005. These
operations are now being consolidated into the Maryland operations,
whereas previously the operations were accounted for on an equity
basis;
- European operations revenues above the prior year period by
$0.9 million due to increased wagering revenues at MagnaBet(TM), our
European account wagering platform; partially offset by
- Northern U.S. operations below the prior year period by $1.6 million
due to $1.3 million of revenue recognized in the prior year period
relating to the sale of a lease right in our Oregon operations.
Revenues were $573.5 million in the nine months ended September 30, 2006, an increase of $87.0 million or 17.9% compared to $486.5 million for the nine months ended September 30, 2005. The increased revenues in the nine months ended September 30, 2006 compared to the prior year comparative period are primarily due to the same factors noted above for the three months ended September 30, 2006, but also includes increased attendance, handle and wagering revenues at Santa Anita Park as a result of better weather and more effective marketing efforts, increased revenues in our Florida operations due to the opening of the new clubhouse facility at Gulfstream Park and increased wagering revenues at Laurel Park as a result of additional live race days and increased average field size.
EBITDA loss of $21.1 million in the three months ended September 30, 2006 improved $5.6 million or 21.0% over the three months ended September 30, 2005 and is impacted by the following:
- Southern U.S. operations above the prior year period by $3.4 million
due to the opening of the casino facility at Remington Park in
November 2005, which contributed $3.7 million in EBITDA this quarter;
- California operations above the prior year period by $3.3 million due
to a change in the racing calendar at Golden Gate Fields as noted
previously;
- European operations above the prior year by $1.9 million due to
increased wagering revenues at MagnaBet(TM) and cost reduction
initiatives at all European operations; partially offset by
- Northern U.S. operations below the prior year period by $1.7 million
due to $1.3 million of revenue recognized in the prior year with
respect to the sale of a lease right in our Oregon operations; and
- Predevelopment, pre-opening and other costs above the prior year
period by $0.9 million primarily due to increased spending at
Thistledown related to the referendum question on a constitutional
amendment with respect to gaming, which will be submitted to the
voters at the November 2006 general election.
EBITDA of $5.4 million for the nine months ended September 30, 2006 increased $19.5 million or 138.0% from a loss of $14.1 million in the nine months ended September 30, 2005. The improvement in EBITDA is primarily a result of the same factors noted above which affected EBITDA in the third quarter combined with improvements at Santa Anita Park due to increased attendance, handle and wagering revenue and in our Florida operations with the opening of our new clubhouse facility at Gulfstream Park and declines in our predevelopment, pre-opening and other costs due to timing of activities partially offset by increased Corporate costs due to severance costs and increased professional fees, stock-based compensation expense and bank charges as well as declines in our technology operations with adjustments recorded at XpressBet(R) in the current year related to asset write-offs and increased accruals.
Net loss from continuing operations for the three months ended September 30, 2006 was $48.2 million, compared to a net loss of $43.4 million in the three months ended September 30, 2005. The increased net loss is due to increased interest expense on our Gulfstream Park and Remington Park project financings and bridge loan facility with a subsidiary of our parent company, MI Developments Inc., and increased depreciation expense primarily as a result of the opening of the new clubhouse facility at Gulfstream Park in the first quarter of 2006 and the opening of the Remington Park casino facility in November 2005. Net loss from continuing operations in the nine months ended September 30, 2006 of $74.0 million increased from a net loss of $66.2 million in the nine months ended September 30, 2005 as EBITDA improvements in the period were offset by increased interest and depreciation for reasons noted above.
In the three months ended September 30, 2006, cash used in operations before changes in non-cash working capital was $30.2 million, compared to $30.7 million in the three months ended September 30, 2005, primarily due to the increased net loss in the current year period, partially offset by an increase in items not involving current cash flows. Total cash used in investing activities during the three months ended September 30, 2006 was $20.7 million, which included real estate property and fixed asset additions of $12.8 million and $9.3 million on the acquisition of AmTote International Inc., partially offset by $1.5 million of proceeds received on the disposal of real estate properties, fixed and other assets. Total cash provided from financing activities in the three months ended September 30, 2006 was $27.2 million, which included $18.1 million of cash proceeds on increased bank indebtedness, $6.9 million from the issuance of long-term debt and $6.3 million received from long-term debt with our parent, partially offset by repayments of long-term debt of $2.5 million and repayment of long-term debt with our parent of $1.6 million.
We will hold a conference call to discuss our third quarter results on Thursday, November 2, 2006 at 10:00 a.m. Eastern Standard time. The number to use for this call is 1-877-871-4098. Please call 10 minutes prior to the start of the conference call. The dial-in number for overseas callers is 416-620-8834. Blake Tohana, Executive Vice-President and Chief Financial Officer of MEC, will chair the conference call. We will also be webcasting 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 number one owner and operator of horse racetracks, based on revenues, acquires, develops, and operates horse racetracks and related casino and pari-mutuel wagering operations, including off-track betting facilities. Additionally, MEC owns and operates XpressBet(R), a national Internet and telephone account wagering system, and Horse Racing TV(TM), a 24-hour horse racing television network.
