MECA Magna Entertainment Corp (MM)

AURORA, ON, Nov. 5 /PRNewswire-FirstCall/ -- Magna Entertainment Corp. ("MEC") (NASDAQ: MECA; TSX: MEC.A) today reported its financial results for the third quarter ended September 30, 2008. ------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- (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) ------------------------------------------------------------------------- Net loss $ (48,359) $ (49,811) $(116,073) $ (70,779) ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- Diluted loss per share(iv) $ (8.26) $ (9.25) $ (19.87) $ (13.15) ------------------------------------------------------------------------- (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. ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- (Unaudited) (U.S. dollars in thousands, except per share figures) Three months ended Nine months ended September 30, September 30, ----------------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 78,630 78,787 468,918 497,504 ------------------------------------------------------------------------- Real estate and other Sale of real estate - - 1,492 - Residential development and other 2,947 2,695 8,425 5,586 ------------------------------------------------------------------------- 2,947 2,695 9,917 5,586 ------------------------------------------------------------------------- 81,577 81,482 478,835 503,090 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 96,604 100,675 462,794 489,121 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 1,854 1,337 5,508 3,476 ------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------- 131,411 126,694 562,363 559,997 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- Comprehensive loss $ (49,141) $ (48,026) $ (114,716) $ (67,080) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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) ------------------------------------------------------------------------- Loss per share $ (8.26) $ (9.25) $ (19.87) $ (13.15) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes MAGNA ENTERTAINMENT CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------- (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 ------------------------------------------------------------------------- (37,739) (33,460) (44,033) (30,456) Changes in non-cash working capital balances 11,255 2,973 (8,289) (13,103) ------------------------------------------------------------------------- (26,484) (30,487) (52,322) (43,559) ------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------- (7,022) (17,886) 9,365 34,317 ------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------- 23,213 32,951 42,815 16,033 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 224,646 227,680 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- $ 1,163,734 $ 1,243,876 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- 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 # 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position # 157-2, Effective Date of FASB Statement # 157, which defers the effective date of SFAS 157 for non-financial assets and liabilities, except for items that are 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 # 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 # 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement # 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 # 141(R), Business Combinations ("SFAS 141(R)"). SFAS 141(R) changes the accounting model for business combinations from a cost allocation standard to a standard that provides, with limited exception, for the recognition of all identifiable assets and liabilities of the business acquired at fair value, regardless of whether the acquirer acquires 100% or a lesser controlling interest of the business. SFAS 141(R) defines the acquisition date of a business acquisition as the date on which control is achieved (generally the closing date of the acquisition). SFAS 141(R) requires recognition of assets and liabilities arising from contractual contingencies and non-contractual contingencies meeting a "more-likely-than-not" threshold at fair value at the acquisition date. SFAS 141(R) also provides for the recognition of acquisition costs as expenses when incurred and for expanded disclosures. SFAS 141(R) is effective for acquisitions closing after December 15, 2008, with earlier adoption prohibited. The Company is currently reviewing SFAS 141(R), but has not yet determined the future impact, if any, on the Company's consolidated financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standard # 160, Non-controlling Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for non-controlling interests in subsidiaries and for the deconsolidation of a subsidiary and also amends certain consolidation procedures for consistency with SFAS 141(R). Under SFAS 160, non-controlling interests in consolidated subsidiaries (formerly known as "minority interests") are reported in the consolidated statement of financial position as a separate component within shareholders' equity. Net earnings and comprehensive income attributable to the controlling and non-controlling interests are to be shown separately in the consolidated statements of earnings and comprehensive income. Any changes in ownership interests of a non-controlling interest where the parent retains a controlling financial interest in the subsidiary are to be reported as equity transactions. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. When adopted, SFAS 160 is to be applied prospectively at the beginning of the year, except that the presentation and disclosure requirements are to be applied retrospectively for all periods presented. The Company is currently reviewing SFAS 160, but has not yet determined the future impact, if any, on the Company's consolidated financial statements. 3. THE MEADOWS TRANSACTION On November 14, 2006, the Company completed the sale of all of the outstanding shares of Washington Trotting Association, Inc., Mountain Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc. (collectively "The Meadows"), each a wholly-owned subsidiary of the Company, through which the Company owned and operated The Meadows, a standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc., and a fund managed by Oaktree Capital Management, LLC ("Oaktree" and together, with PA Meadows, LLC, "Millennium-Oaktree"). On closing, the Company received cash consideration of $171.8 million, net of transaction costs of $3.2 million, and a holdback agreement, under which $25.0 million is payable to the Company over a five-year period, subject to offset for certain indemnification obligations. Under the terms of the holdback agreement, the Company agreed to release the security requirement for the holdback amount, defer subordinate payments under the holdback, defer receipt of holdback payments until the opening of the permanent casino at The Meadows and defer receipt of holdback payments to the extent of available cash flows as defined in the holdback agreement, in exchange for Millennium-Oaktree providing an additional $25.0 million of equity support for PA Meadows, LLC. The Company also entered into a racing services agreement whereby the Company pays $50 thousand per annum and continues to operate, for its own account, the racing operations at The Meadows for at least five years. On December 12, 2007, Cannery Casino Resorts, LLC, the parent company of Millennium-Oaktree, announced it had entered into an agreement to sell Millennium-Oaktree to Crown Limited. If the deal is consummated, either party to the racing services agreement will have the option to terminate the arrangement. The transaction proceeds of $171.8 million were allocated to the assets of The Meadows as follows: (i) $7.2 million was allocated to the long-lived assets representing the fair value of the underlying real estate and fixed assets based on appraised values; and (ii) $164.6 million was allocated to the intangible assets representing the fair value of the racing/gaming licenses based on applying the residual method to determine the fair value of the intangible assets. On the closing date of the transaction, the net book value of the long-lived assets was $18.4 million, resulting in a non-cash impairment loss of $11.2 million relating to the long-lived assets, and the net book value of the intangible assets was $32.6 million, resulting in a gain of $132.0 million on the sale of the intangible assets. This gain was reduced by $5.6 million, representing the net estimated present value of the operating losses expected over the term of the racing services agreement. Accordingly, the net gain recognized by the Company on the disposition of the intangible assets was $126.4 million for the year ended December 31, 2006. Given that the racing services agreement was effectively a lease of property, plant and equipment and since the amount owing under the holdback note is to be paid to the extent of available cash flows as defined in the holdback agreement, the Company was deemed to have continuing involvement with the long-lived assets for accounting purposes. As a result, the sale of The Meadows' real estate and fixed assets was precluded from sales recognition and not accounted for as a sale-leaseback, but rather using the financing method of accounting under U.S. GAAP. Accordingly, $12.8 million of the proceeds were deferred, representing the fair value of long-lived assets of $7.2 million and the net present value of the operating losses expected over the term of the racing services agreement of $5.6 million, and recorded as "other long-term liabilities" on the consolidated balance sheets at the date of completion of the transaction. The deferred proceeds are being recognized in the consolidated statements of operations and comprehensive loss over the five-year term of the racing services agreement and/or at the point when the sale-leaseback subsequently qualifies for sales recognition. For the three and nine months ended September 30, 2008, the Company recognized $0.6 million and $1.0 million, respectively, and for the three and nine months ended September 30, 2007, the Company recognized $0.8 million and $1.2 million, respectively, of the deferred proceeds in income, which is recorded as an offset to racing and gaming "general and administrative" expenses on the accompanying consolidated statements of operations and comprehensive loss. Effective January 1, 2008, The Meadows entered into an agreement with The Meadows Standardbred Owners Association, which expires on December 31, 2009, whereby the horsemen will make contributions to subsidize backside maintenance and marketing expenses at The Meadows. As a result, the Company revised its estimate of the operating losses expected over the remaining term of the racing services agreement, which resulted in an additional $2.0 million of deferred gain being recognized in income for the nine months ended September 30, 2008. At September 30, 2008, the remaining balance of the deferred proceeds is $8.0 million. With respect to the $25.0 million holdback agreement, the Company will recognize this consideration upon the settlement of the indemnification obligations and as payments are received (refer to Note 14(k)). 