AURORA, ON, May 1 /PRNewswire-FirstCall/ - Magna Entertainment Corp. ("MEC") (NASDAQ: MECA; TSX: MEC.SV.A) today reported its financial results for the first quarter ended March 31, 2006.
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Three Months Ended
March 31,
2006 2005(1)
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(unaudited)
Revenues(2) $ 281,470 $ 245,682
Earnings before interest, taxes,
depreciation and amortization ("EBITDA")(2) $ 26,268 $ 11,811
Net income (loss)
Continuing operations $ 2,212 $ (4,683)
Discontinued operations - 563
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Total net income (loss) $ 2,212 $ (4,120)
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Diluted earnings (loss) per share
Continuing operations $ 0.02 $ (0.05)
Discontinued operations - 0.01
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Total diluted earnings (loss) per share $ 0.02 $ (0.04)
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All amounts are reported in U.S. dollars in thousands, except
per share figures.
(1) Results for the three months ended March 31, 2005 have been restated
to reflect only continuing operations, reporting Flamboro Downs, the
sale of which was completed on October 19, 2005, and Maryland-
Virginia Racing Circuit, Inc., the sale of which was completed on
September 30, 2005, as discontinued operations.
(2) Revenues and EBITDA for the three months ended March 31, 2005 are
from continuing operations only.
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In announcing these results, Frank Stronach, Chairman and Interim Chief Executive Officer of MEC, remarked: "While Q1 2006 has marked a return to profitability, we need to continue to execute on our Recapitalization Plan and strengthen our balance sheet. For the first time since the first quarter of 2004, we have had both earnings before interest, income taxes, depreciation and amortization and net income. This is our third consecutive quarter where EBITDA and net income have improved over the comparative prior year period. We are encouraged by these results and believe that we are beginning to see the benefits of our significant investments over the past several years in upgrading our facilities to become entertainment destinations, our pursuit of alternative gaming, and the realization of cost cutting initiatives to improve operating efficiencies. We have made continued progress on our Recapitalization Plan with some recent transactions and continue to focus on the disposal of other non-strategic assets with the goal of reducing debt. Our improving operations, strong asset base and additional financing alternatives should provide a basis for eliminating the going concern issue that arises from our current financial position."
Our racetracks operate for prescribed periods each year. As a result, our racing revenues and operating results for any quarter will not be indicative of our racing revenues and operating results for the year.
Our financial results for the first quarter of 2006 reflect the full quarter's operations for all of MEC's racetracks and related pari-mutuel wagering operations. The comparative results for the first quarter of 2005 have been restated to reflect only continuing operations. Discontinued operations for the three months ended March 31, 2005 reflect the results of Flamboro Downs, the sale of which was completed on October 19, 2005, and Maryland-Virginia Racing Circuit, Inc., the sale of which was completed on September 30, 2005.
Revenues were $281.5 million in the three months ended March 31, 2006, compared to $245.7 million in the three months ended March 31, 2005, an increase of $35.8 million or 14.6%. The increased revenues were primarily a result of:
- Southern U.S. operations revenues above the prior year period by
$14.3 million due to the opening of the casino facility at Remington
Park in November 2005;
- California operations revenues above the prior year period by
$11.2 million, primarily due to the change in the racing calendar at
Golden Gate Fields which resulted in 19 additional live race days in
the first quarter of 2006 compared to the first quarter of 2005, and
higher levels of handle and wagering at Santa Anita Park as a result
of good weather in Southern California in January and February 2006
and focused marketing initiatives to attract patrons "back to the
track". In the first quarter of 2005, Southern California experienced
significant rainfall, which resulted in lower attendance and wagering
during the 2005 live race meet;
- Florida operations revenues above the prior year period by
$5.7 million due to the opening of the new clubhouse facility at
Gulfstream Park. The facility was sufficiently completed to open the
meet on schedule on January 4, 2006, however construction continued
through most of the first quarter of 2006, which affected results for
the quarter. The 2005 race meet operated out of temporary facilities;
- Maryland operations revenues above the prior year period by
$3.2 million due to 15 additional live race days at Laurel Park in
the first quarter of 2006 compared to the first quarter of 2005 and
increased wagering on Laurel Park racing content as the new turf
course at Laurel Park, which opened in the fall of 2005, has
resulted in increased field sizes and export handle; and
- European operations revenues above the prior year period by
$1.1 million due to increased wagering revenues at MagnaBet(TM), our
European account wagering platform.
EBITDA increased from $11.8 million in the three months ended March 31, 2005 to $26.3 million in the three months ended March 31, 2006, an increase of $14.5 million or 122.4%, primarily as a result of the same factors noted above and also due to a decrease of $2.8 million in predevelopment, pre-opening and other costs with decreased spending in the first quarter of 2006 related to the pursuit of alternative gaming compared to the comparative quarter in 2005.
Net income for the three months ended March 31, 2006 was $2.2 million, compared to a net loss of $4.1 million in the three months ended March 31, 2005. The increase in net income was due to EBITDA increases noted above, partially offset by increased interest expense on our Gulfstream Park and Remington Park project financings and bridge loan facility with our parent company, MI Developments Inc., and increased depreciation expense primarily as a result of the opening of the new clubhouse facility at Gulfstream Park in the quarter and the opening of the Remington Park casino facility in November 2005.
During the three months ended March 31, 2006, cash provided from operations before changes in non-cash working capital was $19.0 million, compared to $0.3 million in the three months ended March 31, 2005, primarily due to increased earnings in the current year period as well as an increase in items not involving current cash flows. Total cash used in investment activities during the three months ended March 31, 2006 was $25.5 million, which included real estate property and fixed asset additions of $32.6 million, partially offset by proceeds on the sale of real estate properties, fixed and other assets of $7.1 million. Total cash provided from financing activities in the three months ended March 31, 2006 was $32.8 million, which included $42.1 million of cash proceeds received from advances and long-term debt with our parent, partially offset by $9.3 million of repayments of long-term debt.
MEC, North America's number one owner and operator of horse racetracks, based on revenue, acquires, develops and operates horse racetracks and related pari-mutuel wagering operations, including off-track betting facilities. Additionally, MEC owns and operates XpressBet(R), a national Internet and telephone account wagering system, and HorseRacing TV , a 24-hour horse racing television network.