This press release contains "forward-looking statements" within the meaning of applicable securities legislation, including the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements may include, among others, statements regarding: our strategies and plans; the potential impact of the sale of the Fontana Golf Club will have on our level of debt and our balance sheet in turn; expectations as to financing and liquidity requirements and arrangements; expectations as to operational improvements; expectations as to cost savings, revenue growth 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 new racetracks or other 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 the Company's control, that could cause actual events or results to differ materially from such forward-looking statements. 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, 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 there will not be any material adverse changes: in general economic conditions, the popularity of horse racing and other gaming activities, 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 information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. 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,
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2006 2005 2006 2005
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(restated- (restated-
note 5) note 5)
Revenues
Racing and gaming
Pari-mutuel wagering $ 70,761 $ 59,411 $ 425,801 $ 398,647
Gaming 13,565 - 43,054 -
Non-wagering 26,985 16,798 96,673 78,408
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111,311 76,209 565,528 477,055
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Real estate and other
Golf and other 2,365 2,603 7,975 9,411
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113,676 78,812 573,503 486,466
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Costs and expenses
Racing and gaming
Pari-mutuel purses,
awards and other 43,045 36,877 265,674 246,441
Gaming taxes, purses
and other 6,532 - 20,898 -
Operating costs 60,883 48,615 215,385 192,083
General and
administrative 18,020 14,820 52,249 46,725
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128,480 100,312 554,206 485,249
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Real estate and other
Operating costs 1,277 2,133 5,754 6,767
General and
administrative 238 90 524 302
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1,515 2,223 6,278 7,069
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Predevelopment, pre-
opening and other costs 4,324 3,465 7,418 9,294
Depreciation and
amortization 11,572 9,500 32,165 27,983
Interest expense, net 16,576 8,532 45,989 23,267
Equity loss (income) 435 (495) 225 (1,012)
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162,902 123,537 646,281 551,850
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Loss from continuing
operations before
income taxes (49,226) (44,725) (72,778) (65,384)
Income tax expense
(benefit) (990) (1,336) 1,232 849
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Net loss from continuing
operations (48,236) (43,389) (74,010) (66,233)
Net income (loss) from
discontinued operations (2,506) 8,853 (858) 673
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Net loss (50,742) (34,536) (74,868) (65,560)
Other comprehensive
income (loss)
Foreign currency
translation adjustment (706) 2,041 6,572 (12,219)
Change in fair value
of interest rate swap (133) 149 (33) 406
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Comprehensive loss $ (51,581) $ (32,346) $ (68,329) $ (77,373)
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Earnings (loss) per share
for Class A Subordinate
Voting Stock or Class B
Stock:
Basic and Diluted
Continuing operations $ (0.45) $ (0.40) $ (0.69) $ (0.62)
Discontinued operations (0.02) 0.08 (0.01) 0.01
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Loss per share $ (0.47) $ (0.32) $ (0.70) $ (0.61)
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Average number of shares
of Class A Subordinate
Voting Stock or Class B
Stock outstanding during
the period (in thousands):
Basic and Diluted 107,498 107,359 107,445 107,355
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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,
-----------------------------------------------
2006 2005 2006 2005
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(restated- (restated-
note 5) note 5)
Cash provided from
(used for):
Operating activities
Net loss from continuing
operations $ (48,236) $ (43,389) $ (74,010) $ (66,233)
Items not involving
current cash flows 18,049 12,733 48,820 28,012
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(30,187) (30,656) (25,190) (38,221)
Changes in non-cash
working capital balances 5,151 2,747 (15,292) (7,612)
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(25,036) (27,909) (40,482) (45,833)
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Investing activities
Acquisition of business,
net of cash acquired (9,347) - (9,347) -
Real estate property and
fixed asset additions (12,826) (36,537) (68,964) (82,764)
Other asset disposals
(additions) 804 13 (61) (464)
Proceeds on disposal of
real estate properties
and fixed assets 653 772 3,478 4,403
Proceeds on real estate
sold to a related party - - 5,578 1,400
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(20,716) (35,752) (69,316) (77,425)
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Financing activities
Net increase in bank
indebtedness 18,129 1,300 12,629 800
Proceeds from advances and
long-term debt with parent 6,272 56,004 66,849 76,100
Repayment of advances and
long-term debt with parent (1,600) - (3,400) -
Issuance of long-term debt 6,927 - 12,134 -
Repayment of long-term debt (2,501) (7,733) (14,422) (11,200)
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27,227 49,571 73,790 65,700
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Effect of exchange rate
changes on cash and
cash equivalents (258) (380) (65) (251)
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Net cash flows used for
continuing operations (18,783) (14,470) (36,073) (57,809)
Net cash flows provided
from discontinued
operations 13,946 5,222 16,145 33,402
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Net decrease in cash and
cash equivalents during
the period (4,837) (9,248) (19,928) (24,407)
Cash and cash equivalents,
beginning of period 35,791 44,846 50,882 60,005
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Cash and cash equivalents,
end of period $ 30,954 $ 35,598 $ 30,954 $ 35,598
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MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
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(REFER TO NOTE 1 - GOING CONCERN)
(Unaudited)
(U.S. dollars and share amounts in thousands)
September 30, December 31,
2006 2005
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(restated -
notes 4 and 5)
ASSETS
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Current assets:
Cash and cash equivalents $ 30,954 $ 50,882
Restricted cash 31,940 24,776
Accounts receivable 45,103 51,584
Income taxes receivable - 399
Prepaid expenses and other 19,950 7,021
Assets held for sale 79,538 79,312
Discontinued operations - 904
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207,485 214,878
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Real estate properties, net 930,570 908,957
Fixed assets, net 87,885 58,513
Racing licenses 109,868 109,868
Other assets, net 10,868 14,024
Future tax assets 46,466 44,918
Discontinued operations - 63,486
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$ 1,393,142 $ 1,414,644
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness $ 39,929 $ 30,260
Accounts payable 58,253 62,617
Accrued salaries and wages 7,769 8,160
Customer deposits 2,374 2,549
Other accrued liabilities 58,222 67,485
Income taxes payable 1,834 -
Long-term debt due within one year 73,517 34,262
Due to parent 100,638 72,060
Deferred revenue 6,430 6,789
Liabilities related to assets held for sale 28,772 27,737
Discontinued operations - 12,281
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377,738 324,200
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Long-term debt 127,558 157,270
Long-term debt due to parent 164,323 113,500
Convertible subordinated notes 221,164 220,347
Other long-term liabilities 2,923 2,812
Future tax liabilities 103,182 101,301
Discontinued operations - 35,620
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996,888 955,050
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Shareholders' equity:
Class A Subordinate Voting Stock
(Issued: 2006 - 49,038; 2005 - 48,895) 319,015 318,105
Class B Stock
(Issued: 2006 and 2005 - 58,466) 394,094 394,094
Contributed surplus 20,826 17,943
Other paid-in-capital 1,196 -
Deficit (383,815) (308,947)
Accumulated comprehensive income 44,938 38,399
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396,254 459,594
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$ 1,393,142 $ 1,414,644
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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. Summary of Significant Accounting Policies
Going Concern
These financial statements 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 a working capital deficiency of
$170.3 million as at September 30, 2006. 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, renew or extend current
financing arrangements and maintain its obligations with respect to
secured and unsecured creditors, none of which is assured. On
November 9, 2005, the Company announced that it had entered into a
share purchase agreement with PA Meadows, LLC and a fund managed by
Oaktree Capital Management, LLC (together, "Millennium-Oaktree")
providing for the acquisition by Millennium-Oaktree of all of the
outstanding shares of the Company's wholly-owned subsidiaries through
which the Company owned and operated The Meadows, a standardbred
racetrack in Pennsylvania. The share purchase agreement was amended
on July 26, 2006 (refer to Note 4(b)) to reflect the issuance of two
notes representing the purchase price in the amounts of
$175.0 million (the "First Note") and $25.0 million (the "Second
Note"). On September 27, 2006, the Pennsylvania Gaming Control Board
("PGCB") granted approval to Washington Trotting Association, Inc. of
a Conditional Category 1 Gaming License (the "Gaming License"). The
First Note is expected to be repaid by November 14, 2006. Funds
received on the repayment of the First Note will be used to repay the
bridge loan with the Company's parent, MI Developments Inc. ("MID"),
which matures on December 5, 2006 and will also be used to repay, in
part, the Company's senior secured credit facility, which currently
matures on November 6, 2006, unless further extended with the consent
of both parties and will also be used to repay $2.0 million of the
BE&K, Inc. construction loan. The Company is also continuing to
pursue other funding sources in connection with the previously
announced Recapitalization Plan, which may include further asset
sales, partnerships and raising capital through equity offerings.