4. ASSETS HELD FOR SALE (a) In November and December 2007, the Company entered into sale agreements for three parcels of excess real estate comprising approximately 825 acres in Porter, New York, subject to the completion of due diligence by the purchasers and customary closing conditions. The sale of one parcel was completed in December 2007 for cash consideration of $0.3 million, net of transaction costs, and the sales of the remaining two parcels were completed in January 2008 for total cash consideration of $1.5 million, net of transaction costs. The two parcels of excess real estate for which the sales were completed in January 2008 have been reflected as "assets held for sale" on the consolidated balance sheets at December 31, 2007. The net proceeds received on closing were used to repay a portion of the bridge loan facility with a subsidiary of MID in January 2008. (b) On December 21, 2007, the Company entered into an agreement to sell 225 acres of excess real estate located in Ebreichsdorf, Austria to a subsidiary of Magna International Inc. ("Magna"), a related party, for a purchase price of Euros 20.0 million (U.S. $31.5 million), net of transaction costs. The sale transaction was completed on April 11, 2008. Of the net proceeds that were received on closing, Euros 7.5 million was used to repay a portion of a Euros 15.0 million term loan facility and the remaining portion of the net proceeds was used to repay a portion of the bridge loan facility with a subsidiary of MID. The gain on sale of the excess real estate of approximately Euros 15.5 million (U.S. $24.3 million), net of tax, has been reported as a contribution of equity in contributed surplus. (c) On August 9, 2007, the Company announced its intention to sell a real estate property located in Dixon, California. In addition, in March 2008, the Company committed to a plan to sell excess real estate located in Oberwaltersdorf, Austria. The Company is actively marketing these properties for sale and has listed the properties for sale with real estate brokers. Accordingly, at September 30, 2008 and December 31, 2007, these real estate properties are classified as "assets held for sale" on the consolidated balance sheets in accordance with Statement of Financial Accounting Standard # 144, Accounting for Impairment or Disposal of Long-Lived Assets ("SFAS 144"). (d) On August 12, 2008, the Company announced that it had entered into an agreement to sell approximately 489 acres of excess real estate located in Ocala, Florida to Lincoln Property Company and Orion Investment Properties, Inc. for a purchase price of $16.5 million cash, subject to a 90-day due diligence period in favor of the purchasers. If the purchasers determine that their due diligence review is satisfactory and do not terminate the agreement before the end of the 90-day due diligence period, then the transaction would close 60-days thereafter, subject to the satisfaction of customary closing conditions (refer to Note 16(a)). The property forms part of the security for the Company's bridge loan with a subsidiary of MID, and any net proceeds received from the sale of the property are contractually required to be used to make repayments under the bridge loan. Accordingly, at September 30, 2008 and December 31, 2007, this real estate property is classified as "assets held for sale" on the consolidated balance sheets in accordance with SFAS 144. (e) The Company's assets held for sale and related liabilities at September 30, 2008 and December 31, 2007 are shown below. All assets held for sale and related liabilities are classified as current at September 30, 2008 as the assets and related liabilities described in sections (a) through (d) above have been or are expected to be sold within one year from the consolidated balance sheet date. September 30, December 31, 2008 2007 --------------------------- ASSETS --------------------------------------------------------------------- Real estate properties, net Dixon, California (refer to Note 6) $ 14,139 $ 19,139 Ocala, Florida 8,399 8,407 Oberwaltersdorf, Austria 4,446 - Ebreichsdorf, Austria - 6,619 Porter, New York - 1,493 --------------------------------------------------------------------- 26,984 35,658 Oberwaltersdorf, Austria - 4,482 --------------------------------------------------------------------- $ 26,984 $ 40,140 --------------------------------------------------------------------- --------------------------------------------------------------------- LIABILITIES --------------------------------------------------------------------- Future tax liabilities $ 876 $ 1,047 --------------------------------------------------------------------- --------------------------------------------------------------------- (f) On September 12, 2007, the Company's Board of Directors approved a debt elimination plan designed to eliminate net debt by generating funding from the sale of certain assets, entering into strategic transactions involving the Company's racing, gaming and technology operations, and a possible future equity issuance. In addition to the sales of real estate described in sections (a) through (d) above, the debt elimination plan also contemplates the sale of real estate properties located in Aventura and Hallandale, Florida, both adjacent to Gulfstream Park and in Anne Arundel County, Maryland, adjacent to Laurel Park. The Company also intends to explore selling its membership interests in the mixed-use developments at Gulfstream Park in Florida and Santa Anita Park in California that the Company is pursuing under joint venture arrangements with Forest City Enterprises, Inc. ("Forest City") and Caruso Affiliated, respectively. The Company also intends to sell Thistledown in Ohio and its interest in Portland Meadows in Oregon and, on July 16, 2008, the Company sold Great Lakes Downs in Michigan. The Company also intends to explore other strategic transactions involving other racing, gaming and technology operations, including: partnerships or joint ventures in respect of the existing gaming facility at Gulfstream Park; partnerships or joint ventures in respect of potential alternative gaming operations at certain of the Company's other racetracks that currently do not have gaming operations; the sale of Remington Park, a horse racetrack and gaming facility in Oklahoma City; and transactions involving the Company's technology operations, which may include one or more of the assets that comprise the Company's PariMax business. For those properties that have not been classified as held for sale as noted in sections (a) through (d) above, the Company has determined that they do not meet all of the criteria required in SFAS 144 for the following reasons and, accordingly, these assets continue to be classified as held and used at September 30, 2008: - Real estate properties located in Aventura and Hallandale, Florida (adjacent to Gulfstream Park): At September 30, 2008, the Company had not initiated an active program to locate a buyer for these assets as the properties had not been listed for sale with an external agent and were not being actively marketed for sale. - Real estate property in Anne Arundel County, Maryland (adjacent to Laurel Park): At September 30, 2008, the Company had not initiated an active program to locate a buyer for this asset as the property had not been listed for sale with an external agent and was not being actively marketed for sale. In addition, given the near term potential for a legislative change to permit video lottery terminals at Laurel Park and the possible effect such legislative change could have on the Company's development plans for the overall property is such that at September 30, 2008, the Company does not expect to complete the sale of this asset within one year. - Membership interest in the mixed-use development at Gulfstream Park with Forest City and membership interest in the mixed-use development at Santa Anita Park with Caruso Affiliated: At September 30, 2008, the Company was not actively marketing these assets for sale and does not expect to complete the sale of these assets within one year. The following assets have met the criteria of SFAS 144 to be reflected as assets held for sale and also met the requirements to be reflected as discontinued operations at September 30, 2008 and have been presented accordingly: - Great Lakes Downs: On July 16, 2008, the Company completed the sale of Great Lakes Downs in Michigan for cash consideration of $5.0 million. The proceeds of approximately $4.5 million, net of transaction costs, were used to repay a portion of the bridge loan facility with a subsidiary of MID. The gain on sale of Great Lakes Downs of approximately $0.5 million, net of tax, has been reported in discontinued operations. - Thistledown and Remington Park: In September 2007, the Company engaged a U.S. investment bank to assist in soliciting potential purchasers and managing the sale process for certain assets contemplated in the debt elimination plan. In October 2007, the U.S. investment bank initiated an active program to locate potential buyers and began marketing these assets for sale. The Company has since taken over the sales process from the U.S. investment bank and is currently in discussions with potential buyers for these assets. - Portland Meadows: In November 2007, the Company initiated an active program to locate potential buyers and began marketing this asset for sale. The Company is currently in discussions with potential buyers for this asset. - Magna Racino(TM): In March 2008, the Company committed to a plan to sell Magna Racino(TM). The Company has initiated an active program to locate potential buyers and began marketing the assets for sale through a real estate agent. 5. DISCONTINUED OPERATIONS (a) As part of the debt elimination plan approved by the Board of Directors (refer to Note 4(f)), the Company intends to sell Thistledown in Ohio, Portland Meadows in Oregon, Remington Park in Oklahoma City and Magna Racino(TM) in Ebreichsdorf, Austria and, on July 16, 2008, the Company sold Great Lakes Downs in Michigan. Accordingly, at September 30, 2008, these operations have been classified as discontinued operations. (b) The Company's results of operations related to discontinued operations for the three and nine months ended September 30, 2008 and 2007 are as follows: Three months ended Nine months ended September 30, September 30, ------------------------------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Results of Operations Revenues $ 33,438 $ 33,050 $ 99,028 $ 98,679 Costs and expenses 33,769 35,643 96,737 102,106 --------------------------------------------------------------------- (331) (2,593) 2,291 (3,427) Predevelopment and other costs 76 58 391 104 Depreciation and amortization - 1,750 605 5,252 Interest expense, net 1,080 968 2,630 3,129 Write-down of long-lived assets (refer to Note 6) - - 32,294 - Equity income - - - (32) --------------------------------------------------------------------- Loss before gain on disposition (1,487) (5,369) (33,629) (11,880) Gain on disposition 536 - 536 - --------------------------------------------------------------------- Loss before income taxes (951) (5,369) (33,093) (11,880) Income tax benefit (3,174) (133) (3,559) (295) --------------------------------------------------------------------- Income (loss) from discontinued operations $ 2,223 $ (5,236) $ (29,534) $ (11,585) --------------------------------------------------------------------- --------------------------------------------------------------------- The Company's assets and liabilities related to discontinued operations at September 30, 2008 and December 31, 2007 are shown below. All assets and liabilities related to discontinued operations are classified as current at September 30, 2008 as they are expected to be sold within one year from the consolidated balance sheet date. September 30, December 31, 2008 2007 --------------------------- ASSETS --------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 9,346 $ 9,241 Restricted cash 14,265 7,069 Accounts receivable 4,600 6,602 Inventories 627 426 Prepaid expenses and other 2,621 1,386 Real estate properties, net 55,949 39,094 Fixed assets, net 13,003 11,531 Other assets, net 105 106 Future tax assets 13,547 - --------------------------------------------------------------------- 114,063 75,455 --------------------------------------------------------------------- Real estate properties, net - 41,941 Fixed assets, net - 4,764 Other assets, net - 16 Future tax assets - 13,547 --------------------------------------------------------------------- - 60,268 --------------------------------------------------------------------- $ 114,063 $ 135,723 --------------------------------------------------------------------- --------------------------------------------------------------------- LIABILITIES --------------------------------------------------------------------- Current liabilities: Accounts payable $ 15,782 $ 9,146 Accrued salaries and wages 1,475 946 