We will hold a conference call to discuss our first quarter results on Monday, May 1, 2006 at 2:00 p.m. New York time. The number to use for this call is 1-800-774-7358. Please call 10 minutes prior to the start of the conference call. The dial-in number for overseas callers is 416-641-6678. Frank Stronach, Chairman and Interim Chief Executive Officer of MEC will chair the conference call. We will also be webcasting the conference call at http://www.magnaentertainment.com. If you have any teleconferencing questions, please call Karen Richardson at 905-726-7465.
This press release contains "forward-looking statements" within the meaning of applicable securities legislation, including the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements may include, among others, statements regarding: our strategies and plans; expectations as to financing and liquidity requirements and arrangements; expectations as to operational improvements; expectations as to cost savings, revenue growth and earnings; the time by which certain redevelopment projects, transactions or other objectives will be achieved; estimates of costs relating to environmental remediation and restoration; proposed new racetracks or other developments, products and services; expectations as to the timing and receipt of government approvals and regulatory changes in gaming and other racing laws and regulations; expectations that claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated financial position, operating results, prospects or liquidity; projections, predictions, expectations, estimates, beliefs or forecasts as to our financial and operating results and future economic performance; and other matters that are not historical facts.
Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or the times at or by which such performance or results will be achieved. Undue reliance should not be placed on such statements. Forward- looking statements are based on information available at the time and/or management's good faith assumptions and analysis made in light of our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances and are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Company's control, that could cause actual events or results to differ materially from such forward-looking statements.
Forward-looking statements speak only as of the date the statements were made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
MAGNA ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(U.S. dollars in thousands, except per share figures)
Three Months Ended
March 31,
--------------------------
2006 2005
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(restated -
note 4)
Revenues
Racing and gaming
Pari-mutuel wagering $ 230,419 $ 213,975
Gaming 14,840 -
Non-wagering 30,792 25,807
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276,051 239,782
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Real estate and other
Golf and other 5,419 5,900
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5,419 5,900
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281,470 245,682
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Costs and expenses
Racing and gaming
Pari-mutuel purses, awards and other 145,544 134,824
Gaming taxes, purses and other 6,921 -
Operating costs 80,502 74,732
General and administrative 16,776 16,797
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249,743 226,353
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Real estate and other
Operating costs 3,795 2,982
General and administrative 248 404
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4,043 3,386
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Predevelopment, pre-opening and other costs 1,434 4,219
Depreciation and amortization 10,650 9,706
Interest expense, net 14,071 7,451
Equity income (18) (87)
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279,923 251,028
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Income (loss) from continuing operations
before income taxes 1,547 (5,346)
Income tax benefit (665) (663)
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Net income (loss) from continuing operations 2,212 (4,683)
Net income from discontinued operations - 563
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Net income (loss) 2,212 (4,120)
Other comprehensive income (loss)
Foreign currency translation adjustment 1,687 (6,772)
Change in fair value of interest rate swap 74 389
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Comprehensive income (loss) $ 3,973 $ (10,503)
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Earnings (loss) per share for Class A
Subordinate Voting Stock or Class B Stock:
Basic and Diluted
Continuing operations $ 0.02 $ (0.05)
Discontinued operations - 0.01
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Earnings (loss) per share $ 0.02 $ (0.04)
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Average number of shares of Class A
Subordinate Voting Stock or Class B
Stock outstanding during the period
(in thousands):
Basic 107,376 107,347
Diluted 138,261 107,347
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MAGNA ENTERTAINMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
Three Months Ended
March 31,
--------------------------
2006 2005
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(restated -
note 4)
Cash provided from (used for):
Operating activities
Net income (loss) from continuing operations $ 2,212 $ (4,683)
Items not involving current cash flows 16,813 4,975
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19,025 292
Changes in non-cash working capital balances (22,271) (13,748)
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(3,246) (13,456)
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Investing activities
Real estate property and fixed asset additions (32,645) (22,150)
Other asset (additions) disposals 93 (108)
Proceeds on disposal of real estate properties
and fixed assets 1,437 1,610
Proceeds on real estate sold to a related party 5,578 -
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(25,537) (20,648)
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Financing activities
Decrease in bank indebtedness - (500)
Proceeds from advances and long-term
debt with parent 42,133 11,430
Issuance of long-term debt - 11,040
Repayment of long-term debt (9,287) (1,745)
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32,846 20,225
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Effect of exchange rate changes on cash and
cash equivalents 84 (914)
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Net cash flows provided from (used for)
continuing operations 4,147 (14,793)
Net cash flows provided from discontinued
operations - 1,514
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Net increase (decrease) in cash and cash
equivalents during the period 4,147 (13,279)
Cash and cash equivalents, beginning of period 50,882 60,005
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Cash and cash equivalents, end of period $ 55,029 $ 46,726
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MAGNA ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
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(REFER TO NOTE 1 - GOING CONCERN)
(Unaudited)
(U.S. dollars and share amounts in thousands)
March 31, December 31,
2006 2005
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ASSETS
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Current assets:
Cash and cash equivalents $ 55,029 $ 50,882
Restricted cash 43,309 24,776
Accounts receivable 77,833 51,918
Income taxes receivable 1,250 -
Prepaid expenses and other 15,742 7,591
Assets held for sale 79,453 79,312
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272,616 214,479
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Real estate properties, net 970,747 960,449
Fixed assets, net 70,374 62,016
Racing licenses 109,868 109,868
Other assets, net 14,241 14,976
Future tax assets 52,710 52,457
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$ 1,490,556 $ 1,414,245
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness $ 30,335 $ 30,260
Accounts payable 85,560 63,382
Accrued salaries and wages 10,455 8,254
