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| MECA > SEC Filings for MECA > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
The following discussion of our results of operations and financial position should be read in conjunction with our unaudited consolidated interim financial statements for the three and nine months ended September 30, 2008. This discussion includes forward-looking statements that reflect our current views with respect to future events and financial performance and that involve risks and uncertainties. Our actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including risks discussed in "Management's Discussion and Analysis of Results of Operations and Financial Position - Forward-Looking Statements" included in this Report and the Risk Factors described in our Form 10-K for the fiscal year ended December 31, 2007 and in our Form 10-Q for the fiscal quarter ended September 30, 2008. The amounts described below are based on our unaudited consolidated interim financial statements, which we prepare in accordance with United States generally accepted accounting principles ("U.S. GAAP").
OVERVIEW
Magna Entertainment Corp. ("MEC", "we" or the "Company") owns horse racetracks in California, Florida, Maryland, Texas, Oklahoma, Ohio, Oregon and Ebreichsdorf, Austria. In addition, we operated a racetrack in Michigan until November 2007 and, under a management agreement, operate a racetrack in Pennsylvania that we previously owned. Based on revenues, MEC is North America's number one owner and operator of horse racetracks, and is a leading supplier, via simulcasting, of live racing content to the growing inter-track, off-track and account wagering markets. We currently operate or manage seven thoroughbred racetracks, one standardbred (harness racing) racetrack and two racetracks that run both thoroughbred and quarter horse meets, as well as the simulcast wagering venues at these tracks. Also, we previously managed the thoroughbred and standardbred meets at Magna Racino™, but a local operator is now managing meets at that facility. Three of the racetracks we own or operate (Gulfstream Park, Remington Park and Magna Racino™) include casino operations with alternative gaming machines. In addition, we operate off-track betting facilities ("OTB"), a United States national account wagering business known as XpressBet®, which permits customers to place wagers by telephone and over the Internet on horse races at over 100 North American racetracks and internationally on races in Australia, Dubai, Germany and the United Kingdom, and a European account wagering service known as MagnaBet™. Under a series of March 2007 agreements with Churchill Downs Incorporated ("CDI"), we own a 50% interest in a joint venture, TrackNet Media Group, LLC ("TrackNet Media"), the content management company formed for distribution of the full breadth of MEC's and CDI's horse racing content. In addition to making horse racing content available for both MEC and CDI, it also makes such content available for third parties, including racetracks, off-track betting facilities, casinos and advance deposit wagering companies, and purchases horse racing content from third parties to be made available through CDI's and MEC's respective outlets. The TrackNet Media arrangement also involves the exchange by MEC and CDI of their respective horse racing signals such that CDI's racing content is available for wagering through MEC-owned tracks and simulcast-wagering facilities and through our advance deposit wagering platform, XpressBet®, and our racing content is similarly available for wagering through CDI tracks and off-track betting facilities and through CDI-owned advance deposit wagering platforms. A separate joint venture with CDI, HRTV, LLC, also involves the ownership by each of MEC and CDI of 50% shares in HorseRacing TV® ("HRTV®"), a television network focused on horse racing that MEC initially launched on the Racetrack Television Network ("RTN"). HRTV® is currently distributed to more than 16 million cable and satellite TV subscribers. RTN, in which we have a minority interest, was formed to telecast races from our racetracks and other racetracks to paying subscribers, via private direct to home satellite. We also own AmTote International, Inc. ("AmTote"), a provider of totalisator services to the pari-mutuel industry. To support certain of our thoroughbred racetracks, we own and operate thoroughbred training centers in Palm Beach County, Florida and in the Baltimore, Maryland area and, under a lease agreement, operate an additional thoroughbred training center situated near San Diego, California. We also own and operate production facilities in Austria and in North Carolina for StreuFex™, a straw-based horse bedding product. In addition to our racetracks, our real estate portfolio includes a residential development in Austria. We are also working with potential developers and strategic partners on proposals for developing leisure and entertainment or retail-based projects on excess lands surrounding, or adjacent to, certain of our premier racetracks.