Other accrued liabilities 13,224 11,354 Income taxes payable 95 3,182 Long-term debt due within one year 10,946 22,096 Due to parent (refer to Note 13(a)(v)) 414 397 Deferred revenue 947 1,257 Long-term debt - 115 Long-term debt due to parent (refer to Note 13(a)(v)) 25,325 26,143 Other long-term liabilities 993 760 Future tax liabilities 13,547 - --------------------------------------------------------------------- 82,748 75,396 --------------------------------------------------------------------- Other long-term liabilities - 70 Future tax liabilities - 13,547 --------------------------------------------------------------------- - 13,617 --------------------------------------------------------------------- $ 82,748 $ 89,013 --------------------------------------------------------------------- --------------------------------------------------------------------- 6. WRITE-DOWN OF LONG-LIVED ASSETS When long-lived assets are identified by the Company as available for sale, if necessary, the carrying value is reduced to the estimated fair value less selling costs. Fair value less selling costs is evaluated at each interim reporting period based on discounted future cash flows of the assets, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. Write-downs relating to long-lived assets recognized are as follows: Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Assets held for sale Dixon, California real estate(i) $ - $ - $ 5,000 $ - Porter, New York real estate(ii) - 1,444 - 1,444 --------------------------------------------------------------------- $ - $ 1,444 $ 5,000 $ 1,444 --------------------------------------------------------------------- --------------------------------------------------------------------- Discontinued operations Magna Racino(TM)(iii) $ - $ - $ 29,195 $ - Portland Meadows(iv) - - 3,099 - --------------------------------------------------------------------- $ - $ - $ 32,294 $ - --------------------------------------------------------------------- --------------------------------------------------------------------- (i) As a result of significant weakness in the Northern California real estate market and the U.S. financial market, the Company recorded an impairment charge of $5.0 million related to the Dixon, California real estate property in the nine months ended September 30, 2008, which represents the excess of the carrying value of the asset over the estimated fair value less selling costs. The impairment charge is included in the real estate and other operations segment. (ii) In connection with the sales plan relating to the real estate in Porter, New York, the Company recognized an impairment charge of $1.4 million in the three and nine months ended September 30, 2007, which represents the excess of the carrying value of the asset over the estimated fair value less selling costs. The impairment charge is included in the real estate and other operations segment. In the three months ended December 31, 2007, $0.1 million of this impairment charge was subsequently reversed based on the actual net proceeds realized on the disposition of this real estate. (iii) As a result of the classification of Magna Racino(TM) as discontinued operations, the Company recorded an impairment charge of $29.2 million in the nine months ended September 30, 2008, which represents the excess of the carrying value of the assets over the estimated fair value less selling costs. The impairment charge is included in discontinued operations on the consolidated statements of operations and comprehensive loss. (iv) In June 2003, the Oregon Racing Commission ("ORC") adopted regulations that permitted wagering through Instant Racing terminals as a form of pari-mutuel wagering at Portland Meadows (the "Instant Racing Rules"). In September 2006, the ORC granted a request by Portland Meadows to offer Instant Racing under its 2006-2007 race meet license. In June 2007, the ORC, acting under the advice of the Oregon Attorney General, temporarily suspended and began proceedings to repeal the Instant Racing Rules. In September 2007, the ORC denied a request by Portland Meadows to offer Instant Racing under its 2007-2008 race meet license. In response to this denial, the Company requested the holding of a contested case hearing, which took place in January 2008. On February 27, 2008, the Office of Administrative Hearings released a proposed order in the Company's favor approving Instant Racing as a legal wager at Portland Meadows. However, on April 25, 2008, the ORC issued an order rejecting that recommendation. In May 2008, the Company filed a petition with the Oregon Court of Appeal for judicial review of the order of the ORC and a decision is expected in the first or second quarter of 2009. Based on the ORC's order to reject the Office of Administrative Hearings' recommendation, the Company recorded an impairment charge of $3.1 million related to the Instant Racing terminals and build-out of the Instant Racing facility in the nine months ended September 30, 2008, which is included in discontinued operations on the consolidated statements of operations and comprehensive loss. 7. 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, 2008 and 2007, resulting in an income tax expense of $0.7 million and $3.0 million for the three and nine months ended September 30, 2008, respectively, and an income tax benefit of $0.6 million and an income tax expense of $2.3 million for the three and nine months ended September 30, 2007, respectively. The income tax expense for the nine months ended September 30, 2008 primarily represents valuation allowances recorded against future tax assets in certain U.S. operations that, effective January 1, 2008, were included in the Company's U.S. consolidated income tax return. The income tax expense for the nine months ended September 30, 2007 primarily represents income tax expense recognized from certain of the Company's U.S. operations that were not included in the Company's U.S. consolidated income tax return. A foreign tax audit related to the Company's Austrian operations was concluded during the three months ended September 30, 2008 and as a result, the Company has recognized the benefit of certain previously unrecorded tax benefits in the amount of $3.1 million, which has been reflected in discontinued operations. 8. BANK INDEBTEDNESS AND LONG-TERM DEBT (a) Bank Indebtedness The Company's bank indebtedness consists of the following short-term bank loans: September 30, December 31, 2008 2007 ----------------------------------------------------------------- $40.0 million senior secured revolving credit facility(i) $ 36,491 $ 34,891 $7.5 million revolving loan facility(ii) 6,758 3,499 $3.0 million revolving credit facility(iii) - 824 ----------------------------------------------------------------- $ 43,249 $ 39,214 ----------------------------------------------------------------- ----------------------------------------------------------------- (i) The Company has a $40.0 million senior secured revolving credit facility with a Canadian financial institution, which was scheduled to mature on October 15, 2008, but was extended to November 17, 2008 (refer to Note 16(b)). 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. At September 30, 2008, the Company had borrowings of $36.5 million (December 31, 2007 - $34.9 million) and had issued letters of credit totalling $3.4 million (December 31, 2007 - $4.3 million) under the credit facility, such that $0.1 million was unused and available. The loans under the facility bear interest at the U.S. base rate plus 5% or the London Interbank Offered Rate ("LIBOR") plus 6%. The weighted average interest rate on the loans outstanding under the credit facility at September 30, 2008 was 8.8% (December 31, 2007 - 11.0%). (ii) A wholly-owned subsidiary of the Company that owns and operates Santa Anita Park has a $7.5 million revolving loan facility under its existing credit facility with a U.S. financial institution, which matures on October 31, 2012. The revolving loan facility requires that the aggregate outstanding principal be fully repaid for a period of 60 consecutive days during each year, is guaranteed by the Company's wholly-owned subsidiary, the Los Angeles Turf Club, Incorporated ("LATC") and is secured by a first deed of trust on Santa Anita Park and the surrounding real property, an assignment of the lease between LATC, the racetrack operator, and The Santa Anita Companies, Inc. ("SAC") and a pledge of all of the outstanding capital stock of LATC and SAC. At September 30, 2008, the Company had borrowings of $6.8 million (December 31, 2007 - $3.5 million) under the revolving loan facility. Borrowings under the revolving loan facility bear interest at the U.S. prime rate. The weighted average interest rate on the borrowings outstanding under the revolving loan facility at September 30, 2008 was 5.0% (December 31, 2007 - 7.3%). (iii) A wholly-owned subsidiary of the Company, AmTote International, Inc. ("AmTote"), had a $3.0 million revolving credit facility with a U.S. financial institution to finance working capital requirements, which matured on May 31, 2008, at which time the credit facility was fully repaid and terminated. Accordingly, at September 30, 2008, the Company had no borrowings (December 31, 2007 - $0.8 million) under the credit facility. The weighted average interest rate on the borrowings outstanding under the credit facility at September 30, 2008 was not applicable given that the credit facility was fully repaid and terminated (December 31, 2007 - 7.7%). (b) Long-Term Debt (i) One of the Company's subsidiaries, Pimlico Racing Association, Inc., has a revolving term loan facility with a U.S. financial institution that permits the prepayment of outstanding principal without penalty. This facility matures on December 1, 2013, bears interest at the U.S. prime rate or LIBOR plus 2.6% per annum and is secured by deeds of trust on land, buildings and improvements and security interests in all other assets of the subsidiary and certain affiliates of The Maryland Jockey Club ("MJC"). On August 5, 2008, the revolving term loan facility was amended to reduce the maximum undrawn availability from $7.7 million to $4.5 million. At September 30, 2008, the Company had borrowings of $1.6 million (December 31, 2007 - nil) under this revolving term loan facility. (ii) One of the Company's European wholly-owned subsidiaries had a bank term loan with a European financial institution of up to Euros 3.5 million bearing interest at the Euro Overnight Index Average Rate plus 3.75% per annum. The bank term loan was fully repaid upon its expiry on July 31, 2008. Accordingly, at September 30, 2008, the Company had no borrowings (December 31, 2007 - $3.6 million) under this bank term loan. (iii)On April 30, 2008, AmTote entered into an amending credit agreement with a U.S. financial institution. The principal amendments related to long-term debt included accelerating the maturity dates of the $4.2 million term loan from May 11, 2011 to May 30, 2009 and the $10.0 million equipment loan from May 11, 2012 to May 30, 2009. At September 30, 2008, the Company had total borrowings of $5.0 million (December 31, 2007 - $5.3 million) under these term and equipment loans. As a result of the amendments to the maturity dates, amounts outstanding under the term and equipment loans at September 30, 2008 are reflected in "long-term debt due within one year" on the consolidated balance sheets. 9. CAPITAL STOCK (a) Class A Subordinate Voting Stock and Class B Stock outstanding at September 30, 2008 and December 31, 2007 are shown in the table below (number of shares and stated value have been rounded to the nearest thousand) and have been restated to reflect the effect of the Reverse Stock Split (refer to Note 2). 