Customer deposits 2,925 2,549
Other accrued liabilities 66,040 68,887
Income taxes payable - 3,793
Long-term debt due within one year 56,967 38,033
Due to parent 86,928 72,060
Deferred revenue 18,561 8,846
Liabilities related to assets held for sale 26,940 27,737
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384,711 323,801
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Long-term debt 156,129 182,830
Long-term debt due to parent 145,047 113,500
Convertible subordinated notes 220,619 220,347
Other long-term liabilities 12,747 12,872
Future tax liabilities 103,401 101,301
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1,022,654 954,651
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Shareholders' equity:
Class A Subordinate Voting Stock
(Issued: 2006 - 48,995; 2005 - 48,895) 318,785 318,105
Class B Stock
(Issued: 2006 and 2005 - 58,466) 394,094 394,094
Contributed surplus 20,826 17,943
Other paid-in-capital 772 -
Deficit (306,735) (308,947)
Accumulated comprehensive income 40,160 38,399
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467,902 459,594
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$ 1,490,556 $ 1,414,245
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MAGNA ENTERTAINMENT CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(all amounts in U.S. dollars unless otherwise noted and all tabular
amounts in thousands, except per share figures)
1. Summary of Significant Accounting Policies
Going Concern
These financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the discharge
of liabilities in the normal course of business for the foreseeable
future. The Company has a working capital deficiency of
$112.1 million as at March 31, 2006. Accordingly, the Company's
ability to continue as a going concern is in substantial doubt and is
dependent on the Company generating cash flows that are adequate to
sustain the operations of the business and maintain its obligations
with respect to secured and unsecured creditors, neither of which is
assured. On November 9, 2005, the Company announced that it had
entered into a share purchase agreement with PA Meadows, LLC and a
fund managed by Oaktree Capital Management, LLC (together, "Millenium-
Oaktree") providing for the acquisition by Millenium-Oaktree of all
of the outstanding shares of the Company's wholly-owned subsidiaries
through which the Company currently owns and operates The Meadows, a
standardbred racetrack in Pennsylvania. Subject to the termination
provisions in the share purchase agreement, the sale is scheduled to
close following receipt of approval from the Pennsylvania Harness
Racing Commission, receipt by The Meadows of a Conditional Category 1
slot license pursuant to the Pennsylvania Race Horse Development and
Gaming Act, and satisfaction of certain other customary closing
conditions. Funds received on the closing of this transaction will be
used to repay the Company's bridge loan with MI Developments Inc.
("MID"), which will mature on August 31, 2006, unless extended with
the consent of both parties. Funds received on closing of the
transaction will also be used to repay, in part, the Company's senior
secured credit facility, which will mature on July 31, 2006, unless
extended with the consent of both parties. At this time, the Company
is uncertain as to the timing of the receipt of the slot license and
the Pennsylvania Harness Racing Commission approval, which is largely
dependent on the applicable Pennsylvania regulatory approval process,
and will ultimately determine the closing date of the transaction.
The Company expects the transaction to close during 2006, but is
uncertain that closing will occur prior to the current maturity dates
of the MID bridge loan and senior secured credit facility. The
Company is considering alternatives with respect to these credit
facilities, which may include refinancing or extension subject to
agreement by the lenders. The Company is also continuing to pursue
other funding sources in connection with the previously announced
Recapitalization Plan, which may include further asset sales,
partnerships and raising equity. However, the successful realization
of these efforts is not determinable at this time. These financial
statements do not give effect to any adjustments which would be
necessary should the Company be unable to continue as a going concern
and, therefore, be required to realize its assets and discharge its
liabilities in other than the normal course of business and at
amounts different from those reflected in the accompanying financial
statements.
Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with United States generally accepted
accounting principles ("U.S. GAAP") for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. The
preparation of the consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from
estimates. In the opinion of management, all adjustments, which
consist of normal and recurring adjustments, necessary for fair
presentation have been included. For further information, refer to
the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended
December 31, 2005.
Seasonality
The Company's racing business is seasonal in nature. The Company's
racing revenues and operating results for any quarter will not be
indicative of the racing revenues and operating results for the year.
The Company's racing operations have historically operated at a loss
in the second half of the year, with the third quarter generating the
largest operating loss. This seasonality has resulted in large
quarterly fluctuations in revenue and operating results.
Comparative Amounts
Certain of the comparative amounts have been reclassified to reflect
discontinued operations and changes in assets held for sale.
2. Accounting Change
Prior to January 1, 2006, the Company accounted for stock-based
compensation under the recognition and measurement provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, as permitted by FASB Statement No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation. No stock-based compensation
expense was recognized in the accompanying unaudited consolidated
statements of operations and comprehensive income (loss) related to
stock options for the three months ended March 31, 2005 as all
options granted had an exercise price no less than the fair market
value of the Company's Class A Subordinate Voting Stock at the date
of grant.
Effective January 1, 2006, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R) ("SFAS 123(R)"),
Share-Based Payment, using the modified-prospective method. Under the
modified-prospective method, compensation expense recognized in the
three months ended March 31, 2006, includes: (a) compensation expense
for all share-based payments granted prior to, but not yet vested as
of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and (b)
compensation expense for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for the three
months ended March 31, 2005, have not been restated.
The Company's income before income taxes and net income for the three
months ended March 31, 2006 would have been $2.3 million and
$3.0 million, respectively, if the Company had not adopted SFAS
123(R) on January 1, 2006 and continued to account for share-based
compensation under APB Opinion No. 25 compared to reported income
before income taxes and net income of $1.5 million and $2.2 million,
respectively and basic and diluted earnings per share for the three
months ended March 31, 2006 would have been $0.03, compared to
reported basic and diluted earnings per share of $0.02. As a result
of the adoption of SFAS 123(R), for the three months ended March 31,
2006, the Company recognized $0.8 million of stock-based compensation
expense related to stock options which has been recorded on the
accompanying unaudited consolidated balance sheets as "other paid-in-
capital". The Company has estimated a nominal annual effective tax
rate for the entire year (refer to note 5) and accordingly has
applied this effective tax rate to the stock-based compensation
expense recognized for the three months ended March 31, 2006,
resulting in a nominal income tax impact related to stock-based
compensation expense.