However, the successful realization of these efforts is not
determinable at this time. These financial statements do not give
effect to any adjustments 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 accompanying unaudited financial statements.
Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with United States generally accepted
accounting principles ("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 consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from
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, 2005.
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 revenue and operating results.
Impact of Recently Issued Accounting Standards
Under Staff Accounting Bulletin 74, the Company is required to
disclose certain information related to new accounting standards,
which have not yet been adopted due to delayed effective dates.
In June 2006, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation # 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the Company's financial
statements in accordance with FASB Statement # 109, "Accounting for
Income Taxes", and prescribes a minimum recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax provision taken or expected to be taken in a tax
return. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006. The Company is currently reviewing
FIN 48, but has not yet determined the impact on the Company's
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standard ("SFAS") # 157, "Fair Value Measurements" ("SFAS 157").
SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements.
The provisions of SFAS 157 are effective for the fiscal years
beginning after November 15, 2007. The Company is currently reviewing
SFAS 157, but has not yet determined the impact on the Company's
financial statements.
In September 2006, the FASB issued SFAS # 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans" ("SFAS 158"). SFAS 158 requires employers to fully recognize
the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or
liability on their financial statements, recognize changes in that
funded status in the year in which the changes occur through
comprehensive income and disclose in the notes to financial
statements additional information about certain effects on net
periodic benefit cost for the next fiscal year that arise from
delayed recognition of the gains or losses, prior service costs or
credits, and transition asset or obligation. The disclosure
provisions of SFAS 158 are effective for fiscal years ending after
December 15, 2006, but before June 16, 2007 and the measurement
provisions of SFAS 158 are effective for fiscal years ending after
December 15, 2008. The Company is currently reviewing SFAS 158, but
has not yet determined the impact on the Company's financial
statements.
Comparative Amounts
Certain of the comparative amounts have been reclassified to reflect
discontinued operations and changes in assets held for sale.
2. Accounting Change
Prior to January 1, 2006, the Company accounted for stock-based
compensation under the recognition and measurement provisions of APB
Opinion # 25, "Accounting for Stock Issued to Employees", and
related Interpretations, as permitted by SFAS # 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). No stock-based
compensation expense was recognized in the accompanying unaudited
consolidated statements of operations and comprehensive loss related
to stock options for the three and nine months ended September 30,
2005 as all options granted had an exercise price no less than the
fair market value of the Company's Class A Subordinate Voting Stock
at the date of grant.
Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS # 123(R), "Share-Based Payment"
("SFAS 123(R)"), using the modified-prospective method. Under the
modified-prospective method, compensation expense recognized in the
three and nine months ended September 30, 2006, includes: (a)
compensation expense for all share-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of
SFAS 123, and (b) compensation expense for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R).
Results for the three and nine months ended September 30, 2005, have
not been restated.
The Company's net loss from continuing operations and net loss for
the three months ended September 30, 2006 would have been
$48.1 million and $50.6 million, respectively, if the Company had not
adopted SFAS 123(R) on January 1, 2006 and continued to account for
share-based compensation under APB Opinion # 25 compared to
reported net loss from continuing operations and net loss of
$48.2 million and $50.7 million, respectively and basic and diluted
loss per share of $0.47 for the three months ended September 30, 2006
would have remained unchanged.
The Company's net loss from continuing operations and net loss for
the nine months ended September 30, 2006 would have been
$72.8 million and $73.7 million, respectively, if the Company had not
adopted SFAS 123(R) on January 1, 2006 and continued to account for
share-based compensation under APB Opinion # 25 compared to
reported net loss from continuing operations and net loss of
$74.0 million and $74.9 million, respectively and basic and diluted
loss per share for the nine months ended September 30, 2006 would
have been $0.69, compared to a reported basic and diluted loss per
share of $0.70.
As a result of the adoption of SFAS 123(R), for the three and nine
months ended September 30, 2006, the Company recognized $0.1 million
and $1.2 million, respectively, of stock-based compensation expense
related to stock options which has been recorded on the accompanying
unaudited consolidated balance sheets as "other paid-in-capital". The
Company has estimated a nominal annual effective tax rate for the
entire year (refer to Note 6) and accordingly has applied this
effective tax rate to the stock-based compensation expense recognized
for the three and nine months ended September 30, 2006, resulting in
a nominal income tax impact related to stock-based compensation
expense.
The pro-forma impact on net loss and loss per share if the Company
had applied the fair value recognition provisions of SFAS 123 to
stock-based compensation for the three and nine months ended
September 30, 2005 is as follows:
Three months Nine months
ended ended
September 30, September 30,
2005 2005
---------------------------------------------------------------------
Net loss, as reported $ (34,536) $ (65,560)
Pro-forma stock compensation expense
determined under the fair value method,
net of tax (15) (611)
---------------------------------------------------------------------
Pro-forma net loss $ (34,551) $ (66,171)
---------------------------------------------------------------------
Loss per share
Basic - as reported $ (0.32) $ (0.61)
Basic - pro-forma $ (0.32) $ (0.62)
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted - as reported $ (0.32) $ (0.61)
Diluted - pro-forma $ (0.32) $ (0.62)
---------------------------------------------------------------------
---------------------------------------------------------------------
3. Acquisition
On August 22, 2003, MEC Maryland Investments Inc. ("MEC Maryland"), a
wholly-owned subsidiary of the Company, acquired a 30% equity
interest in AmTote International, Inc. ("AmTote") for a total cash
purchase price, including transaction costs, of $4.3 million. MEC
Maryland had a purchase option (the "First Option") to acquire an
additional 30% equity interest in AmTote, exercisable at any time
during the three year period commencing after the date of
acquisition. If MEC Maryland exercised the First Option, it had a
second purchase option (the "Second Option") to acquire the remaining
40% equity interest in AmTote, exercisable at anytime during the
three year period commencing after the date that the First Option was
exercised. In addition, in the event the holders of the AmTote shares
exercised their put option within 120 days of the exercise date of
the First Option, MEC Maryland could have been required to purchase
the remaining 40% equity interest on 60 days notice.