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, 2007 and March 31, 2008 2,908 $ 339,435 2,923 $394,094 5,831 $733,529 Issued under the Long- term Incentive Plan 22 152 - - 22 152 ------------------------------------------------------------------------- Issued and outstanding at June 30, 2008 2,930 339,587 2,923 394,094 5,853 733,681 Redemption, at stated value, of fractional share capital on Reverse Stock Split (1) (141) - - (1) (141) ------------------------------------------------------------------------- Issued and outstanding at September 30, 2008 2,929 $339,446 2,923 $394,094 5,852 $733,540 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (b) 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 and convertible subordinated notes issued and outstanding at September 30, 2008 were exercised or converted and has been restated to reflect the effect of the Reverse Stock Split (refer to Note 2): Number of Shares ------------------------------------------------------------------------- Class A Subordinate Voting Stock outstanding 2,929 Class B Stock outstanding 2,923 Options to purchase Class A Subordinate Voting Stock 237 8.55% Convertible Subordinated Notes, convertible at $141.00 per share 1,064 7.25% Convertible Subordinated Notes, convertible at $170.00 per share 441 ------------------------------------------------------------------------- 7,594 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. LONG-TERM INCENTIVE PLAN The Company's Long-term Incentive Plan (the "Incentive Plan") (adopted in 2000 and amended in 2007) 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. Prior to the Reverse Stock Split, a maximum of 8.8 million shares of Class A Subordinate Voting Stock remained available to be issued under the Incentive Plan, of which 7.8 million were available for issuance pursuant to stock options and tandem stock appreciation rights and 1.0 million were available for issuance pursuant to any other type of award under the Incentive Plan. As a result of the Reverse Stock Split, effective July 22, 2008, 440 thousand shares of Class A Subordinate Voting Stock remain available to be issued under the Incentive Plan, of which 390 thousand are available for issuance pursuant to stock options and tandem stock appreciation rights and 50 thousand are available for issuance pursuant to any other type of award under the Incentive Plan. Under a 2005 incentive compensation program, the Company awarded performance shares of Class A Subordinate Voting Stock to certain officers and key employees. The number of shares of Class A Subordinate Voting Stock underlying the performance share awards was 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 of the Company. These performance shares vested over a six or eight month period to December 31, 2005 and were distributed, subject to certain conditions, in two equal installments. The first distribution occurred in March 2006 and the second distribution occurred in March 2007. For 2006, the Company continued the incentive compensation program as described above. The program was similar in all respects except that the 2006 performance shares vested over a 12-month period to December 31, 2006 and were distributed, subject to certain conditions, in March 2007. Accordingly, for the nine months ended September 30, 2007, the Company issued 8,737 of these vested performance share awards with a stated value of $0.6 million and 324 performance share awards were forfeited. No performance share awards remain to be issued subsequent to March 2007 under the 2005 and 2006 incentive compensation arrangements and there is no unrecognized compensation expense related to these performance share award arrangements. For the nine months ended September 30, 2008, 21,687 shares were issued with a stated value of $0.2 million to the Company's directors in payment of services rendered (for the nine months ended September 30, 2007 - 1,547 shares were issued with a stated value of $0.1 million). 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 Incentive 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 subject to option is as follows (number of shares subject to option in the following table is expressed in whole numbers and has not been rounded to the nearest thousand) and has been restated to reflect the effect of the Reverse Stock Split (refer to Note 2): Shares Subject Weighted Average to Option Exercise Price --------------------- --------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Balance outstanding at beginning of year 247,500 245,250 $ 116.40 $ 121.60 Forfeited or expired(i) (10,000) (8,300) 111.20 134.80 --------------------------------------------------------------------- Balance outstanding at March 31 237,500 236,950 116.60 121.20 Forfeited or expired(i) (550) (1,250) 133.20 114.20 --------------------------------------------------------------------- Balance outstanding at June 30 236,950 235,700 116.55 121.40 Granted - 19,500 - 64.00 Forfeited or expired(i) - (700) - 104.00 --------------------------------------------------------------------- Balance outstanding at September 30 236,950 254,500 $ 116.55 $ 117.00 --------------------------------------------------------------------- --------------------------------------------------------------------- (i) Options forfeited or expired were as a result of employment contracts being terminated and voluntary employee resignations. No options that were forfeited were subsequently reissued. Information regarding stock options outstanding is as follows and has been restated to reflect the effect of the Reverse Stock Split (refer to Note 2): Options Outstanding Options Exercisable --------------------- --------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Number 236,950 254,500 220,802 221,783 Weighted average exercise price $ 116.55 $ 117.00 $ 118.92 $ 120.40 Weighted average remaining contractual life (years) 2.7 4.0 2.3 3.2 --------------------------------------------------------------------- --------------------------------------------------------------------- At September 30, 2008, the 236,950 stock options outstanding had exercise prices ranging from $55.60 to $140.00 per share. The average fair value of the stock option grants for the three and nine months ended September 30, 2008 using the Black-Scholes option valuation model was not applicable given that there were no options granted during the respective periods (for the three and nine months ended September 30, 2007, the 19,500 stock options granted had a weighted-average fair value of $27.20 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, --------------------- --------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Risk free interest rates N/A 4.15% N/A 4.15% Dividend yields N/A - N/A - Volatility factor of expected market price of Class A Subordinate Voting Stock N/A 0.559 N/A 0.559 Weighted average expected life (years) N/A 5.00 N/A 5.00 --------------------------------------------------------------------- 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 Company recognized a nominal amount and $0.1 million of compensation expense for the three and nine months ended September 30, 2008, respectively (for the three and nine months ended September 30, 2007 - $0.5 million and $0.6 million, respectively) related to stock options. At September 30, 2008, the total unrecognized compensation expense related to stock options is $0.2 million, which is expected to be recognized as an expense over a period of 3.0 years. For the three and nine months ended September 30, 2008, the Company recognized a nominal amount and $0.3 million, respectively, of total compensation expense (for the three and nine months ended September 30, 2007 - $0.5 million and $0.7 million, respectively) relating to director compensation and stock options under the Incentive Plan. 11. OTHER PAID-IN-CAPITAL Other paid-in-capital consists of accumulated stock option compensation expense less the fair value of stock options at the date of grant that have been exercised and reclassified to share capital. Changes in other paid-in-capital for the three and nine months ended September 30, 2008 and 2007 are shown in the following table: 2008 2007 --------------------------------------------------------------------- Balance at beginning of year $ 2,031 $ 1,410 Stock-based compensation expense 44 73 --------------------------------------------------------------------- Balance at March 31 2,075 1,483 Stock-based compensation expense 35 70 --------------------------------------------------------------------- Balance at June 30 2,110 1,553 Stock-based compensation expense 36 463 Excess of stated value over purchase price on redemption of fractional share capital on Reverse Stock Split 131 - --------------------------------------------------------------------- Balance at September 30 $ 2,277 $ 2,016 --------------------------------------------------------------------- --------------------------------------------------------------------- 12. EARNINGS (LOSS) PER SHARE The following table is a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share computations (in thousands, except per share amounts) and has been restated to reflect the effect of the Reverse Stock Split (refer to Note 2): Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Basic and Basic and Basic and Basic and Diluted Diluted Diluted Diluted --------------------------------------------------------------------- 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) --------------------------------------------------------------------- Net loss $ (48,359) $ (49,811) $(116,073) $ (70,779) --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted average number of shares outstanding: Class A Subordinate Voting Stock 2,929 2,463 2,920 2,460 Class B Stock 2,923 2,923 2,923 2,923 --------------------------------------------------------------------- Weighted average number of shares outstanding 5,852 5,386 5,843 5,383 --------------------------------------------------------------------- --------------------------------------------------------------------- Earnings (loss) per share: Continuing operations $ (8.64) $ (8.28) $ (14.82) $ (11.00) Discontinued operations 0.38 (0.97) (5.05) (2.15) --------------------------------------------------------------------- Loss per share $ (8.26) $ (9.25) $ (19.87) $ (13.15) --------------------------------------------------------------------- --------------------------------------------------------------------- As a result of the net loss for the three and nine months ended September 30, 2008, options to purchase 236,950 shares and notes convertible into 1,505,006 shares have been excluded from the computation of diluted loss per share since their effect is anti-dilutive. As a result of the net loss for the three and nine months ended September 30, 2007, options to purchase 254,500 shares and notes convertible into 1,505,006 shares have been excluded from the computation of diluted loss per share since their effect is anti-dilutive. 