The pro-forma impact on net loss and loss per share if the Company
had applied the fair value recognition provisions of SFAS 123 to
stock-based compensation for the three months ended March 31, 2005 is
as follows:
Three months ended
March 31,
2005
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Net loss, as reported $ (4,120)
Pro-forma stock compensation expense determined
under the fair value method, net of tax (209)
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Pro-forma net loss $ (4,329)
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Loss per share
Basic - as reported $ (0.04)
Basic - pro-forma $ (0.04)
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Diluted - as reported $ (0.04)
Diluted - pro-forma $ (0.04)
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3. Assets Held for Sale
(a) On November 3, 2005, the Company announced that one of its
subsidiaries that owns approximately 157 acres of excess real
estate in Palm Beach County, Florida had entered into an
agreement to sell the real property to Toll Bros., Inc. (the
"purchaser"), a Pennsylvania real estate development company for
$51.0 million in cash. The proposed sale was subject to the
completion of due diligence by the purchaser by April 3, 2006 and
a closing by April 28, 2006. On April 3, 2006, the Company
announced that the sale agreement was being terminated and, as
such, the purchaser was not proceeding with the proposed sale as
stipulated in the agreement. Upon termination of this agreement,
a mortgage in favour of MID was registered against the property
under the terms of the bridge loan. The Company is considering
its options with respect to this property. As at March 31, 2006,
the Company has determined that the plan of sale criteria under
FASB Statement No.144, Accounting for Impairment or Disposal of
Long-Lived Assets, are no longer met and accordingly, as at
December 31, 2005, the property has been reclassified to reflect
the carrying amount of the property in "real estate properties,
net" rather than in "assets held for sale" on the accompanying
unaudited consolidated balance sheets.
(b) On November 9, 2005, the Company announced that it had entered
into a share purchase agreement with PA Meadows, LLC, a company
jointly owned by William Paulos and William Wortman, controlling
shareholders of Millennium Gaming, Inc. and a fund managed by
Oaktree Capital Management, LLC ("Oaktree" and together, with PA
Meadows, LLC, "Millennium-Oaktree"), providing for the
acquisition by Millennium-Oaktree of all of the outstanding
shares of Washington Trotting Association, Inc., Mountain Laurel
Racing, Inc. and MEC Pennsylvania Racing, Inc., each wholly-owned
subsidiaries of the Company, through which the Company currently
owns and operates The Meadows, a standardbred racetrack in
Pennsylvania. Subject to the termination provisions in the share
purchase agreement, the sale is scheduled to close following
receipt of approval from the Pennsylvania Harness Racing
Commission, receipt by The Meadows of a Conditional Category 1
slot license pursuant to the Pennsylvania Race Horse Development
and Gaming Act, and satisfaction of certain other customary
closing conditions. Under the terms of the share purchase
agreement, Millennium-Oaktree will pay the Company $225.0 million
and the Company will continue to manage the racing operations at
The Meadows on behalf of Millennium-Oaktree pursuant to a minimum
five-year racing services agreement. The purchase price is
payable in cash at closing, subject to a holdback amount of
$39.0 million, which will be released over time in accordance
with the terms of the share purchase agreement.
(c) The Company's assets held for sale and related liabilities as at
March 31, 2006 and December 31, 2005 are shown below. All assets
held for sale and related liabilities have been classified as
current at March 31, 2006 and December 31, 2005 as the assets and
related liabilities described in section (b) above are expected
to be sold within one year from the balance sheet date.
March 31, December 31,
2006 2005
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ASSETS
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Current assets:
Restricted cash $ 433 $ 443
Accounts receivable 172 450
Income taxes receivable 1,231 857
Prepaid expenses and other 964 969
Real estate properties, net 16,166 16,154
Fixed assets, net 1,600 1,576
Racing license 58,266 58,266
Other assets, net 200 200
Future tax assets 421 397
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$ 79,453 $ 79,312
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LIABILITIES
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Current liabilities:
Accounts payable $ 1,213 $ 2,012
Accrued salaries and wages 206 44
Other accrued liabilities 748 623
Deferred revenue 21 312
Future tax liabilities 24,752 24,746
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$ 26,940 $ 27,737
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(d) In accordance with the terms of the senior secured revolving
credit facility and the Company's bridge loan agreement with MID,
the Company is required to use the net proceeds from the sale of
The Meadows, as described in section (b) above, to fully pay down
principal amounts outstanding under the bridge loan and to
permanently pay down a portion of the principal amounts
outstanding under the senior secured revolving credit facility up
to $12.0 million.
4. Discontinued Operations
(a) On August 16, 2005, the Company and Great Canadian Gaming
Corporation ("GCGC") entered into a share purchase agreement
under which GCGC acquired all of the outstanding shares of
Ontario Racing, Inc. ("ORI"). Required regulatory approval for
the sale transaction was obtained on October 17, 2005 and the
Company completed the transaction on October 19, 2005. On
closing, GCGC paid Cdn. $50.7 million and U.S. $23.6 million, in
cash and assumed ORI's existing debt.
(b) On August 18, 2005, three subsidiaries of the Company entered
into a share purchase agreement with Colonial Downs, L.P.
("Colonial LP") pursuant to which Colonial LP purchased all of
the outstanding shares of Maryland-Virginia Racing Circuit, Inc.
("MVRC"). MVRC was an indirect subsidiary of the Company that
managed the operations of Colonial Downs, a thoroughbred and
standardbred horse racetrack located in New Kent, Virginia,
pursuant to a management agreement with Colonial LP, the owner of
Colonial Downs. Required regulatory approval for the sale
transaction was obtained on September 28, 2005 and the Company
completed the transaction on September 30, 2005. On closing, the
Company received cash consideration of $6.8 million, net of
transaction costs, and a one-year interest-bearing note in the
principal amount of $3.0 million, which is included in accounts
receivable on the accompanying unaudited consolidated balance
sheets.
(c) The Company's results of operations and cash flows related to
discontinued operations for the three months ended March 31, 2005
is as follows:
Three months ended
March 31,
Results of Operations 2005
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Revenues $ 6,680
Costs and expenses 4,923
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1,757
Depreciation and amortization 246
Interest expense, net 634
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Income before income taxes 877
Income tax expense 314
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Net income $ 563
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Cash Flows
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Operating activities $ 1,713
Investing activities (210)
Financing activities -
Effect of exchange rate changes on cash
and cash equivalents 323
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Net increase in cash and cash equivalents during
the period from operations 1,826
Payments to MEC's continuing operations (1,514)
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Net increase in cash and cash equivalents during
the period 312
Cash and cash equivalents, beginning of period 636
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Cash and cash equivalents, end of period $ 948
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5. 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 income (loss) from
continuing operations before income taxes for the three months ended
March 31, 2006 and 2005, resulting in an income tax benefit of
$0.7 million for the three months ended March 31, 2006 and 2005,
respectively. The income tax benefit for the three months ended
March 31, 2006 and 2005 primarily represents losses benefited in
certain U.S. operations that are not included in the Company's U.S.
consolidated income tax return.