On July 26, 2006, MEC Maryland acquired the remaining 70% equity
interest of AmTote for a total cash purchase price of $9.3 million,
including transaction costs of $0.1 million, net of cash acquired of
$5.5 million. AmTote is a leading provider of totalisator services to
the North American pari-mutuel industry with service contracts with
over 70 North American racetracks and other wagering entities.
The purchase price, has been allocated to the assets and liabilities
acquired as follows:
---------------------------------------------------------------------
Non-cash working capital $ 1,203
Fixed assets 12,008
Other assets 127
Goodwill 683
Long-term debt (1,470)
Other long-term liabilities (980)
Future tax liabilities (2,224)
---------------------------------------------------------------------
Net assets acquired and total purchase price,
net of cash acquired $ 9,347
---------------------------------------------------------------------
---------------------------------------------------------------------
The purchase price allocation for this acquisition is preliminary
and may be adjusted further as a result of obtaining additional
information regarding preliminary estimates of fair values made at
the date of purchase.
4. Assets Held for Sale
(a) On November 3, 2005, the Company announced that one of its
subsidiaries that owns approximately 157 acres of excess real
estate in Palm Beach County, Florida had entered into an
agreement to sell the real property to Toll Bros., Inc. (the
"purchaser"), a Pennsylvania real estate development company for
$51.0 million in cash. The proposed sale was subject to the
completion of due diligence by the purchaser by April 3, 2006 and
a closing by April 28, 2006. On April 3, 2006, the Company
announced the termination of the sale agreement and, as such, the
purchaser was not proceeding with the proposed sale as stipulated
in the agreement. Upon termination of this agreement, a mortgage
in favor of MID was registered against the property under the
terms of the bridge loan. The Company is considering its options
with respect to this property. The Company has determined that
the plan of sale criteria under SFAS # 144, "Accounting for
Impairment or Disposal of Long-Lived Assets", are no longer met
and accordingly, the property has been reclassified to reflect
the carrying amount of the property in "real estate properties,
net" rather than in "assets held for sale" on the accompanying
unaudited consolidated balance sheets.
(b) On November 9, 2005, the Company announced that it had entered
into a share purchase agreement (the "Initial SPA") with 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"), providing for the acquisition by Millennium-Oaktree of
all of the outstanding shares of Washington Trotting Association,
Inc., Mountain Laurel Racing, Inc. and MEC Pennsylvania Racing,
Inc. (collectively "The Meadows Entities"), each wholly-owned
subsidiaries of the Company, through which the Company owned and
operated The Meadows, a standardbred racetrack in Pennsylvania.
On July 26, 2006, the Company announced that it had entered into
an amended share purchase agreement, which modifies the Initial
SPA with respect to the sale of The Meadows. As a result of
regulatory requirements relating to the approval of the issuance
of a gaming license by the PGCB, as well as significant changes
in the economic and regulatory environment in Pennsylvania since
the date of the Initial SPA, including regulations adopted by the
Pennsylvania Department of Revenue in respect of the amount of
local share assessment taxes payable to North Strabane Township
and Washington County, the parties agreed to revise the terms of
the Initial SPA. The $225.0 million purchase price in the Initial
SPA, which included a $39.0 million holdback, was reduced to
$200.0 million, with a $25.0 million holdback payable to the
Company over a five-year period, subject to offset for certain
indemnification obligations. In exchange for the shares of The
Meadows Entities, the Company received two notes representing the
purchase price in the amounts of $175.0 million (the "First
Note") and $25.0 million (the "Second Note"). On September 27,
2006, the PGCB granted approval to Washington Trotting
Association, Inc. of a Conditional Category 1 Gaming License. The
First Note is expected to be repaid by November 14, 2006. Due
to regulatory issues relating to the approval of the Gaming
License, the parties have agreed to modify the terms of the
Second Note. The amount of the Second Note will remain intact,
however, the Company has agreed to release the security
requirement for the holdback amount, defer subordinate payments
under the holdback and defer receipt of holdback payments until
the opening of the permanent casino at The Meadows, in exchange
for Millennium-Oaktree providing an additional $25.0 million of
equity support for PA Meadows, LLC. If the First Note is not
repaid by November 2, 2006, the Company retains the right, from
November 3, 2006 until such repayment, to cancel the two notes
and effect the return to the Company of the shares of The Meadows
Entities. Concurrently with entering into the amended share
purchase agreement, the parties entered into a racing services
agreement whereby the Company will continue to manage the racing
operations at The Meadows, on behalf of Millennium-Oaktree, for
at least five years.
(c) The Company's assets held for sale and related liabilities as at
September 30, 2006 and December 31, 2005 are shown below. All
assets held for sale and related liabilities have been classified
as current at September 30, 2006 and December 31, 2005 as the
assets and related liabilities described in section (b) above are
expected to be sold within one year from the balance sheet date.
September 30, December 31,
2006 2005
-----------------------------------------------------------------
ASSETS
-----------------------------------------------------------------
Current assets:
Restricted cash $ 480 $ 443
Accounts receivable 437 450
Income taxes receivable 614 857
Prepaid expenses and other 898 969
Real estate properties, net 16,485 16,154
Fixed assets, net 1,691 1,576
Racing license 58,266 58,266
Other assets, net 200 200
Future tax assets 467 397
-----------------------------------------------------------------
$ 79,538 $ 79,312
-----------------------------------------------------------------
-----------------------------------------------------------------
LIABILITIES
-----------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,341 $ 2,012
Accrued salaries and wages 253 44
Other accrued liabilities 647 623
Deferred revenue 13 312
Future tax liabilities 26,518 24,746
-----------------------------------------------------------------
$ 28,772 $ 27,737
-----------------------------------------------------------------
-----------------------------------------------------------------
(d) In accordance with the terms of the senior secured revolving
credit facility and the Company's bridge loan agreement with MID,
the Company is required to use the net proceeds from the sale of
The Meadows, as described in section (b) above, to fully pay down
principal amounts outstanding under the bridge loan and to
permanently pay down $39.0 million of the principal amounts
outstanding under the senior secured revolving credit facility.
The Company is also required to repay $2.0 million of the BE&K,
Inc. construction loan within 30 days after the collection of the
First Note.