Results of Operations
Revenues for the nine months ended September 30, 2008 decreased from $503.1 million in the nine months ended September 30, 2007 to $478.8 million in the nine months ended September 30, 2008 and were negatively impacted by: (i) a net loss of eight live race days at Santa Anita Park during the live race meet as a result of heavy rains and track drainage issues affecting the new synthetic racetrack surface; (ii) 13 fewer live race days at The Maryland Jockey Club, decreased handle and wagering at the 2008 Preakness Stakes and decreased attendance and handle generally in a challenging competitive and economic environment; and (iii) decreased simulcast wagering at Golden Gate Fields which was impacted by the loss of eight live race days at Santa Anita Park which is a popular simulcast signal at Golden Gate Fields. These decreases were partially offset by increased revenues at Gulfstream Park in the period, which had improved slot operations and introduced full card simulcasting after the live race meet for the first time in its history. Earnings before interest, income taxes, depreciation and amortization ("EBITDA") in the nine months ended September 30, 2008 from continuing operations decreased from $5.1 million in the nine months ended September 30, 2007 to $0.7 million in the current year period. The decrease in EBITDA was consistent with the decline in revenue and was also negatively impacted by a write-down of long-lived assets of $5.0 million relating to the Dixon, California real estate property. Net loss for the nine months ended September 30, 2008 of $116.1 million increased from a net loss of $70.8 million in the prior year comparative period, reflecting the negative impact of a write-down of long-lived assets of $32.3 million relating to the Magna Racino™ and Instant Racing terminals and facilities at Portland Meadows, increased depreciation and amortization primarily related to the slot facilities at Gulfstream Park and the new racetrack surfaces at Santa Anita Park and Golden Gate Fields, and increased interest expense with higher debt levels compared to the prior year. Revenues from continuing operations in the three months ended September 30, 2008 increased from $81.5 million in the three months ended September 30, 2007 to $81.6 million in the three months ended September 30, 2008. EBITDA loss from continuing operations improved from $23.4 million in the three months ended September 30, 2007 to $20.4 million in the three months ended September 30, 2008 primarily due to improved results at Gulfstream Park and XpressBet® and reduced costs at our Corporate office, partially offset by increased predevelopment and other costs incurred with respect to the November 2008 gaming referendum in Maryland. Our net loss in the third quarter of 2008 was $48.4 million as compared to a net loss of $49.8 million in the third quarter of 2007. We discuss our results of operations in detail in the "RESULTS OF OPERATIONS" section below.
Liquidity and Capital Resources
At September 30, 2008, we had a working capital deficiency of $195.4 million and $255.4 million of debt due to mature in the 12-month period ending September 30, 2009, including: (i) $36.5 million owing under our $40.0 million senior secured revolving credit facility with a Canadian financial institution, which is scheduled to mature on November 17, 2008; (ii) $88.6 million under our bridge loan facility (the "Bridge Loan") of up to $125.0 million with a subsidiary of our controlling shareholder, MI Developments Inc. ("MID"), which is scheduled to mature on December 1, 2008 (or such later date or dates as may be determined from time to time by the 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); and (iii) our obligation to repay $100.0 million of indebtedness under the Gulfstream Park project financings with a subsidiary of MID by December 1, 2008 (or such later date or dates as may be determined from time to time by the 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). Accordingly, our financial statements have been prepared with a "going concern" qualification. See the "OUTLOOK" and "GOING CONCERN" sections for more information.
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) we were 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. As a result of October 15, 2008 changes to the Bridge Loan agreement (i) the maximum commitment available was increased from $110.0 million to $125.0 million and we are permitted to redraw amounts that were repaid in July 2008 (approximately $4.5 million), such that the amount available to borrow under the Bridge Loan will be increased by approximately $19.5 million and (ii) the Bridge Loan maturity date was extended from October 31, 2008 to December 1, 2008. Further draws under the Bridge Loan will not be permitted after November 17, 2008 unless our $40.0 million senior secured revolving credit facility, which is currently due on November 17, 2008, is further extended or replaced. The Gulfstream Park and Remington Park project financings were also amended such that the deadline for repayment of $100.0 million under the Gulfstream Park project financing was extended from August 31, 2008 to October 31, 2008. Subsequently, the deadline for repayment of the $100.0 million was further extended to December 1, 2008, during which time any repayments made under either facility will not be subject to a make-whole payment.
MID Reorganization Proposal
On March 31, 2008, MID received a reorganization proposal on behalf of various shareholders of MID, including entities affiliated with the Stronach Trust (the "Stronach Group"), MID's controlling shareholder. The MID reorganization proposal contemplated, among other things, MID contributing to a limited partnership that would be controlled by the Stronach Group all of MID's loans to MEC and its subsidiaries, $150.0 million in cash (subject to adjustment if the amount of the MID loans is more or less than $247.0 million) and certain of MID's development lands in Aurora, Ontario. The proposal also contemplated that MID's controlling equity investment in MEC would be sold to an entity to be identified by the Stronach Group, a new MID company would be formed ("New MID") and New MID would be prohibited from entering into any future transactions with MEC or the limited partnership without the unanimous consent of New MID's Board of Directors.