6. Bank Indebtedness
(a) The Company has a $50.0 million senior secured revolving credit
facility, which expires on July 31, 2006. The credit facility is
available by way of U.S. dollar loans and letters of credit for
general corporate purposes. 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 March 31,
2006, the Company had borrowings under the facility of
$27.3 million (December 31, 2005 - $27.3 million) and had issued
letters of credit totaling $21.9 million (December 31, 2005 -
$21.7 million) under the credit facility, such that $0.8 million
was unused and available.
The loans under the facility bear interest at either the U.S.
Base rate plus 3% or the London Interbank Offered Rate ("LIBOR")
plus 4%. The weighted average interest rate on the loans
outstanding under the credit facility as at March 31, 2006 was
9.0% (December 31, 2005 - 9.3%).
(b) One of the Company's European subsidiaries has a bank term line
of credit agreement of Euros 2.5 million (U.S. $3.0 million),
bearing interest at the European Interbank Offered Rate
("EURIBOR") plus 0.75% per annum (March 31, 2006 - 3.4%). The
term line of credit is due on July 31, 2006. A European
subsidiary has provided two first mortgages on real estate as
security for this facility. At March 31, 2006, the bank term line
of credit is fully drawn.
7. Capital Stock and Long-Term Incentive Plan
(a) Capital Stock
Changes in the Class A Subordinate Voting Stock and Class B Stock
for the three months ended March 31, 2006 are shown in the
following table (number of shares and stated value have been
rounded to the nearest thousand):
Class A
Subordinate
Voting Stock Class B Stock Total
-------------------------------------------------------------------------
Number Number Number
of Stated of Stated of Stated
Shares Value Shares Value Shares Value
-------------------------------------------------------------------------
Issued and
outstanding at
December 31,
2005 48,895 $318,105 58,466 $394,094 107,361 $712,199
Issued under
the Long-term
Incentive Plan 100 680 - - 100 680
-------------------------------------------------------------------------
Issued and
outstanding at
March 31,
2006 48,995 $318,785 58,466 $394,094 107,461 $712,879
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Long-Term Incentive Plan
The Company has a Long-term Incentive Plan (the "Plan") (adopted
in 2000), which allows for the grant of non-qualified stock
options, incentive stock options, stock appreciation rights,
restricted stock, bonus stock and performance shares to
directors, officers, employees, consultants, independent
contractors and agents. A maximum of 7.6 million shares of
Class A Subordinate Voting Stock are available to be issued under
the Plan, of which 6.3 million are available for issuance
pursuant to stock options and tandem stock appreciation rights
and 1.3 million are available for issuance pursuant to any other
type of award under the Plan.
During 2005, the Company introduced an incentive compensation
program for certain officers and key employees, which will award
performance shares of Class A Subordinate Voting Stock under the
Plan. The number of shares of Class A Subordinate Voting Stock
underlying the performance share awards is based either on a
percentage of a guaranteed bonus or a percentage of total 2005
compensation divided by the market value of the Class A
Subordinate Voting Stock on the date the program was approved by
the Compensation Committee of the Board of Directors. These
performance shares vested over a six or eight month period to
December 31, 2005 and are to be distributed, subject to certain
conditions, in two equal installments. The first distribution
occurred prior to March 31, 2006 and the second distribution date
is to occur on or about March 31, 2007. During the year ended
December 31, 2005, 201,863 performance share awards were granted
under the Plan with a weighted average grant-date market value of
either U.S. $6.26 or Cdn. $7.61 per share. At December 31, 2005,
there were 199,471 performance share awards vested with an
average grant-date market value of either U.S. $6.26 or Cdn.
$7.61 per share and no non-vested performance share awards.
During the three months ended March 31, 2006, 73,443 of these
vested performance share awards were issued with a stated value
of $0.5 million. Accordingly, there are 126,028 vested
performance shares remaining to be issued under this 2005
incentive compensation arrangement.
For 2006, the Company continued the incentive compensation
program as described in the preceding paragraph. The program is
similar in all respects except that the 2006 performance shares
will vest over a 12 month period to December 31, 2006 and will be
distributed, subject to certain conditions on or about March 31,
2007. In the three months ended March 31, 2006, 159,788
performance share awards were granted under the Plan with a
weighted average grant-date market value of either U.S. $6.80 or
Cdn. $7.63 per share, 39,947 performance share awards vested with
an average grant-date market value of either U.S. $6.80 or
Cdn. $7.63 per share and no performance share awards were
forfeited. As at March 31, 2006, there were 119,841 non-vested
performance share awards with an average grant-date market value
of either U.S. $6.80 or Cdn. $7.63 per share. The compensation
expense related to these performance shares was approximately
$0.3 million for the three months ended March 31, 2006. As at
March 31, 2006, the total unrecognized compensation expense
related to these performance shares is $0.8 million, which is
expected to be recognized into expense over the remaining period
to December 31, 2006.
In the three months ended March 31, 2006, 25,896 shares with a
stated value of $0.2 million (for the three months ended
March 31, 2005, 14,175 shares with a stated value of
$0.1 million) were issued to Company directors in payment
of services rendered.
The Company grants stock options to certain directors, officers,
key employees and consultants to purchase shares of the Company's
Class A Subordinate Voting Stock. All of such stock options give
the grantee the right to purchase Class A Subordinate Voting
Stock of the Company at a price no less than the fair market
value of such stock at the date of grant. Generally, stock
options under the Plan vest over a period of two to six years
from the date of grant at rates of 1/7th to 1/3rd per year and
expire on or before the tenth anniversary of the date of grant,
subject to earlier cancellation upon the occurrence of certain
events specified in the stock option agreements entered into by
the Company with each recipient of options.