5. Discontinued Operations
(a) On August 25, 2006, a wholly-owned subsidiary of the Company
completed the sale of the Magna Golf Club located in Aurora,
Ontario to Magna International Inc. ("Magna"), a related party,
for cash consideration of Cdn. $51.8 million (U.S.
$46.4 million), net of transaction costs, subject to various
closing adjustments. The Company recognized an impairment loss of
$1.2 million at the date of disposition equal to the excess of
the Company's carrying value of the assets disposed over their
fair values at the date of disposition. Of the sale proceeds,
Cdn. $32.6 million (U.S. $29.3 million) was used to pay all
amounts owing under certain loan agreements with Bank Austria
Creditanstalt AG related to the Magna Golf Club. In addition, a
subsidiary of MID received a fee of Cdn. $0.2 million (1% of the
net sale proceeds) as consideration for waiving repayment rights
under the bridge loan agreement with MID.
(b) On May 26, 2006, the Company completed the sale of a restaurant
and related real estate in the United States and received cash
consideration of $2.0 million, net of transaction costs, and
recognized a gain on disposition of approximately $1.5 million.
(c) On August 16, 2005, the Company and Great Canadian Gaming
Corporation ("GCGC") entered into a share purchase agreement
under which GCGC acquired all of the outstanding shares of
Ontario Racing, Inc. ("ORI"). Required regulatory approval for
the sale transaction was obtained on October 17, 2005 and the
Company completed the transaction on October 19, 2005. On
closing, GCGC paid Cdn. $50.7 million (U.S. $43.1 million) and
U.S. $23.6 million, in cash and assumed ORI's existing debt.
(d) On August 18, 2005, three subsidiaries of the Company entered
into a share purchase agreement with Colonial Downs, L.P.
("Colonial LP") pursuant to which Colonial LP purchased all of
the outstanding shares of Maryland-Virginia Racing Circuit, Inc.
("MVRC"). MVRC was an indirect subsidiary of the Company that
managed the operations of Colonial Downs, a thoroughbred and
standardbred horse racetrack located in New Kent, Virginia,
pursuant to a management agreement with Colonial LP, the owner of
Colonial Downs. Required regulatory approval for the sale
transaction was obtained on September 28, 2005 and the Company
completed the transaction on September 30, 2005. On closing, the
Company received cash consideration of $6.8 million, net of
transaction costs, and a one-year interest-bearing note in the
principal amount of $3.0 million, which was repaid as at
September 30, 2006.
(e) The Company's results of operations and cash flows related to
discontinued operations for the three and nine months ended
September 30, 2006 and 2005 is as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Results of Operations
Revenues $ 2,733 $ 11,758 $ 9,676 $ 32,469
Costs and expenses 2,076 8,491 6,475 23,256
-----------------------------------------------------------------
657 3,267 3,201 9,213
Depreciation and
amortization 286 669 1,133 2,001
Interest expense, net 294 1,017 1,086 2,700
Impairment loss recorded
on disposition 1,202 - 1,202 -
Write-down of racing
license - - - 12,290
-----------------------------------------------------------------
Income (loss) before
gain on disposition (1,125) 1,581 (220) (7,778)
Gain on disposition - 9,837 1,495 9,837
-----------------------------------------------------------------
Income (loss) before
income taxes (1,125) 11,418 1,275 2,059
Income tax expense 1,381 2,565 2,133 1,386
-----------------------------------------------------------------
Net income (loss) $ (2,506) $ 8,853 $ (858) $ 673
-----------------------------------------------------------------
-----------------------------------------------------------------
Cash Flows
Operating activities $ (5,852) $ (889) $ (1,509) $ 1,667
Investing activities 46,497 6,738 48,157 6,577
Financing activities (26,699) - (30,503) 25,501
-----------------------------------------------------------------
Net cash flows during
the period from
operations 13,946 5,849 16,145 33,745
Payments to MEC's
continuing operations (13,946) (5,222) (16,145) (33,402)
-----------------------------------------------------------------
Net increase in cash
and cash equivalents
during the period - 627 - 343
Cash and cash
equivalents, beginning
of period - 352 - 636
-----------------------------------------------------------------
Cash and cash
equivalents, end
of period $ - $ 979 $ - $ 979
-----------------------------------------------------------------
-----------------------------------------------------------------
The Company's assets and liabilities related to discontinued
operations as at September 30, 2006 and December 31, 2005 are as
follows:
September 30, December 31,
2006 2005
-----------------------------------------------------------------
ASSETS
-----------------------------------------------------------------
Current assets:
Accounts receivable $ - $ 334
Prepaid expenses and other - 570
-----------------------------------------------------------------
- 904
-----------------------------------------------------------------
Real estate properties, net - 51,492
Fixed assets, net - 3,503
Other assets, net - 952
Future tax assets - 7,539
-----------------------------------------------------------------
- 63,486
-----------------------------------------------------------------
$ - $ 64,390
-----------------------------------------------------------------
-----------------------------------------------------------------
LIABILITIES
-----------------------------------------------------------------
Current liabilities:
Accounts payable $ - $ 765
Accrued salaries and wages - 94
Other accrued liabilities - 1,402
Income taxes payable - 4,192
Long-term debt due within one year - 3,771
Deferred revenue - 2,057
-----------------------------------------------------------------
- 12,281
-----------------------------------------------------------------
Long-term debt - 25,560
Other long-term liabilities - 10,060
-----------------------------------------------------------------
- 35,620
-----------------------------------------------------------------
$ - $ 47,901
-----------------------------------------------------------------
-----------------------------------------------------------------
6. Income Taxes
In accordance with U.S. GAAP, the Company estimates its annual
effective tax rate at the end of each of the first three quarters of
the year, based on current facts and circumstances. The Company has
estimated a nominal annual effective tax rate for the entire year and
accordingly has applied this effective tax rate to the loss from
continuing operations before income taxes for the three and nine
months ended September 30, 2006 and 2005, resulting in an income tax
recovery of $1.0 million and $1.3 million for the three months ended
September 30, 2006 and 2005, respectively, and an income tax expense
of $1.2 million and $0.8 million for the nine months ended September
30, 2006 and 2005, respectively. The income tax expense for the nine
months ended September 30, 2006 and 2005 primarily represents income
tax expense recognized from certain of the Company's U.S. operations
that are not included in the Company's U.S. consolidated income tax
return.