13. TRANSACTIONS WITH RELATED PARTIES (a) The Company's indebtedness and long-term debt due to parent consists of the following: September 30, December 31, 2008 2007 ----------------------------------------------------------------- Bridge loan facility (i) $ 88,596 $ 35,889 Gulfstream Park project financing Tranche 1 (ii) 129,478 130,324 Tranche 2 (iii) 24,542 24,304 Tranche 3 (iv) 14,522 13,593 ----------------------------------------------------------------- 257,138 204,110 Less: due within one year (190,158) (137,003) ----------------------------------------------------------------- $ 66,980 $ 67,107 ----------------------------------------------------------------- ----------------------------------------------------------------- (i) Bridge Loan Facility On September 12, 2007, the Company entered into a bridge loan agreement with a subsidiary of MID pursuant to which up to $80.0 million of financing was made available to the Company, subject to certain conditions. On May 23, 2008, the bridge loan agreement was amended, such that: (i) the maximum commitment available was increased from $80.0 million to $110.0 million, (ii) the Company is permitted to redraw amounts that were repaid prior to May 23, 2008 (approximately $21.5 million) and (iii) the maturity date was extended from May 31, 2008 to August 31, 2008. The maturity date of the bridge loan was extended to September 30, 2008 under an August 13, 2008 amending agreement and, subsequently, from September 30, 2008 to October 31, 2008 under a September 15, 2008 amending agreement (refer to Note 16(c)). The bridge loan is non-revolving and bears interest at a rate of LIBOR plus 12.0% per annum. An arrangement fee of $2.4 million was paid to MID on the September 12, 2007 closing date, an additional arrangement fee of $0.8 million was paid to MID on February 29, 2008, which was equal to 1.0% of the maximum principal amount then available under this facility, and an amendment fee of $1.1 million was paid to MID on May 23, 2008 in connection with the bridge loan amendments, which was equal to 1.0% of the increased maximum commitment available under the facility. An additional arrangement fee of $1.1 million was paid on August 1, 2008, which was equal to 1.0% of the then maximum loan commitment, as the MID reorganization was not approved by that date. In addition, an amendment fee of $0.5 million was paid on each of August 13, 2008 and September 15, 2008 in accordance with the amending agreements providing forth the extensions of the maturity dates. There is a commitment fee equal to 1.0% per annum (payable in arrears) on the undrawn portion of the $110.0 million maximum loan commitment. The bridge loan is required to be repaid by way of the payment of the net proceeds of any asset sale, any equity offering (other than the Fair Enterprise private placement completed in October 2007) or any debt offering, subject to specified amounts required to be paid to eliminate other prior-ranking indebtedness. The bridge loan is secured by essentially all of the assets of the Company and by guarantees provided by certain subsidiaries of the Company. The guarantees are secured by charges over the lands owned by Golden Gate Fields, Santa Anita Park and Thistledown, and charges over the lands in Dixon, California and Ocala, Florida, as well as by pledges of the shares of certain of the Company's subsidiaries. The bridge loan is also cross-defaulted to all other obligations to MID and to other significant indebtedness of the Company and certain of its subsidiaries. For the three and nine months ended September 30, 2008, the Company received loan advances of $24.0 million and $75.4 million (for the three and nine months ended September 30, 2007 - $11.5 million), repaid outstanding principal of $4.5 million and $26.0 million (for the three and nine months ended September 30, 2007 - nil), incurred interest expense and commitment fees of $2.8 million and $6.6 million (for the three and nine months ended September 30, 2007 - $0.1 million), and repaid interest and commitment fees of $2.5 million and $6.0 million (for the three and nine months ended September 30, 2007 - nil), respectively, such that at September 30, 2008, $89.2 million was outstanding under the bridge loan facility, including $1.0 million of accrued interest and commitment fees payable. In addition, for the three and nine months ended September 30, 2008, the Company amortized $2.5 million and $6.2 million of loan origination costs (for the three and nine months ended September 30, 2007 - $0.2 million), respectively, such that at September 30, 2008, $0.6 million of net loan origination costs have been recorded as a reduction of the outstanding loan balance. The loan balance is being accreted to its face value over the term to maturity. The weighted average interest rate on the borrowings outstanding under the bridge loan at September 30, 2008 is 15.7% (December 31, 2007 - 16.2%). (ii) Gulfstream Park Project Financing - Tranche 1 In December 2004, as amended in September 2007, certain of the Company's subsidiaries entered into a $115.0 million project financing arrangement with a subsidiary of MID, for the reconstruction of facilities at Gulfstream Park. This project financing arrangement was amended on July 22, 2005 in connection with the Remington Park loan as described in Note 13(a)(v) below. The project financing was made by way of progress draw advances to fund reconstruction. The loan has a ten-year term from the completion date of the reconstruction project, which was February 1, 2006. Prior to the completion date, amounts outstanding under the loan bore interest at a floating rate equal to 2.55% per annum above MID's notional cost of borrowing under its floating rate credit facility, compounded monthly. After the completion date, amounts outstanding under the loan bear interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, interest was capitalized to the principal balance of the loan. Commencing January 1, 2007, the Company is required to make monthly blended payments of principal and interest based on a 25-year amortization period commencing on the completion date. The loan contains cross-guarantee, cross-default and cross-collateralization provisions. The loan is guaranteed by the Company and its subsidiaries that own and operate Remington Park and the Palm Meadows Training Center ("Palm Meadows") and is collateralized principally by security over the lands forming part of the operations at Gulfstream Park, Remington Park and Palm Meadows and over all other assets of Gulfstream Park, Remington Park and Palm Meadows, excluding licenses and permits. For the three and nine months ended September 30, 2008, the Company repaid outstanding principal of $0.4 million and $1.1 million (for the three and nine months ended September 30, 2007 - $0.3 million and $2.1 million), incurred interest expense of $3.4 million and $10.2 million (for the three and nine months ended September 30, 2007 - $3.4 million and $10.3 million), and repaid interest of $3.4 million and $10.2 million (for the three and nine months ended September 30, 2007 - $3.4 million and $9.1 million), respectively, such that at September 30, 2008, $132.4 million was outstanding under this project financing arrangement, including $1.1 million of accrued interest payable. In addition, for the three and nine months ended September 30, 2008, the Company amortized $0.1 million and $0.3 million (for the three and nine months ended September 30, 2007 - $0.1 million and $0.3 million) of loan origination costs, respectively, such that at September 30, 2008, $2.9 million of net loan origination costs have been recorded as a reduction of the outstanding loan balance. The loan balance is being accreted to its face value over the term to maturity. In connection with the May 23, 2008, August 13, 2008 and September 15, 2008 amendments to the bridge loan as described in Note 13(a)(i) above, the Company and the lender also amended the Gulfstream Park and Remington Park project financings. These amendments included extending the deadline for repayment of $100.0 million under the Gulfstream Park project financing from May 31, 2008 to August 31, 2008, then from August 31, 2008 to September 30, 2008 and then again from September 30, 2008 to October 31, 2008, during which time any repayments made under either facility would not be subject to a make-whole payment (refer to Note 16(c)). (iii) Gulfstream Park Project Financing - Tranche 2 On July 26, 2006, certain of the Company's subsidiaries that own and operate Gulfstream Park entered into an amending agreement relating to the existing Gulfstream Park project financing arrangement with a subsidiary of MID by adding an additional tranche of $25.8 million, plus lender costs and capitalized interest, to fund the design and construction of phase one of the slots facility to be located in the existing Gulfstream Park clubhouse building, as well as related capital expenditures and start-up costs, including the acquisition and installation of approximately 500 slot machines. The second tranche of the Gulfstream Park project financing has a five-year term and bears interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, interest on this tranche was capitalized to the principal balance of the loan. Beginning January 1, 2007, this tranche requires blended payments of principal and interest based on a 25-year amortization period commencing on that date. Advances related to phase one of the slots facility were made available by way of progress draw advances and there is no prepayment penalty associated with this tranche. The Gulfstream Park project financing facility was further amended to introduce a mandatory annual cash flow sweep of not less than 75% of Gulfstream Park's total excess cash flow, after permitted capital expenditures and debt service, to be used to repay the additional principal amount being made available under the new tranche. A lender fee of $0.3 million (1% of the amount of this tranche) was added to the principal amount of the loan as consideration for the amendments on July 26, 2006. For the three and nine months ended September 30, 2008, the Company received no loan advances (for the three and nine months ended September 30, 2007 - $0.7 million and $5.5 million), repaid outstanding principal of $0.1 million and $0.2 million (for the three and nine months ended September 30, 2007 - $0.1 million and $0.3 million), incurred interest expense of $0.6 million and $1.9 million (for the three and nine months ended September 30, 2007 - $0.6 million and $1.8 million), and repaid interest of $0.6 million and $1.9 million (for the three and nine months ended September 30, 2007 - $0.6 million and $1.5 million), respectively, such that at September 30, 2008, $24.5 million was outstanding under this project financing arrangement, including $0.2 million of accrued interest payable. In addition, for the three and nine months ended September 30, 2008, the Company amortized nil and $0.4 million (for the three and nine months ended September 30, 2007 - $0.1 million and $0.2 million) of loan origination costs, respectively, such that at September 30, 2008, no loan origination costs remained recorded as a reduction of the outstanding loan balance. The loan balance was accreted to its face value over the term to maturity. (iv) Gulfstream Park Project Financing - Tranche 3 On December 22, 2006, certain of the Company's subsidiaries that own and operate Gulfstream Park entered into an additional amending agreement relating to the existing Gulfstream Park project financing arrangement with a subsidiary of MID by adding an additional tranche of $21.5 million, plus lender costs and capitalized interest, to fund the design and construction of phase two of the slots facility, as well as related capital expenditures and start-up costs, including the acquisition and installation of approximately 700 slot machines. This third tranche of the Gulfstream Park project financing has a five-year term and bears interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to May 1, 2007, interest on this tranche was capitalized to the principal balance of the loan. Beginning May 1, 2007, this tranche requires blended payments of principal and interest based on a 25-year amortization period commencing on that date. Advances related to phase two of the slots facility were made available by way of progress draw advances and there is no prepayment penalty associated with this tranche. A lender fee of $0.2 million (1% of the amount of this tranche) was added to the principal amount of the loan as consideration for the amendments on January 19, 2007, when the first funding advance was made available to the Company. For the three and nine months ended September 30, 2008, the Company received no loan advances and loan advances of $0.7 million (for the three and nine months ended September 30, 2007 - $1.1 million and $13.1 million), repaid a nominal amount and $0.1 million of outstanding principal (for the three and nine months ended September 30, 2007 - $0.1 million and $0.2 million), incurred interest expense of $0.4 million and $1.1 million (for the three and nine months ended September 30, 2007 - $0.3 million and $0.6 million, of which $0.1 million was capitalized to the principal balance of the loan), and repaid interest of $0.4 million and $1.1 million (for the three and nine months ended September 30, 2007 - $0.3 million and $0.4 million), respectively, such that at September 30, 2008, $14.5 million was outstanding under this project financing arrangement, including $0.1 million of accrued interest payable. In addition, for the three and nine months ended September 30, 2008, the Company amortized nil and $0.3 million (for the three and nine months ended September 30, 2007 - $0.1 million and $0.1 million) of loan origination costs, respectively, such that at September 30, 2008, no loan origination costs remained recorded as a reduction of the outstanding loan balance. The loan balance was accreted to its face value over the term to maturity. (v) Remington Park Project Financing In July 2005, the Company's subsidiary that owns and operates Remington Park entered into a $34.2 million project financing arrangement with a subsidiary of MID for the build-out of the casino facility at Remington Park. Advances under the loan were made by way of progress draw advances to fund the capital expenditures relating to the development, design and construction of the casino facility, including the purchase and installation of electronic gaming machines. The loan has a ten-year term from the completion date of the reconstruction project, which was November 28, 2005. Prior to the completion date, amounts outstanding under the loan bore interest at a floating rate equal to 2.55% per annum above MID's notional cost of LIBOR borrowing under its floating rate credit facility, compounded monthly. After the completion date, amounts outstanding under the loan bear interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, interest was capitalized to the principal balance of the loan. Commencing January 1, 2007, the Company is required to make monthly blended payments of principal and interest based on a 25-year amortization period commencing on the completion date. Certain cash from the operations of Remington Park must be used to pay deferred interest on the loan plus a portion of the principal under the loan equal to the deferred interest on the Gulfstream Park construction loan. The loan is secured by all assets of Remington Park, excluding licenses and permits. The loan is also secured by a charge over the Gulfstream Park lands and a charge over Palm Meadows and contains cross-guarantee, cross-default and cross-collateralization provisions. For the three and nine months ended September 30, 2008, the Company received no loan advances and loan advances of $1.0 million (for the three and nine months ended September 30, 2007 - nil), repaid a nominal amount of outstanding principal and $1.9 million (for the three and nine months ended September 30, 2007 - $1.6 million and $3.5 million), incurred interest expense of $0.7 million and $2.1 million (for the three and nine months ended September 30, 2007 - $0.7 million and $2.3 million), and repaid interest of $0.7 million and $2.1 million (for the three and nine months ended September 30, 2007 - $0.8 million and $2.1 million), respectively, such that at September 30, 2008, $26.8 million was outstanding under this project financing arrangement, including $0.2 million of accrued interest payable. In addition, for the three and nine months ended September 30, 2008 and 2007, the Company amortized a nominal amount and $0.1 million of loan origination costs, respectively, such that at September 30, 2008, $1.1 million of net loan origination costs have been recorded as a reduction of the outstanding loan balance. The loan balance is being accreted to its face value over the term to maturity. The Remington Park project financing has been reflected in discontinued operations (refer to Note 5). (b) At September 30, 2008, $0.9 million (December 31, 2007 - $4.5 million) of the funds the Company placed into escrow with MID remains in escrow. (c) On April 2, 2008, one of the Company's European wholly-owned subsidiaries, Fontana Beteiligungs GmbH ("Fontana"), entered into an agreement to sell real estate with a carrying value of Euros 0.2 million (U.S. $0.3 million) located in Oberwaltersdorf, Austria to Fontana Immobilien GmbH, an entity in which Fontana had a 50% joint venture equity interest, for Euros 0.8 million (U.S. $1.2 million). The purchase price was originally payable in instalments according to the sale of apartment units by the joint venture and, in any event, no later than April 2, 2009. On August 1, 2008, Fontana sold its 50% joint venture equity interest in Fontana Immobilien GmbH to a related party. The sale price included nominal cash consideration equal to Fontana's initial capital contribution and a future profit participation in Fontana Immobilien GmbH. Fontana and Fontana Immobilien GmbH also agreed to amend the real estate sale agreement such that the payment of the purchase price was accelerated to, and was paid on August 7, 2008. The gain on sale of the real estate of approximately Euros 0.6 million (U.S. $0.9 million) has been reported in the consolidated statements of operations and comprehensive loss for the three months ended September 30, 2008 in the real estate and other operations segment. (d) On December 21, 2007, the Company entered into an agreement to sell 225 acres of excess real estate located in Ebreichsdorf, Austria to a subsidiary of Magna, a related party, for a purchase price of Euros 20.0 million (U.S. $31.5 million), net of transaction costs. The sale transaction was completed on April 11, 2008. Of the net proceeds that were received on closing, Euros 7.5 million was used to repay a portion of a Euros 15.0 million term loan facility and the remaining portion of the net proceeds was used to repay a portion of the bridge loan facility with a subsidiary of MID. The gain on sale of the excess real estate of approximately Euros 15.5 million (U.S. $24.3 million), net of tax, has been reported as a contribution of equity in contributed surplus. (e) On June 7, 2007, the Company sold 205 acres of land and buildings, located in Bonsall, California, and on which the San Luis Rey Downs Training Center is situated, to MID for cash consideration of approximately $24.0 million. In the three and nine months ended September 30, 2008, an additional $0.1 million of cash consideration related to environmental holdbacks was received by the Company. The Company also has entered into a lease agreement whereby a subsidiary of the Company will lease the property from MID for a three year period on a triple-net lease basis, which provides for a nominal annual rent in addition to operating costs that arise from the use of the property. The lease is terminable at any time by either party on four months notice. The gain on sale of the property, net of tax, for the three and nine months ended September 30, 2008 of approximately $0.1 million and $0.1 million (for the three and nine months ended September 30, 2007 - $0.1 million and $17.7 million), respectively, has been reported as a contribution of equity in contributed surplus. (f) On March 28, 2007, the Company sold a 157 acre parcel of excess land adjacent to Palm Meadows, located in Palm Beach County, Florida and certain development rights to MID for cash consideration of $35.0 million. The gain on sale of the excess land and development rights of approximately $16.7 million, net of tax, has been reported as a contribution of equity in contributed surplus. On February 7, 2007, MID acquired all of the Company's interests and rights in a 34 acre parcel of residential development land in Aurora, Ontario, Canada for cash consideration of Cdn. $12.0 million (U.S. $10.1 million), which was equal to the carrying value of the land. On February 7, 2007, MID also acquired a 64 acre parcel of excess land at Laurel Park in Howard County, Maryland for cash consideration of $20.0 million. The gain on sale of the excess land of approximately $15.8 million, net of tax, has been reported as a contribution of equity in contributed surplus. The Company has been granted profit participation rights in respect of each of these three properties under which it is entitled to receive 15% of the net proceeds from any sale or development after MID achieves a 15% internal rate of return. (g) The Company has entered into a consulting agreement with MID, dated September 12, 2007, under which MID will provide consulting services to the Company's management and Board of Directors in connection with the debt elimination plan. The Company is required to reimburse MID for its expenses, but there are no fees payable to MID in connection with the consulting agreement. The consulting agreement may be terminated by either party under certain circumstances. (h) For the three and nine months ended September 30, 2008, the Company incurred $0.8 million and $2.3 million (for the three and nine months ended September 30, 2007 - $0.3 million and $2.0 million) of rent for facilities and central shared and other services to Magna and its subsidiaries. At September 30, 2008, amounts due to Magna and its subsidiaries totalled $1.5 million (December 31, 2007 - $2.8 million). 14. COMMITMENTS AND CONTINGENCIES (a) The Company generates a substantial amount of its revenues from wagering activities and, therefore, it is subject to the risks inherent in the ownership and operation of its racetracks. These include, among others, the risks normally associated with changes in the general economic climate, trends in the gaming industry, including competition from other gaming institutions and state lottery commissions, and changes in tax laws and gaming laws. (b) In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with, among others, customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to accurately estimate the extent of potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company. (c) On May 18, 2007, ODS Technologies, L.P., operating as TVG Network, filed a summons against the Company, HRTV, LLC and XpressBet, Inc. seeking an order that the defendants be enjoined from infringing certain patents relating to interactive wagering systems and for an award for damages to compensate for the infringement. An Answer to Complaint, Affirmative Defenses and Counterclaims have been filed on behalf of the defendants. The discovery and disposition process is ongoing. At the present time, the final outcome related to this action cannot be accurately determined by management. (d) The Company has letters of credit issued with various financial institutions of $0.9 million to guarantee various construction projects related to activity of the Company. These letters of credit are secured by cash deposits of the Company. The Company also has letters of credit issued under its senior secured revolving credit facility of $3.4 million (refer to Note 8(a)(i)). (e) The Company has provided indemnities related to surety bonds and letters of credit issued in the process of obtaining licenses and permits at certain racetracks and to guarantee various construction projects related to activity of its subsidiaries. At September 30, 2008, these indemnities amounted to $6.5 million with expiration dates through 2009. (f) Contractual commitments outstanding at September 30, 2008, which related to construction and development projects, amounted to approximately $0.2 million. (g) On March 4, 2007, the Company entered into a series of customer-focused agreements with Churchill Downs Incorporated ("CDI") in order to enhance wagering integrity and security, to own and operate HRTV(R), to buy and sell horse racing content, and to promote the availability of horse racing signals to customers worldwide. These agreements involved the formation of a joint venture, TrackNet Media, a reciprocal content swap agreement and the purchase by CDI from the Company of a 50% interest in HRTV(R). TrackNet Media is the vehicle through which the Company and CDI horse racing content is made available to third parties, including racetracks, off-track betting facilities, casinos and advance deposit wagering companies. TrackNet Media purchases horse racing content from third parties to be made available through the Company's and CDI's respective outlets. Under the reciprocal content swap agreement, the Company and CDI exchange their respective horse racing signals. To facilitate the sale of 50% of HRTV(R) to CDI, on March 4, 2007, HRTV, LLC was created with