Information with respect to shares under option at March 31, 2006
and 2005 is as follows (number of shares subject to option in the
following tables are expressed in whole numbers and have not been
rounded to the nearest thousand):
Weighted Average
Shares Subject to Option Exercise Price
-------------------------- ---------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Balance at
January 1 4,827,500 4,500,500 $ 6.14 $ 6.18
Granted - 490,000 - 6.40
Exercised - - - -
Forfeited and
expired(i) - (145,000) - 6.76
-----------------------------------------------------------------
Balance at
March 31 4,827,500 4,845,500 $ 6.14 $ 6.19
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) For the three months ended March 31, 2005, options
forfeited were primarily as a result of employment
contracts being terminated and voluntary employee
resignations. No options that were forfeited for the three
months ended March 31, 2005 were subsequently reissued.
Options Outstanding Options Exercisable
--------------------- ---------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Number 4,827,500 4,845,500 4,217,215 4,089,430
Weighted average
exercise price $ 6.14 $ 6.19 $ 6.08 $ 6.12
Weighted average
remaining contractual
life (years) 4.9 6.0 4.4 5.5
-----------------------------------------------------------------
At March 31, 2006, the 4,827,500 stock options outstanding had
exercise prices ranging from $3.91 to $7.24 per share.
During the three months ended March 31, 2006, no stock options
were granted (for the three months March 31, 2005 - 490,000
options were granted with a weighted-average fair value of
$3.00 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
March 31,
--------------------
2006 2005
-----------------------------------------------------------------
Risk free interest rates N/A 4.0%
Dividend yields N/A -
Volatility factor of expected market
price of Class A Subordinate Voting Stock N/A 0.551
Weighted average expected life (years) N/A 4.00
-----------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that require the
input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded
options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the Company's stock
options.
The compensation expense recognized related to stock options was
approximately $0.8 million for the three months ended March 31,
2006 (for the three months ended March 31, 2005 - nil). As at
March 31, 2006, the total unrecognized compensation expense
related to stock options is $1.1 million, which is expected to
be recognized into expense over a period of 3.8 years.
For the three months ended March 31, 2006, the Company recognized
total compensation expense of $1.1 million (for the three months
ended March 31, 2005 - nil) relating to performance share awards,
director compensation and stock options under the Plan.
(c) Maximum Shares
The following table (number of shares have been rounded to the
nearest thousand) presents the maximum number of shares of Class
A Subordinate Voting Stock and Class B Stock that would be
outstanding if all of the outstanding options, convertible
subordinated notes and performance shares issued and outstanding
as at March 31, 2006 were exercised or converted:
Number of Shares
------------------------------------------------------------------
Class A Subordinate Voting Stock outstanding 48,995
Class B Stock outstanding 58,466
Options to purchase Class A Subordinate Voting Stock 4,828
8.55% Convertible Subordinated Notes, convertible
at $7.05 per share 21,276
7.25% Convertible Subordinated Notes, convertible
at $8.50 per share 8,824
Performance share awards of Class A Subordinate
Voting Stock 286
------------------------------------------------------------------
142,675
------------------------------------------------------------------
------------------------------------------------------------------
8. Earnings (Loss) Per Share
The following is a reconciliation of the numerator and denominator of
the basic and diluted earnings (loss) per share computations (in
thousands, except per share amounts):
Three months ended
March 31,
-------------------------------
2006 2005
---------------------------------------------------------------------
Basic and
Basic Diluted Diluted
---------------------------------------------------------------------
Net income (loss) from continuing
operations $ 2,212 $ 2,212 $ (4,683)
Net income from discontinued
operations - - 563
---------------------------------------------------------------------
Net income (loss) 2,212 2,212 (4,120)
Interest, net of related tax on
convertible subordinated notes - 4,616 -
---------------------------------------------------------------------
$ 2,212 $ 6,828 $ (4,120)
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average shares outstanding:
Class A Subordinate Voting Stock 48,910 79,795 48,881
Class B Stock 58,466 58,466 58,466
---------------------------------------------------------------------
107,376 138,261 107,347
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings (loss) per share:
Continuing operations $ 0.02 $ 0.02 $ (0.05)
Discontinued operations - - 0.01
---------------------------------------------------------------------
Earnings (loss) per share $ 0.02 $ 0.02 $ (0.04)
---------------------------------------------------------------------
---------------------------------------------------------------------
As a result of the net loss for the three months ended March 31,
2005, options to purchase 4,845,500 shares and notes convertible into
30,100,124 shares have been excluded from the computation of diluted
loss per share since the effect is anti-dilutive.
9. Transactions With Related Parties
(a) The Company's indebtedness and long-term debt due to parent
consists of the following:
March 31, December 31,
2006 2005
-----------------------------------------------------------------
Bridge loan facility, including accrued
interest and commitment fees payable
of nil (December 31, 2005 -
$0.6 million)(i) $ 86,614 $ 72,060
Gulfstream Park project financing,
including long-term accrued interest
payable of $6.4 million (December 31,
2005 - $3.7 million)(ii) 116,139 93,646
Remington Park project financing,
including long-term accrued interest
payable of $1.0 million (December 31,
2005 - $0.3 million)(iii) 29,222 19,854
-----------------------------------------------------------------
$ 231,975 $ 185,560
Less: due within one year (86,928) (72,060)
-----------------------------------------------------------------
$ 145,047 $ 113,500
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) Bridge Loan Facility
In July 2005, a subsidiary of the Company's parent company,
MID, provided to the Company a non-revolving bridge loan
facility of up to $100.0 million. The first tranche of
$50.0 million was available to the Company as of the
closing of the bridge loan, a second tranche of
$25.0 million was made available to the Company on
October 17, 2005 and a third tranche of $25.0 million was
made available to the Company on February 10, 2006. The
bridge loan terminates on August 31, 2006. An arrangement
fee of $1.0 million was paid on closing, a second
arrangement fee of $0.5 million was paid when the second
tranche was made available to the Company and an additional
arrangement fee of $0.5 million was paid when the third
tranche was made available to the Company. There is a
commitment fee of 1.0% per year on the undrawn portion of
the $100.0 million maximum amount of the loan commitment,
payable quarterly in arrears. At the Company's option, the
loan bears interest either at: (1) floating rate, with
annual interest equal to the greater of (a) U.S. Base Rate,
as announced from time to time, plus 5.5% and (b) 9.0%
(with interest in each case payable monthly in arrears); or
(2) fixed rate, with annual interest equal to the greater
of: (a) LIBOR plus 6.5% and (b) 9.0%, subject to certain
conditions. The overall weighted average interest rate on
the advances under the bridge loan at March 31, 2006 was
11.2% (December 31, 2005 - 10.9%). The bridge loan may be
repaid at any time, in whole or in part, without penalty.