7. Bank Indebtedness
(a) On July 26, 2006, the Company amended and extended its senior
secured revolving credit facility. The maturity date was extended
from July 31, 2006 to November 6, 2006, unless further extended
with the consent of both parties, and the maximum permitted
borrowings for general corporate purposes was increased to
$50.0 million. The facility was also amended to provide for an
additional $14.0 million to finance the Company's purchase of the
remaining 70% equity interest of AmTote (refer to Note 3). The
amendment requires that the Company repay $39.0 million upon
closing of the sale of The Meadows, after repaying the MID bridge
loan. The credit facility is available by way of U.S. dollar
loans and letters of credit. Loans under the facility are secured
by a first charge on the assets of Golden Gate Fields and a
second charge on the assets of Santa Anita Park, and are
guaranteed by certain subsidiaries of the Company. In addition,
the Company has pledged the shares of its wholly-owned subsidiary
that owns AmTote. At September 30, 2006, the Company had
borrowings of $39.9 million (December 31, 2005 - $27.3 million),
had issued letters of credit totaling $23.5 million (December 31,
2005 - $21.7 million) and had permanently repaid principal
amounts outstanding of $0.3 million under the credit facility,
such that $0.3 million was unused and available.
The loans under the facility bear interest at either the U.S.
Base rate plus 3% or the London Interbank Offered Rate ("LIBOR")
plus 4%. The weighted average interest rate on the loans
outstanding under the credit facility as at September 30, 2006
was 9.5% (December 31, 2005 - 9.3%).
(b) On July 31, 2006, one of the Company's European subsidiaries
amended and extended its bank term line of credit of Euros
2.5 million and its bank term loan of Euros 2.9 million. The
amendments to the agreement included converting the two
facilities into one bank term loan, requiring the repayment of
Euros 0.9 million on July 31, 2006, extending the term to
July 31, 2007 and requiring a further repayment of Euros
0.7 million on January 31, 2007. The bank term loan bears
interest at the Euro Overnight Index Average ("EONIA") rate plus
1.1% per annum (September 30, 2006 - 4.23%). A European
subsidiary has provided two first mortgages on real estate as
security for this bank term loan. At September 30, 2006, the
amount outstanding under the fully drawn bank term loan is Euros
4.5 million (U.S. $5.7 million).
8. Long-term Debt
On November 17, 2005, a subsidiary of the Company entered into a loan
agreement with BE&K, Inc., the parent company of Suitt Construction
Co. Inc., the general contractor for the reconstruction of the
racetrack facilities at Gulfstream Park, for a loan of up to
$13.5 million to assist in the financing of costs as a result of
additional material and labor costs and changes in scope of work
related to the reconstruction. The loan agreement was amended on
June 30, 2006, and the loan amount was increased to $16.6 million.
The loan matures on April 14, 2007 and may be extended at the
lender's option to July 31, 2008. The loan bears interest at the U.S.
prime rate plus 0.40% per annum (September 30, 2006 - 8.65%) and may
be repaid at any time, in whole or in part, without penalty. Loans
under the facility are secured by a mortgage over land in Ocala,
Florida and a guarantee of $5.0 million by the Company. The Company
is required to repay $2.0 million upon closing of the sale of The
Meadows, after repaying the MID bridge loan and the $39.0 million
required under the senior secured revolving credit facility, within
30 days after the collection of the First Note on the sale of The
Meadows. At September 30, 2006, $12.2 million is outstanding under
the loan facility.
9. Capital Stock and Long-Term Incentive Plan
(a) Capital Stock
Changes in the Class A Subordinate Voting Stock and Class B Stock
for the three and nine months ended September 30, 2006 are shown
in the following table (number of shares and stated value have
been rounded to the nearest thousand):
Class A
Subordinate
Voting Stock Class B Stock Total
------------------ ------------------ ------------------
Number Number Number
of Stated of Stated of Stated
Shares Value Shares Value Shares Value
-------------------------------------------------------------------------
Issued and
outstanding
at December 31,
2005 48,895 $318,105 58,466 $394,094 107,361 $712,199
Issued under the
Long-term
Incentive Plan 100 680 - - 100 680
-------------------------------------------------------------------------
Issued and
outstanding at
March 31, 2006 48,995 318,785 58,466 394,094 107,461 712,879
Issued under the
Long-term
Incentive Plan 4 24 - - 4 24
-------------------------------------------------------------------------
Issued and
outstanding at
June 30, 2006 48,999 318,809 58,466 394,094 107,465 712,903
Issued under
the Long-term
Incentive Plan 39 206 - - 39 206
-------------------------------------------------------------------------
Issued and
outstanding at
September 30,
2006 49,038 $319,015 58,466 $394,094 107,504 $713,109
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Long-Term Incentive Plan
The Company's Long-term Incentive Plan (the "Plan") adopted in
2000 allows for the grant of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted
stock, bonus stock and performance shares to directors, officers,
employees, consultants, independent contractors and agents. A
maximum of 7.6 million shares of Class A Subordinate Voting Stock
remain available to be issued under the Plan, of which
6.3 million are available for issuance pursuant to stock options
and tandem stock appreciation rights and 1.3 million are
available for issuance pursuant to any other type of award under
the Plan.
During 2005, the Company introduced an incentive compensation
program for certain officers and key employees, which will award
performance shares of Class A Subordinate Voting Stock under the
Plan. The number of shares of Class A Subordinate Voting Stock
underlying the performance share awards is based either on a
percentage of a guaranteed bonus or a percentage of total 2005
compensation divided by the market value of the Class A
Subordinate Voting Stock on the date the program was approved by
the Compensation Committee of the Board of Directors. These
performance shares vested over a six or eight month period to
December 31, 2005 and are distributable, subject to certain
conditions, in two equal installments. The first distribution
occurred prior to March 31, 2006 and the second distribution is
to occur on or about March 31, 2007. During the year ended
December 31, 2005, 201,863 performance share awards were granted
under the Plan with a weighted average grant-date market value of
either U.S. $6.26 or Cdn. $7.61 per share. At December 31, 2005,
there were 199,471 performance share awards vested with an
average grant-date market value of either U.S. $6.26 or Cdn.
$7.61 per share and no non-vested performance share awards.
During the nine months ended September 30, 2006, 115,408 of these
vested performance share awards were issued with a stated value
of $0.7 million. Accordingly, there are 84,063 vested performance
shares remaining to be issued under this 2005 incentive
compensation arrangement.