an effective date of April 27, 2007. Both the Company and CDI are required to make quarterly capital contributions, on an equal basis, until October 2009 to fund the operations of HRTV, LLC; however, the Company may under certain circumstances be responsible for additional capital commitments. As of September 30, 2008, the Company has not made any additional capital contributions. The Company's share of the required capital contributions to HRTV, LLC is expected to be approximately $7.0 million of which $4.3 million has been contributed to September 30, 2008. (h) On December 8, 2005, legislation authorizing the operation of slot machines within existing, licensed Broward County, Florida pari-mutel facilities that had conducted live racing or games during each of 2002 and 2003 was passed by the Florida Legislature. On January 4, 2006, the Governor of Florida signed the legislation into law and subsequently the Division of Pari-mutuel Wagering developed the governing rules and regulations. Prior to the November 15, 2006 opening of the slots facility at Gulfstream Park, the Company was awarded a gaming license for slot machine operations at Gulfstream Park in October 2006 despite an August 2006 decision rendered by the Florida First District Court of Appeals that ruled that a trial is necessary to determine whether the constitutional amendment adopting the slots initiative was invalid because the petitions bringing the initiative forward did not contain the minimum number of valid signatures. Previously, a lower court decision had granted summary judgment in favor of "Floridians for a Level Playing Field" ("FLPF"), a group in which Gulfstream Park is a member. Though FLPF pursued various procedural options in response to the Florida First District Court of Appeals decision, the Florida Supreme Court ruled in late September 2007 that the matter was not procedurally proper for consideration by the court. That ruling effectively remanded the matter to the trial court for a trial on the merits, which will likely take an additional year or more to fully develop and could take as many as three years to achieve a full factual record and trial court ruling for an appellate court to review. The Company believes that the August 2006 decision rendered by the Florida First District Court of Appeals is incorrect, and accordingly, the Company has opened the slots facility. At September 30, 2008, the carrying value of the fixed assets related to the slots facility is approximately $25.1 million. If the August 2006 decision rendered by the Florida First District Court of Appeals is correct, the Company may incur a write-down of these fixed assets. (i) In May 2005, a Limited Liability Company Agreement was entered into with Forest City concerning the planned development of "The Village at Gulfstream Park(TM)". That agreement contemplates the development of a mixed-use project consisting of residential units, parking, restaurants, hotels, entertainment, retail outlets and other commercial use projects on a portion of the Gulfstream Park property. Forest City is required to contribute up to a maximum of $15.0 million as an initial capital contribution. The Company is obligated to contribute 50% of any equity amounts in excess of $15.0 million as and when needed, and to September 30, 2008 has made equity contributions in the amount of $4.2 million. At September 30, 2008, approximately $72.5 million of costs have been incurred by The Village at Gulfstream Park, LLC, which have been funded by a construction loan and equity contributions from Forest City and the Company. The Company has reflected its unpaid share of equity amounts in excess of $15.0 million, of approximately $2.6 million, as an obligation which is included in "other accrued liabilities" on the accompanying consolidated balance sheets. If the Company or Forest City fails to make required capital contributions when due, then either party to the agreement may advance such funds to the Limited Liability Company, equal to the required capital contributions, as a recourse loan or as a capital contribution for which the capital accounts of the partners would be adjusted accordingly. The Limited Liability Company Agreement also contemplated additional agreements, including a ground lease, a reciprocal easement agreement, a development agreement, a leasing agreement and a management agreement which were executed upon satisfaction of certain conditions. Upon the opening of The Village at Gulfstream Park(TM), construction of which commenced in June 2007, annual cash receipts (adjusted for certain disbursements and reserves) will first be distributed to the Forest City partner, subject to certain limitations, until such time as the initial contribution accounts of the partners are equal. Thereafter, the cash receipts are generally expected to be distributed to the partners equally, provided they maintain their equal interest in the partnership. The annual cash payments made to the Forest City partner to equalize the partners' initial contribution accounts will not exceed the amount of the annual ground rent. (j) On September 28, 2006, certain of the Company's affiliates entered into definitive operating agreements with certain Caruso Affiliated affiliates regarding the proposed development of The Shops at Santa Anita on approximately 51 acres of undeveloped land surrounding Santa Anita Park. This development project, first contemplated in an April 2004 Letter of Intent which also addressed the possibility of developing undeveloped lands surrounding Golden Gate Fields, contemplates a mixed-use development with approximately 800,000 square feet of retail, entertainment and restaurants as well as 4,000 parking spaces. Westfield Corporation ("Westfield"), a developer of a neighboring parcel of land, has challenged the manner in which the entitlement process for the development of the land surrounding Santa Anita Park has been proceeding. On May 16, 2007, Westfield commenced civil litigation in the Los Angeles Superior Court in an attempt to overturn the Arcadia City Council's approval and granting of entitlements related to the construction of The Shops at Santa Anita. In addition, on May 21, 2007, Arcadia First! filed a petition against the City of Arcadia to overturn the entitlements and named the Company and certain of its subsidiaries as real parties in interest. The first hearings on the merits of the petitioners' claims were heard before the trial judge on May 23, 2008. On July 23, 2008, the court issued a tentative opinion in favor of the petitioners in part, concluding that eleven parts of the final environmental impact report were deficient. On September 29, 2008, the court heard the respondents' motion to vacate the tentative opinion and to enter a new and different decision. That motion was denied and the court declared its tentative opinion to be the court's final decision. The respondents' are considering whether to amend and supplement the environmental impact report in an attempt to cure the eleven defects, or in the alternative, to file notice of appeal. The last day to file an appeal is December 16, 2008. Accordingly, development efforts may be delayed or suspended. To September 30, 2008, the Company has expended approximately $10.7 million on these initiatives, of which $0.7 million was paid during the nine months ended September 30, 2008. These amounts have been recorded as "real estate properties, net" on the accompanying consolidated balance sheets. Under the terms of the Letter of Intent, the Company may be responsible to fund additional costs; however, to September 30, 2008, the Company has not made any such payments. (k) Until December 25, 2007, The Meadows participated in a multi-employer defined benefit pension plan (the "Pension Plan") for which the Pension Plan's total vested liabilities exceeded its assets. The New Jersey Sports & Exposition Authority previously withdrew from the Pension Plan effective November 1, 2007. As the only remaining participant in the Pension Plan, The Meadows withdrew from the Pension Plan effective December 25, 2007, which constituted a mass withdrawal. An updated actuarial valuation is in the process of being obtained; however, based on allocation information currently provided by the Pension Plan, the estimated withdrawal liability of The Meadows is approximately $6.2 million. This liability may be satisfied by annual payments of approximately $0.3 million. As part of the indemnification obligations under the holdback agreement with Millennium-Oaktree (refer to Note 3), the mass withdrawal liability that has been triggered as a result of withdrawal from the Pension Plan will be offset against the amount owing to the Company under the holdback agreement. (l) MJC was party to agreements with the Maryland Thoroughbred Horsemen's Association ("MTHA") and the Maryland Breeders' Association, which expired on December 31, 2007, under which the horsemen and breeders each contributed 4.75% of the costs of simulcasting to MJC. On August 28, 2008, MJC entered into an agreement under which the MTHA paid $0.6 million as an expense contribution towards the costs associated with simulcasting at MJC. In return, MJC agreed to conduct 65 live racing days during the period from September 4, 2008 to December 31, 2008, maintain overnight purses at an average of $160 thousand per day during the aforementioned period, and maintain stabling facilities at Laurel Park and the Bowie Training Center during the aforementioned period. (m) On May 8, 2008, one of the Company's wholly-owned subsidiaries, LATC, commenced civil litigation in the District Court in Los Angeles for breach of contract. It is seeking damages in excess of $8.4 million from Cushion Track Footing USA, LLC and other defendants for failure to install a racing surface at Santa Anita Park suitable for the purpose for which it was intended. The defendants were served with the complaint and filed a motion to dismiss the action for lack of personal jurisdiction. On October 20, 2008, the presiding judge denied the defendant's motions, such that they are now required to file answers to the complaint within 20 days of the judge's decision. 15. SEGMENT INFORMATION Operating Segments The Company's reportable segments reflect how the Company is organized and managed by senior management. The Company has two principal operating segments: racing and gaming operations and real estate and other operations. The racing and gaming segment has been further segmented to reflect geographical and other operations as follows: (1) California operations include Santa Anita Park, Golden Gate Fields and San Luis Rey Downs; (2) Florida operations include Gulfstream Park's racing and gaming operations and Palm Meadows; (3) Maryland operations include Laurel Park, Pimlico Race Course, Bowie Training Center and the Maryland off-track betting network; (4) Southern U.S. operations include Lone Star Park; (5) Northern U.S. operations include The Meadows and its off-track betting network and the North American production and sales operations for StreuFex(TM); (6) European operations include the European production and sales operations for StreuFex(TM); (7) PariMax operations include XpressBet(R), HRTV(R) to April 27, 2007, MagnaBet(TM), RaceONTV(TM), AmTote and the Company's equity investments in Racing World Limited, TrackNet Media and HRTV, LLC from April 28, 2007; and (8) Corporate and other operations includes costs related to the Company's corporate head office, cash and other corporate office assets and investments in racing related real estate held for development. Eliminations reflect the elimination of revenues between business units. The real estate and other operations segment includes the sale of excess real estate and the Company's residential housing development. Comparative amounts reflected in segment information for the three and nine months ended September 30, 2007 have been reclassified to reflect the operations of Remington Park's racing and gaming operations and its off-track betting network, Thistledown, Great Lakes Downs, Portland Meadows and the Oregon off-track