The bridge loan requires that the net proceeds of any
equity offering by the Company be used to reduce
outstanding indebtedness under the bridge loan, subject to
specified amounts required to be paid to reduce other
indebtedness. Also, subject to specified exceptions, the
proceeds of any debt offering or asset sale must be used to
reduce outstanding indebtedness under the bridge loan or
other specified indebtedness. The bridge loan is secured by
substantially all of the assets of the Company and
guaranteed by certain subsidiaries of the Company. The
guarantees are secured by first ranking security over the
lands owned by The Meadows (ahead of the Gulfstream project
financing as described in note 9(a)(ii) below), second
ranking security over the lands owned by Golden Gate Fields
(behind an existing third party lender) and third ranking
security over the lands owned by Santa Anita Park (behind
existing third party lenders). In addition, the Company has
pledged the shares and licenses of certain subsidiaries (or
provided negative pledges where a pledge is not available
due to regulatory constraints or due to a prior pledge to
an existing third party lender). As security for the loan,
the Company has also assigned all inter-company loans made
between the Company and its subsidiaries and all insurance
proceeds to the lender, and taken out title insurance for
all real property subject to registered security. The
bridge loan is cross-defaulted to all other obligations of
the Company and its subsidiaries to the lender and to the
Company's other principal indebtedness. The security over
the lands owned by The Meadows may be subordinated to new
third party financings of up to U.S. $200.0 million for the
redevelopment of The Meadows.
For the three months ended March 31, 2006, $15.0 million
was advanced on this bridge loan, such that at March 31,
2006, $89.1 million was outstanding under the bridge loan.
Net loan origination expenses of $2.5 million have been
recorded as a reduction of the outstanding bridge loan
balance. The bridge loan balance is being accreted to its
face value over the term to maturity. In addition, during
the three months ended March 31, 2006, $2.3 million of
commitment fees and interest expense were incurred related
to the bridge loan, of which a nominal amount was
outstanding as at March 31, 2006.
In 2005, the Company and MID amended the bridge loan
agreement to provide that (i) the Company place
$13.0 million from the Flamboro Downs sale proceeds, and
such additional amounts as necessary to ensure that future
Gulfstream Park construction costs can be funded, into
escrow with MID, (ii) MID waive its negative pledge over
the Company's land in Ocala, Florida, (iii) Gulfstream Park
enter into a definitive agreement with BE&K, Inc., for debt
financing of $13.5 million to be used to pay for
construction costs for the Gulfstream Park construction
project, (iv) the Company will use commercially reasonable
efforts to sell certain assets and use the proceeds of such
sales to pay down the bridge loan, and (v) in the event
that the Company did not enter into definitive agreements
prior to December 1, 2005 to sell The Meadows or repay the
full balance of the bridge loan by January 15, 2006, MID
would be granted mortgages on certain additional properties
owned by the Company. Upon the closing of the sale of The
Meadows, the Company will also be required to put into
escrow with MID, the amount required to pre-pay the loan
from BE&K, Inc. On November 17, 2005, Gulfstream Park
signed a loan agreement with BE&K, Inc., which to March 31,
2006 had not been drawn upon. On February 9, 2006, the
bridge loan was further amended such that certain
subsidiaries of the Company were added as guarantors of the
bridge loan. The guarantees are secured by charges over the
lands commonly known as San Luis Rey Downs in California,
Dixon Downs in California, Palm Meadows Residential in
Florida, the New York lands in New York and the Thistledown
lands in Ohio, and by pledges of the shares of certain
subsidiaries.
As at March 31, 2006, the Company has placed $14.3 million
into escrow with MID, which is included in accounts
receivable on the consolidated balance sheets.
In accordance with the terms of the senior secured
revolving credit facility and the bridge loan agreement,
the Company was required to use the net proceeds from the
sale of Flamboro Downs to pay down the principal amount
owing under the two loans in equal portions. However, both
MID and the lender under the senior secured revolving
credit facility agreed to mutually waive this repayment
requirement, subject to certain other amendments, including
provisions for repayment upon closing of certain future
asset sales.
(ii) Gulfstream Park Project Financing
In December 2004, 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 27, 2005 in connection with
the Remington Park loan as described in note 9(a)(iii)
below. The project financing is 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, payment of interest will be
deferred. Commencing January 1, 2007, the Company will 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's subsidiaries that own and operate The
Meadows, Remington Park and the Palm Meadows training
center and is collateralized principally by security over
the lands forming part of the operations at Gulfstream
Park, Remington Park, Palm Meadows and The Meadows and over
all other assets of Gulfstream Park, Remington Park, Palm
Meadows and The Meadows, excluding licenses and permits.
For the three months ended March 31, 2006, $19.7 million
was advanced and $2.7 million of interest was accrued on
this loan, such that at March 31, 2006, $119.5 million was
outstanding under the Gulfstream Park loan, including
$6.4 million of accrued interest. Net loan origination
expenses of $3.4 million 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.
(iii) 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 are 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, payment of interest will be deferred.
Commencing January 1, 2007, the Company will 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 lands owned by Gulfstream Park and a
charge over the Palm Meadows training center and contains
cross-guarantee, cross-default and cross-collateralization
provisions. For the three months ended March 31, 2006,
$8.6 million was advanced and $0.7 million of interest was
accrued on this loan, such that at March 31, 2006,
$30.3 million was outstanding under the Remington Park
loan, including $1.0 million of accrued interest. Net loan
origination expenses of $1.1 million 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.
(b) On February 20, 2006, a subsidiary of the Company extended its
option agreement with MID to acquire 100% of the shares of the
MID subsidiary that owns land in Romulus, Michigan to April 3,
2006, which was further extended on April 3, 2006 to June 2,
2006. If the Company is unable to renew this option arrangement
with MID upon its expiry, then the Company may incur a write-down
of the costs that have been incurred with respect to entitlements
on this property and in pursuit of a racing license. At March 31,
2006, the Company has incurred approximately $2.9 million of
costs related to this property and in pursuit of the license.