For 2006, the Company continued the incentive compensation
program as described in the immediately preceding paragraph. The
program is similar in all respects except that the 2006
performance shares will vest over a 12 month period to December
31, 2006 and will be distributed, subject to certain conditions
on or about March 31, 2007. In the nine months ended September
30, 2006, 161,099 performance share awards were granted under the
Plan with a weighted average grant-date market value of either
U.S. $6.80 or Cdn. $7.63 per share, 1,616 performance share
awards were issued and 12,490 performance share awards were
forfeited. As at September 30, 2006, there were 112,106
performance share awards vested with an average grant-date market
value of either U.S. $6.80 or Cdn. $7.63 per share and there were
34,887 non-vested performance share awards with an average grant-
date market value of either U.S. $6.80 or Cdn. $7.63 per share.
The compensation expense related to these performance shares was
approximately $0.2 million and $0.8 million for the three and
nine months ended September 30, 2006, respectively. As at
September 30, 2006, the total unrecognized compensation expense
related to these performance shares is $0.2 million, which is
expected to be recognized into expense over the remaining period
to December 31, 2006.
In the nine months ended September 30, 2006, 25,896 shares with a
stated value of $0.2 million (for the nine months ended September
30, 2005, 14,175 shares with a stated value of $0.1 million) were
issued to Company directors in payment of services rendered.
The Company grants stock options to certain directors, officers,
key employees and consultants to purchase shares of the Company's
Class A Subordinate Voting Stock. All of such stock options give
the grantee the right to purchase Class A Subordinate Voting
Stock of the Company at a price no less than the fair market
value of such stock at the date of grant. Generally, stock
options under the Plan vest over a period of two to six years
from the date of grant at rates of 1/7th to 1/3rd per year and
expire on or before the tenth anniversary of the date of grant,
subject to earlier cancellation upon the occurrence of certain
events specified in the stock option agreements entered into by
the Company with each recipient of options.
Information with respect to shares under option at September 30,
2006 and 2005 is as follows (number of shares subject to option
in the following tables are expressed in whole numbers and have
not been rounded to the nearest thousand):
Shares Subject Weighted Average
to Option Exercise Price
--------------------- ---------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Balance at January 1 4,827,500 4,500,500 $6.14 $6.18
Granted - 490,000 - 6.40
Exercised - - - -
Forfeited and
expired(i) - (145,000) - 6.76
-----------------------------------------------------------------
Balance at March 31 4,827,500 4,845,500 $6.14 $6.19
Granted - 155,000 - 6.70
Exercised - - - -
Forfeited and
expired(i) (64,000) (88,000) 6.80 7.32
-----------------------------------------------------------------
Balance at June 30 4,763,500 4,912,500 $6.13 $6.18
Granted - - - -
Exercised - - - -
Forfeited and
expired(i) - (150,000) - 8.08
-----------------------------------------------------------------
Balance at
September 30 4,763,500 4,762,500 $6.13 $6.12
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) For the three and nine months ended September 30, 2006 and
2005, options forfeited were primarily as a result of
employment contracts being terminated and voluntary employee
resignations. No options that were forfeited for the three
and nine months ended September 30, 2006 and 2005 were
subsequently reissued.
Options Outstanding Options Exercisable
--------------------- ---------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Number 4,763,500 4,762,500 4,279,700 4,038,715
Weighted average
exercise price $6.13 $6.12 $6.08 $6.05
Weighted average
remaining contractual
life (years) 4.3 5.3 3.9 4.7
-----------------------------------------------------------------
At September 30, 2006, the 4,763,500 stock options outstanding
had exercise prices ranging from $3.91 to $7.24 per share.
During the three and nine months ended September 30, 2006, no
stock options were granted (for the three months ended September
30, 2005 - no options were granted; for the nine months ended
September 30, 2005 - 645,000 options were granted with a
weighted-average fair value of $2.90 per option). The fair value
of stock option grants is estimated at the date of grant using
the Black-Scholes option valuation model with the following
assumptions:
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Risk free interest
rates N/A N/A N/A 3.9%
Dividend yields N/A N/A N/A -
Volatility factor of
expected market
price of Class A
Subordinate Voting
Stock N/A N/A N/A 0.549
Weighted average
expected life (years) N/A N/A N/A 4.00
-----------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that require the
input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded
options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the Company's stock
options.
The compensation expense recognized for the three and nine months
ended September 30, 2006 related to stock options was
approximately $0.1 million and $1.2 million, respectively (for
the three and nine months ended September 30, 2005 - nil). As at
September 30, 2006, the total unrecognized compensation expense
related to stock options is $0.5 million, which is expected to be
recognized into expense over a period of 3.25 years.
For the three and nine months ended September 30, 2006, the
Company recognized total compensation expense of $0.4 million and
$2.1 million, respectively (for the three and nine months ended
September 30, 2005 - $0.7 million and $0.9 million, respectively)
relating to performance share awards, director compensation and
stock options under the Plan.
(c) Maximum Shares
The following table (number of shares have been rounded to the
nearest thousand) presents the maximum number of shares of Class
A Subordinate Voting Stock and Class B Stock that would be
outstanding if all of the outstanding options, convertible
subordinated notes and performance shares issued and outstanding
as at September 30, 2006 were exercised or converted:
Number of
Shares
-----------------------------------------------------------------
Class A Subordinate Voting Stock outstanding 49,038
Class B Stock outstanding 58,466
Options to purchase Class A Subordinate Voting Stock 4,764
8.55% Convertible Subordinated Notes,
convertible at $7.05 per share 21,276
7.25% Convertible Subordinated Notes,
convertible at $8.50 per share 8,824
Performance share awards of Class A Subordinate
Voting Stock 231
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142,599
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10. Loss Per Share
The following is a reconciliation of the numerator and denominator of
the basic and diluted earnings (loss) per share computations (in
thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------
Basic and Basic and Basic and Basic and
Diluted Diluted Diluted Diluted
---------------------------------------------------------------------
Net loss from continuing
operations $(48,236) $(43,389) $(74,010) $(66,233)
Net income (loss) from
discontinued operations (2,506) 8,853 (858) 673
Net loss (50,742) (34,536) (74,868) (65,560)
Interest, net of related
tax on convertible
subordinated notes - - - -
---------------------------------------------------------------------
$(50,742) $(34,536) $(74,868) $(65,560)
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Weighted average shares
outstanding:
Class A Subordinate
Voting Stock 49,032 48,893 48,979 48,889
Class B Stock 58,466 58,466 58,466 58,466
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107,498 107,359 107,445 107,355
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Earnings (loss) per share:
Continuing operations $ (0.45) $ (0.40) $ (0.69) $ (0.62)
Discontinued operations (0.02) 0.08 (0.01) 0.01
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Loss per share $ (0.47) $ (0.32) $ (0.70) $ (0.61)
---------------------------------------------------------------------
---------------------------------------------------------------------
As a result of the net loss for the three and nine months ended
September 30, 2006, options to purchase 4,763,500 shares, notes
convertible into 30,100,124 shares and 231,056 performance share
awards have been excluded from the computation of diluted loss per
share since the effect is anti-dilutive.