The proposal contemplated MID calling by May 30, 2008 a special meeting of shareholders to consider the reorganization and closing the transaction no later than July 30, 2008. On May 30, 2008, MID called a special meeting of shareholders to be held on July 24, 2008. However, on June 27, 2008, MID announced that, in light of shareholder discussions relating to potential amendments to the reorganization proposal, the special meeting was being postponed. On August 22, 2008, MID announced that it had retained GMP Securities L.P. ("GMP") as a financial advisor to liaise with shareholders in an attempt to develop a consensus on how best to reorganize MID. No consensus was reached with respect to amendments that would have resulted in a revised reorganization proposal that MID would have been asked to put before its shareholders for their consideration, and although GMP continues to liaise with the Company's shareholders, discussions with respect to the reorganization proposal have effectively terminated. MID is continuing to explore strategic transactions and alternatives available in respect of its investment in MEC, including a recapitalization, restructuring or sales of some or all of MEC's assets, and evaluating whether, or to what extent, MID might participate in any such transactions or alternatives. There can be no assurance that any reorganization transaction or any other transaction will be completed and what impact, if any, such transaction may have with respect to MEC.
Debt Elimination Plan
Following the completion of a strategic review of the Company's assets and
operations, on September 12, 2007, our Board of Directors approved a debt
elimination plan (the "Plan") designed to eliminate net debt by December 31,
2008 by generating funding from: (i) the sale of certain real estate, racetracks
and other assets; (ii) the sale of, or entering into strategic transactions
involving, the Company's other racing, gaming and technology operations; and
(iii) a possible future equity issuance. We also arranged for $100.0 million of
funding in September 2007, to address immediate liquidity concerns and provide
sufficient time to implement the Plan. This funding was comprised of: (i) a
$20.0 million private placement of Class A Subordinate Voting Stock ("Class A
Stock") to Fair Enterprise Limited ("Fair Enterprise"), a company that forms
part of an estate planning vehicle for the family of Frank Stronach, MEC's
Chairman and Chief Executive Officer (the "Fair Enterprise Private Placement");
and (ii) the Bridge Loan.
The Plan contemplated selling certain real estate properties, including those situated in the following locations: Dixon, California; Ocala, Florida; Aventura and Hallandale, Florida, both adjacent to Gulfstream Park; Porter, New York; Anne Arundel County, Maryland, adjacent to Laurel Park and Ebreichsdorf, Austria, adjacent to the Magna Racino™. We have initiated an active program to sell the Dixon real estate property and have listed the property for sale with a real estate broker. The real estate market in which the Dixon, California property is located has worsened considerably since we listed the property for sale. As a result of this continued deterioration of the Northern California real estate market, we recorded a write-down of $5.0 million in the first quarter of 2008 related to this property, which represented the excess of the carrying value of the asset over the estimated fair value less selling costs. On August 12, 2008, we entered into an agreement to sell the Ocala real estate property 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. On November 3, 2008, we announced that the prospective purchasers terminated the agreement. We still intend to sell the Ocala property and will re-initiate our marketing efforts. The Porter lands, which comprised three parcels of land, were sold in December 2007 and January 2008. The sale of these properties generated net proceeds of approximately $1.7 million, net of transaction costs, which was used to repay a portion of the Bridge Loan in the first quarter of 2008. We recognized an impairment charge of $1.3 million in 2007 in relation to the Porter lands. On April 11, 2008, we completed the sale of 225 acres of excess real estate located in Ebreichsdorf, Austria to a subsidiary of Magna International Inc., a related party, for a purchase price of Euros 20.0 million (approximately U.S. $31.5 million), net of transaction costs. Of the net proceeds, 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. 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.
We also intend to explore the sale of our membership interests in the mixed-use developments at Gulfstream Park in Florida and Santa Anita Park in California that we are pursuing under joint venture arrangements with Forest City Enterprises, Inc. ("Forest City") and Caruso Affiliated, respectively.