(c) On March 31, 2006, the Company sold a non-core real estate
property located in the United States to Magna
International Inc. for total proceeds of $5.6 million, net of
transaction costs. The gain on sale of the property of
approximately $2.9 million, net of tax, is reported as a
contribution of equity. In accordance with the terms of the
senior secured revolving credit facility, the Company is required
to use the net proceeds from this transaction to repay principal
amounts outstanding under this credit facility.
10. 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 a racetrack. 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) The Company has letters of credit issued with various financial
institutions of $2.4 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 $21.9 million.
(d) 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
March 31, 2006, these indemnities amounted to $5.0 million with
expiration dates through 2007.
(e) Contractual commitments outstanding at March 31, 2006, which
related to construction and development projects, amounted to
approximately $13.4 million.
(f) The Maryland Jockey Club was a party to an agreement (the
"Maryland Operating Agreement") with Cloverleaf Enterprises, Inc.
("Cloverleaf"), the current owner of Rosecroft Raceway
("Rosecroft"), a standardbred track located in Prince George's
County in Maryland. The Maryland Operating Agreement was in
effect since June 9, 2004 and expired on April 30, 2005, however
both parties continued to informally operate under its terms
until a new agreement could be finalized.
The Maryland Operating Agreement has enabled Pimlico, Laurel Park
and Rosecroft to conduct simulcast wagering on thoroughbred and
harness race signals during the day and evening hours without
restriction. Under the Maryland Operating Agreement, Cloverleaf
agreed to pay the thoroughbred industry a 12% premium on pari-
mutuel wagering (net of refunds) conducted at Rosecroft on all
thoroughbred race signals, and The Maryland Jockey Club agreed to
pay Cloverleaf a 12% premium on pari-mutuel wagering (net of
refunds) conducted at Pimlico and Laurel Park on all standardbred
race signals.
On March 28, 2006, The Maryland Jockey Club entered into a
Memorandum of Understanding, with an effective date of April 9,
2006 (the "Cross-Breed Agreement") with Cloverleaf. Under the
Cross-Breed Agreement, the parties agree to conduct cross-breed
simulcasting at The Maryland Jockey Club locations and at
Rosecroft Raceway, to operate the existing off-track betting
facilities, to develop new off-track betting facilities within
the state of Maryland and allocate any future legislative
authorized purse subsidies.
(g) In October 2003, the Company signed a Letter of Intent to explore
the possibility of a joint venture between Forest City
Enterprises, Inc. ("Forest City") and various affiliates of the
Company, anticipating the ownership and development of a portion
of the Gulfstream Park racetrack property. Forest City has paid
$2.0 million to the Company in consideration for its right to
work exclusively with the Company on this project. This deposit
has been included in other accrued liabilities on the Company's
unaudited consolidated balance sheets. 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)". The Limited Liability Company Agreement contemplates
the development of a mixed-use project consisting of residential
units, parking, restaurants, hotels, entertainment, retail
outlets and other commercial uses on a portion of the Gulfstream
Park property. Under the Limited Liability Company Agreement,
Forest City is required to contribute up to a maximum of
$15.0 million as an initial capital contribution. The
$2.0 million deposit received to date from Forest City shall
constitute the final $2.0 million of the initial capital
contribution. The Company is obligated to contribute 50% of any
and all equity amounts in excess of $15.0 million as and when
needed, however, to March 31, 2006, the Company has not made any
such contributions. In the event the development does not
proceed, the Company may have an obligation to fund a portion of
those pre-development costs incurred to that point in time. As at
March 31, 2006, approximately $9.2 million of costs have been
incurred by The Village at Gulfstream Park, LLC, which have been
funded entirely by Forest City. The Limited Liability Company
Agreement further contemplates additional agreements, including a
ground lease, a reciprocal easement agreement, a development
agreement, a leasing agreement and a management agreement to be
executed in due course and upon satisfaction of certain
conditions.
(h) In April 2004, the Company signed a Letter of Intent to explore
the possibility of joint ventures between Caruso Affiliates
Holdings and certain affiliates of the Company to develop certain
undeveloped lands surrounding Santa Anita Park and Golden Gate
Fields racetracks. Upon execution of this Letter of Intent, the
Company agreed to fund 50% of approved pre-development costs in
accordance with a preliminary business plan for each of these
projects, with the goal of entering into Operating Agreements by
May 31, 2005, which has been extended by mutual agreement of the
parties on several occasions and has been extended to May 15,
2006. To date, the Company has expended approximately $3.3
million on this initiative, of which $1.5 million was paid during
the three months ended March 31, 2006. These amounts have been
recorded as fixed assets on the Company's unaudited consolidated
balance sheets. The Company is continuing to explore these
developmental opportunities, but to March 31, 2006 has not
entered into definitive Operating Agreements on either of these
potential developments. Under the terms of the Letter of Intent,
the Company may be responsible to fund additional costs, however
to March 31, 2006, the Company has not made any such payments.
(i) On August 22, 2003, the Company completed the acquisition of a
30% equity interest in AmTote International, Inc. ("AmTote") for
a total cash purchase price, including transaction costs, of
$4.3 million. The Company has an option (the "First Option") to
acquire an additional 30% equity interest in AmTote, exercisable
at any time during the three year period commencing after the
date of acquisition. If the Company exercises the First Option,
it has a second option to acquire the remaining 40% equity
interest in AmTote, exercisable at any time during the three year
period commencing after the date of exercise of the First Option.
Also, the shareholders of AmTote have the right to sell to the
Company their remaining equity interest during the 120 day period
following the exercise of the First Option. AmTote is a provider
of totalisator services to the pari-mutuel industry and has
service contracts with over 70 North American racetracks and
other wagering entities. The Company's 30% share of the results
of operations of AmTote is accounted for under the equity method.
11. Segment Information
Operating Segments
The Company's reportable segments reflect how the Company is
organized and managed by senior management, including its President
and Chief Executive Officer. 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 and the Palm Meadows training center; (3) Maryland operations