As a result of the net loss for the three and nine months ended
September 30, 2005, options to purchase 4,762,500 shares, notes
convertible into 30,100,124 shares and 210,122 performance share
awards have been excluded from the computation of diluted loss per
share since the effect is anti-dilutive.
11. Transactions With Related Parties
(a) The Company's indebtedness and long-term debt due to parent
consists of the following:
September 30, December 31,
2006 2005
-----------------------------------------------------------------
Bridge loan facility, including accrued
interest and commitment fees payable
of $0.2 million (December 31, 2005 -
$0.6 million)(i) $ 99,536 $ 72,060
Gulfstream Park project financing-
Tranche 1, including long-term accrued
interest payable of $13.1 million
(December 31, 2005 - $3.7 million)(ii) 127,800 93,646
Gulfstream Park project financing-
Tranche 2, including long-term accrued
interest payable of $0.1 million
(December 31, 2005 - nil)(iii) 6,508 -
Remington Park project financing,
including long-term accrued interest
payable of $0.4 million (December 31,
2005 - $0.3 million)(iv) 31,117 19,854
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$ 264,961 $ 185,560
Less: due within one year (100,638) (72,060)
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$ 164,323 $ 113,500
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(i) Bridge Loan Facility
In July 2005, a subsidiary of the Company's parent company,
MID, provided to the Company a non-revolving bridge loan
facility of up to $100.0 million. As at September 30, 2006,
as a result of advances being made under three separate
tranches since July 22, 2005, a total of $100.0 million was
drawn under this facility. An arrangement fee of
$1.0 million was paid on closing, a second arrangement fee
of $0.5 million was paid when the second tranche was made
available to the Company and an additional arrangement fee
of $0.5 million was paid when the third tranche was made
available to the Company. On July 26, 2006, the Company
amended and extended its bridge loan facility with MID and
the bridge loan maturity date was extended from August 31,
2006 to December 5, 2006. In connection with the amendments
on July 26, 2006, there was an extension fee of $0.5 million
(0.5% of the amount of the bridge loan) and an additional
fee of $0.5 million is to be paid if a deadline related to
the sale of The Meadows is not met. At the time of the
July 26, 2006 amendment, it was expected that the applicable
deadline would occur on or about November 6, 2006. Due to
the fact that The Meadows related deadline was achieved
earlier than had been expected, the due date for the
additional fee is now November 3, 2006. In the event the
sale of The Meadows is not completed by November 7, 2006,
the interest rate for all outstanding and future amounts
under the bridge loan will be increased by 250 basis points
per annum and the bridge loan default provisions would also
apply. There is a commitment fee of 1.0% per year on the
undrawn portion of the $100.0 million maximum amount of the
loan commitment, payable quarterly in arrears. At the
Company's option, the loan bears interest either at: (1)
floating rate, with annual interest equal to the greater of
(a) U.S. Base Rate, as announced from time to time, plus
5.5% and (b) 9.0% (with interest in each case payable
monthly in arrears); or (2) fixed rate, with annual interest
equal to the greater of: (a) LIBOR plus 6.5% and (b) 9.0%,
subject to certain conditions. The overall weighted average
interest rate on the advances under the bridge loan at
September 30, 2006 was 11.8% (December 31, 2005 - 10.9%).
The bridge loan may be repaid at any time, in whole or in
part, without penalty. The bridge loan requires that the net
proceeds of any equity offering by the Company be used to
reduce outstanding indebtedness under the bridge loan,
subject to specified amounts required to be paid to reduce
other indebtedness. Also, subject to specified exceptions,
the proceeds of any debt offering or asset sale must be used
to reduce outstanding indebtedness under the bridge loan or
other specified indebtedness. The bridge loan is secured by
substantially all of the assets of the Company and
guaranteed by certain subsidiaries of the Company. The
guarantees are secured by first ranking security over the
lands owned by The Meadows (ahead of the Gulfstream Park
project financing as described in Note 11(a)(ii) and (iii)
below), second ranking security over the lands owned by
Golden Gate Fields (behind an existing third party lender)
and third ranking security over the lands owned by Santa
Anita Park (behind existing third party lenders). In
addition, the Company has pledged the shares and licenses of
certain subsidiaries (or provided negative pledges where a
pledge is not available due to regulatory constraints or due
to a prior pledge to an existing third party lender). As
security for the loan, the Company has also assigned all
inter-company loans made between the Company and its
subsidiaries and all insurance proceeds to the lender, and
taken out title insurance for all real property subject to
registered security. The bridge loan is cross-defaulted to
all other obligations of the Company and its subsidiaries to
the lender and to the Company's other principal
indebtedness. The security over the lands owned by The
Meadows has the same rank in priority as to the same types
of security provided for in the loan related to the
reconstruction of facilities at Gulfstream Park.
On September 29, 2006, the Company amended the bridge loan
with MID. The maximum permitted borrowings under the bridge
loan have been increased by $19.0 million to a total of
$119.0 million and it is expected that further advances
would be taken during the fourth quarter of 2006. The
maturity date remains unchanged as December 5, 2006. An
arrangement fee of $0.2 million in connection with these
amendments to the bridge loan was payable to MID.
During the nine months ended September 30, 2006,
$25.9 million was advanced on this bridge loan, such that at
September 30, 2006, $100.0 million was outstanding under the
bridge loan and $19.0 million was unused and available. Net
loan origination expenses of $0.7 million have been recorded
as a reduction of the outstanding bridge loan balance. The
bridge loan balance is being accreted to its face value over
the term to maturity. In addition, during the nine months
ended September 30, 2006, $8.0 million of commitment fees
and interest expense were incurred related to the bridge
loan, of which $0.2 million was outstanding as at September
30, 2006.
The Company and MID amended the bridge loan agreement to
provide that (i) the Company place $13.0 million from the
Flamboro Downs sale proceeds, and such additional amounts as
necessary to ensure that future Gulfstream Park construction
costs can be funded, into escrow with MID, (ii) MID waive
its negative pledge over the Company's land in Ocala,
Florida, (iii) Gulfstream Park enter into a definitive
agreement with BE&K, Inc., for debt financing of