The racetracks that we have sold or intend to sell under the Plan included:
Great Lakes Downs in Michigan (which was sold on July 16, 2008 for net proceeds
of approximately $4.5 million which were used to partially repay the Bridge
Loan), Remington Park in Oklahoma, Thistledown in Ohio and our interest in
Portland Meadows in Oregon. In September 2007, we engaged a U.S. investment
bank, recognized as an experienced advisor in the gaming industry, to assist in
soliciting potential purchasers and manage the sale process for certain assets
and in October 2007, the U.S. investment bank began marketing Remington Park and
Thistledown for sale. We have since taken over the sales process from the
U.S. investment bank and are currently in discussions with potential buyers for
these assets. In November 2007, we initiated an active program to locate a buyer
and began marketing our interest in Portland Meadows for sale. In the first
quarter of 2008, primarily as a result of recent actions of the Oregon Attorney
General and the Oregon Racing Commission (the "ORC"), we recorded a write-down
of long-lived assets of $3.1 million related to Instant Racing terminals and the
build-out of the Instant Racing facility at Portland Meadows. In June 2003, the
ORC adopted regulations that permitted wagering through Instant Racing terminals
as a form of pari-mutuel wagering at Portland Meadows. 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 regulations. 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, we requested the holding of a contested case hearing, which took place in January 2008. On February 27, 2008, the Administrative Law Judge issued a proposed order that supported the installation and operations of Instant Racing machines at Portland Meadows. However, on April 25, 2008, the ORC issued an order rejecting that recommendation. In May 2008, we 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.
We also intend 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 our other racetracks that currently do not have gaming operations; and transactions involving our technology operations, which may include one or more of the assets that comprise our PariMax business.
The original Plan did not contemplate the sale of our Austrian assets, other than the 225 acres of excess real estate in Ebreichsdorf discussed above. However, in the first quarter of 2008, we committed to a plan to sell certain Austrian assets, including Magna Racino™ and other lands in Ebreichsdorf, Austria and certain excess lands located in Oberwaltersdorf, Austria. We have initiated an active program to sell these Austrian assets and have engaged a sales agent to market these properties for sale. We recognized a write-down of long-lived assets of Euros 18.8 million (approximately U.S. $29.2 million) in the first quarter of 2008 in relation to these Austrian assets, which represents the excess of the carrying value of the assets over their estimated fair value less selling costs.
The real estate properties located in Dixon, California, Ocala, Florida and Oberwaltersdorf, Austria have been classified as "assets held for sale" on our consolidated balance sheet at September 30, 2008. The operations of Great Lakes Downs, Remington Park, Thistledown, Portland Meadows and Magna Racino™ have been presented as "discontinued operations" at September 30, 2008 given that all of these operations met the criteria under U.S. GAAP for classification as "discontinued operations" at September 30, 2008. Comparative periods presented have been restated to reflect the results of these assets held for sale and discontinued operations on a consistent basis.
On November 5, 2008, we announced that we have engaged Miller Buckfire & Co., LLC ("Miller Buckfire") as our 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 us in identifying, managing and executing our asset sales program and possible joint venture transactions.
OUTLOOK
Although we continue to take steps to implement our 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 MID, 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 MID, 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.
If we are unable to repay our obligations when due or satisfy required covenants in debt agreements, substantially all of our other current and long-term debt will also become due on demand as a result of cross-default provisions within loan agreements, unless we are able to obtain waivers, modifications or extensions. The availability of any required waivers, modifications, extensions or additional funds is not assured and, if available, the terms thereof are not yet determinable. If we are unsuccessful in our efforts, we could be required to liquidate assets in the fastest manner possible to raise funds, seek protection from our creditors in one or more ways, or be unable to continue as a going concern. See the "GOING CONCERN" section included in this Report for more information.
Most of 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 any other quarter or for the year as a whole. Because four of our largest racetracks, Santa Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie and Pimlico Race Course, run live race meets principally during the first half of the year, our racing operations have historically operated at a loss in the second half of the year, with our third quarter generating the largest operating loss. This seasonality has resulted in large quarterly fluctuations in revenue and operating results.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Racing and gaming operations
Live race days are a significant factor in the operating and financial performance of our racing business. Another significant factor is the level of wagering per customer on our racing content on-track, at inter-track simulcast locations and at OTB facilities. There are also many other factors that have a significant impact on our racetrack revenues. Such factors include, but are not limited to: attendance at our racetracks, inter-track simulcast locations and OTB facilities; activity through our XpressBet® and MagnaBet™ systems; the number of races conducted at our racetracks and at racetracks whose signals we import and the average field size per race; our ability to attract the industry's top horses and trainers; inclement weather; and changes in the economy.
In the nine months ended September 30, 2008, we operated our continuing operations racetracks for 565 live race days, which is 15 fewer days than operated in the nine months ended September 30, 2007. As discussed further below, contributing to this decrease from the prior year period are reductions in live race days at Santa Anita Park and The Maryland Jockey Club, partially offset by increased live race days at Golden Gate Fields.
Set forth below is a schedule of our actual live race days by racetrack for the first, second and third quarters and awarded live race days for the remaining quarter of 2008 with comparatives for 2007.
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