betting network, and Magna Racino(TM) as discontinued operations. The Company uses revenues and earnings (loss) before interest, income taxes, depreciation and amortization ("EBITDA") as key performance measures of results of operations for purposes of evaluating operating and financial performance internally. Management believes that the use of these measures enables management and investors to evaluate and compare, from period to period, operating and financial performance of companies within the horse racing industry in a meaningful and consistent manner as EBITDA eliminates the effects of financing and capital structures, which vary between companies. Because the Company uses EBITDA as a key measure of financial performance, the Company is required by U.S. GAAP to provide the information in this note concerning EBITDA. However, these measures should not be considered as an alternative to, or more meaningful than, net income (loss) as a measure of the Company's operating results or cash flows, or as a measure of liquidity. The accounting policies of each segment are the same as those described in the "Summary of Significant Accounting Policies" sections of the Company's annual report on Form 10-K for the year ended December 31, 2007. The following summary presents key information by operating segment: Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Revenues California operations $ 11,095 $ 8,010 $ 149,613 $ 167,756 Florida operations 13,730 11,129 116,277 109,685 Maryland operations 15,721 18,961 77,428 88,530 Southern U.S. operations 13,702 14,880 47,067 48,831 Northern U.S. operations 7,794 8,289 26,036 28,936 European operations 361 247 1,059 841 PariMax operations 17,755 18,307 60,926 62,807 --------------------------------------------------------------------- 80,158 79,823 478,406 507,386 Corporate and other 65 151 204 257 Eliminations (1,593) (1,187) (9,692) (10,139) --------------------------------------------------------------------- Total racing and gaming operations 78,630 78,787 468,918 497,504 --------------------------------------------------------------------- Sale of real estate - - 1,492 - Residential development and other 2,947 2,695 8,425 5,586 --------------------------------------------------------------------- Total real estate and other operations 2,947 2,695 9,917 5,586 --------------------------------------------------------------------- Total revenues $ 81,577 $ 81,482 $ 478,835 $ 503,090 --------------------------------------------------------------------- --------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, ------------------------------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Earnings (loss) before interest, income taxes, depreciation and amortization ("EBITDA") California operations $ (6,600) $ (6,436) $ 9,592 $ 13,627 Florida operations (6,959) (8,500) (1,050) (3,217) Maryland operations (1,818) (1,767) 2,120 8,024 Southern U.S. operations 889 1,256 4,004 4,386 Northern U.S. operations (164) (96) 561 (100) European operations (8) (31) (76) (45) PariMax operations 1,383 473 5,011 3,224 --------------------------------------------------------------------- (13,277) (15,101) 20,162 25,899 Corporate and other (5,407) (7,822) (16,657) (19,679) Predevelopment and other costs (2,766) (393) (4,213) (1,765) Recognition of deferred gain on The Meadows transaction - - 2,013 - --------------------------------------------------------------------- Total racing and gaming operations (21,450) (23,316) 1,305 4,455 --------------------------------------------------------------------- Residential development and other 1,093 1,358 4,409 2,110 Write-down of long-lived assets - (1,444) (5,000) (1,444) --------------------------------------------------------------------- Total real estate and other operations 1,093 (86) (591) 666 --------------------------------------------------------------------- Total EBITDA (loss) $ (20,357) $ (23,402) $ 714 $ 5,121 --------------------------------------------------------------------- --------------------------------------------------------------------- Reconciliation of EBITDA to Net Loss Three months ended September 30, 2008 --------------------------------------------------------------------- Racing and Real Estate Gaming and Other Operations Operations Total --------------------------------------------------------------------- EBITDA (loss) from continuing operations $ (21,450) $ 1,093 $ (20,357) Interest (expense) income, net (18,143) 28 (18,115) Depreciation and amortization (11,352) (10) (11,362) --------------------------------------------------------------------- Income (loss) from continuing operations before income taxes $ (50,945) $ 1,111 (49,834) Income tax expense 748 --------------------------------------------------------------------- Loss from continuing operations (50,582) Income from discontinued operations 2,223 --------------------------------------------------------------------- Net loss $ (48,359) --------------------------------------------------------------------- --------------------------------------------------------------------- Three months ended September 30, 2007 --------------------------------------------------------------------- Racing and Real Estate Gaming and Other Operations Operations Total --------------------------------------------------------------------- EBITDA (loss) from continuing operations $ (23,316) $ (86) $ (23,402) Interest expense, net (11,644) (68) (11,712) Depreciation and amortization (10,090) (8) (10,098) --------------------------------------------------------------------- Loss from continuing operations before income taxes $ (45,050) $ (162) (45,212) Income tax benefit (637) --------------------------------------------------------------------- Loss from continuing operations (44,575) Loss from discontinued operations (5,236) --------------------------------------------------------------------- Net loss $ (49,811) --------------------------------------------------------------------- --------------------------------------------------------------------- Nine months ended September 30, 2008 --------------------------------------------------------------------- Racing and Real Estate Gaming and Other Operations Operations Total --------------------------------------------------------------------- EBITDA (loss) from continuing operations $ 1,305 $ (591) $ 714 Interest (expense) income, net (50,621) 13 (50,608) Depreciation and amortization (33,610) (24) (33,634) --------------------------------------------------------------------- Loss from continuing operations before income taxes $ (82,926) $ (602) (83,528) Income tax expense 3,011 --------------------------------------------------------------------- Loss from continuing operations (86,539) Loss from discontinued operations (29,534) --------------------------------------------------------------------- Net loss $(116,073) --------------------------------------------------------------------- --------------------------------------------------------------------- Nine months ended September 30, 2007 --------------------------------------------------------------------- Racing and Real Estate Gaming and Other Operations Operations Total --------------------------------------------------------------------- EBITDA from continuing operations $ 4,455 $ 666 $ 5,121 Interest expense, net (34,074) (145) (34,219) Depreciation and amortization (27,785) (24) (27,809) --------------------------------------------------------------------- Income (loss) from continuing operations before income taxes $ (57,404) $ 497 (56,907) Income tax expense 2,287 --------------------------------------------------------------------- Loss from continuing operations (59,194) Loss from discontinued operations (11,585) --------------------------------------------------------------------- Net loss $ (70,779) --------------------------------------------------------------------- -------------------------------------------------------------------- September 30, December 31, 2008 2007 -------------------------------------------------------------------- Total Assets California operations $ 295,807 $ 320,781 Florida operations 352,517 358,907 Maryland operations 159,818 162,606 Southern U.S. operations 96,181 97,228 Northern U.S. operations 19,039 18,502 European operations 1,430 1,468 PariMax operations 38,492 43,717 -------------------------------------------------------------------- 963,284 1,003,209 Corporate and other 53,527 59,590 -------------------------------------------------------------------- Total racing and gaming operations 1,016,811 1,062,799 -------------------------------------------------------------------- Residential development and other 5,876 5,214 -------------------------------------------------------------------- Total real estate and other operations 5,876 5,214 -------------------------------------------------------------------- Total assets from continuing operations 1,022,687 1,068,013 Total assets held for sale 26,984 40,140 Total assets of discontinued operations 114,063 135,723 -------------------------------------------------------------------- Total assets $ 1,163,734 $ 1,243,876 -------------------------------------------------------------------- -------------------------------------------------------------------- 16. SUBSEQUENT EVENTS (a) On November 3, 2008, the Company announced that its agreement to sell approximately 489 acres of excess real estate located in Ocala, Florida to Lincoln Property Company and Orion Investment Properties, Inc. for a purchase price of $16.5 million cash was terminated by the prospective purchasers. The Company still intends to sell the Ocala property and will re-initiate its marketing efforts (refer to Note 4(d)). (b) On October 15, 2008, the Company's $40.0 million senior secured revolving credit facility with a Canadian financial institution was extended from October 15, 2008 to November 17, 2008. The Company incurred a fee of $0.4 million in connection with this credit facility (refer to Note 8(a)(i)). (c) As a result of October 15, 2008 changes to the Company's bridge loan agreement with a subsidiary of MID, (i) the maximum commitment available was increased from $110.0 million to $125.0 million and the Company is also now permitted to redraw amounts that it repaid in July 2008 (approximately $4.5 million), such that the amount available to the Company under the bridge loan was increased by approximately $19.5 million and (ii) the bridge loan maturity date was extended from October 31, 2008 to December 1, 2008 (or such later date or dates as may be determined from time to time by the bridge loan lender in its sole discretion, with such later date or dates being subject to such conditions as may be determined by the lender in its sole discretion). Further draws under the bridge loan will not be permitted after November 17, 2008 unless the Company's $40.0 million senior secured revolving credit facility is further extended or replaced (refer to Note 13(a)(i)). In connection with the above changes to the bridge loan, the repayment deadline for $100.0 million under the Gulfstream Park project financing facility with a subsidiary of MID was extended from October 31, 2008 to December 1, 2008 (or such later date or dates as may be determined from time to time by the bridge loan lender in its sole discretion, with such later date or dates being subject to such conditions as may be determined by the lender in its sole discretion), during which time any repayments made under the Gulfstream Park facility or the Remington Park facility will not be subject to a make-whole payment (refer to Note 13 (a)(ii)). The Company incurred a fee of $1.25 million in connection with the changes to the bridge loan and a fee of $1.0 million in connection with the extension of the $100.0 million repayment requirement under the Gulfstream Park facility. DATASOURCE: Magna Entertainment Corp. CONTACT: Blake Tohana, Executive Vice-President and Chief Financial Officer, Magna Entertainment Corp., 337 Magna Drive, Aurora, ON, L4G 7K1, Tel: (905) 726-7493

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