/FIRST AND FINAL ADD - TO226 - MI Developments Inc. results/ 12.
STOCK-BASED COMPENSATION (a) On August 29, 2003, MID's Board of
Directors approved the Incentive Stock Option Plan (the "MID
Plan"), which allows for the grant of stock options or stock
appreciation rights to directors, officers, employees and
consultants. A maximum of 2.85 million MID Class A Subordinate
Voting Shares are available to be issued under the MID Plan. MID
grants stock options to certain directors, officers, key employees
and consultants to purchase MID's Class A Subordinate Voting
Shares. 1/5th of options vest on the date of grant, and remaining
options vest over a period of 4 years at a rate of 1/5th on each
anniversary of the date of grant. Options expire on the tenth
anniversary of the date of grant, subject to earlier cancellation
in the events specified in the stock option agreement entered into
by MID with each recipient of options. Activity in MID's option
plan was as follows: Weighted Average Remaining Exercise
Contractual Price Life Number ($Cdn) (years)
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Stock options outstanding at December 31, 2003 575,000 $ 31.85 9.7
Options granted 270,000 37.10 Options exercised (60,000) 31.85
Options cancelled (295,000) 34.48
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Stock options outstanding at December 31, 2004 490,000 $ 33.16 9.2
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Stock options exercisable at December 31, 2004 216,000 $ 32.44 8.9
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During the three months ended December 31, 2004, 170,000 MID stock
options were granted with an exercise price of Cdn$35.62 and a fair
value of $7.38 per option. During the three months ended March 31,
2004, there were 100,000 MID stock options granted with a fair
value of $7.57 per option. These 100,000 MID stock options and an
additional 193,000 MID stock options were subsequently cancelled
during the three months ended September 30, 2004. An additional
2,000 MID stock options were cancelled during the three months
ended December 31, 2004. During the three months ended September
30, 2003 and the year ended December 31, 2003 there were 575,000
MID stock options granted with a fair value of $6.25 per option.
During each of the three month periods ending March 31, 2004 and
December 31, 2004, 30,000 MID options were exercised at a price of
Cdn$31.85 per option. The fair value of MID stock options granted
was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
Three months ended Year ended December 31, December 31, 2004 2003
2004 2003
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Risk-free interest rate 3.4% N/A 3.3% 4.0% Expected dividend yield
1.24% N/A 1.23% 1.49% Expected volatility of MID's Class A
Subordinate Voting Stock 29.8% N/A 30.0% 30.2% Weighted average
expected life (years) 4.0 N/A 4.0 4.0
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(b) MEC has a Long-term Incentive Plan (the "MEC 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 MEC's Class A Subordinate Voting
Stock are available to be issued under the MEC 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 MEC Plan.
MEC grants stock options to certain directors, officers, key
employees and consultants to purchase shares of MEC's Class A
Subordinate Voting Stock. All of such stock options give the
grantee the right to purchase Class A Subordinate Voting Stock of
MEC at a price no less than the fair market value of such stock at
the date of grant. Generally, stock options under the MEC 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 MEC with each recipient of options.
During the three months ended December 31, 2004, no MEC shares were
issued under the MEC Plan. During the year ended December 31, 2004,
199,000 MEC shares were issued under the MEC Plan, including
175,000 MEC shares issued on the exercise of MEC stock options.
During the three months ended December 31, 2004, no stock options
were granted, 122,000 stock options were forfeited and no stock
options were exercised or expired. During the year ended December
31, 2004, 200,000 MEC stock options were granted with an average
fair value of $2.38 per option, and 366,000 MEC stock options were
forfeited. During the three months ended December 31, 2003, no
stock options were granted, 501,000 stock options were forfeited
and no stock options were exercised or expired. During the year
ended December 31, 2003, 640,000 MEC stock options were granted
with an average fair value of $1.50 per option, 6,000 options were
exercised and 1,154,333 stock options were forfeited. At December
31, 2004, there were 4,500,500 MEC stock options outstanding with
exercise prices ranging from $3.91 to $9.43 per share and a
weighted average exercise price of $6.18 per share. There were
3,909,430 MEC stock options exercisable at December 31, 2004 with a
weighted average exercise price of $6.14 per share. The fair value
of MEC stock option grants is estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted
average assumptions: Three months ended Year ended December 31,
December 31, 2004 2003 2004 2003
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Risk-free interest rate N/A N/A 3.0% 2.0% Expected dividend yield
N/A N/A 0.84% 0.84% Expected volatility of MEC's Class A
Subordinate Voting Stock N/A N/A 57.4% 53.4% Weighted average
expected life (years) N/A N/A 4.0 4.0
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Pro Forma Results Under Fair Value Method
----------------------------------------- If the fair value method
of accounting for stock-based compensation had been applied to the
Company's results prior to the adoption of the fair value method
effective January 1, 2004, the Company's pro forma net income would
have been as follows: Three months ended Year ended December 31,
December 31, 2003 2003
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Net income, as reported $ (50,406) $ (32,344) Stock-based
compensation expense - MID (180) (930) Stock-based compensation
expense, net of tax - MEC (116) (2,181) Minority interest in MEC
stock-based compensation expense 48 903
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Pro forma net income $ (50,654) $ (34,522)
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For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the option's vesting
period. 13. DETAILS OF CASH FROM OPERATING ACTIVITIES (a) Items not
involving current cash flows: Three months ended Year ended
December 31, December 31, 2004 2003 2004 2003
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Real Estate Business (Gain) loss on disposal of real estate $ - $
(20) $ (216) $ 114 Straight-line rent adjustment 404 91 300 (2,313)
Depreciation and amortization 8,806 8,577 34,211 32,086 Future
income taxes 193 3,718 4,350 7,526 Stock-based compensation expense
275 - 1,833 - Other (203) (500) (83) (43)
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9,475 11,866 40,395 37,370
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MEC Gain on disposal of real estate - (31) (9,626) (31)
Depreciation and amortization 10,303 8,740 38,255 31,897 Future
income taxes 2,101 (60,817) (5,081) (64,155) Minority interest
(20,049) (42,844) (39,775) (43,957) Stock-based compensation
expense 220 - 972 - Dilution losses and other (gains) - - (883) -
Write-down of other assets and fixed assets - 134,856 26,685
134,856 Other 464 1,276 1,796 3,688
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(6,961) 41,180 12,343 62,298
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Eliminations (note 15(a)) 85 - 85 -
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Consolidated $ 2,599 $ 53,046 $ 52,823 $ 99,668
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(b) Changes in non-cash balances: Three months ended Year ended
December 31, December 31, 2004 2003 2004 2003
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Real Estate Business Accounts receivable $ (1,286) $ (2,686) $
5,442 $ (3,493) Prepaid expenses and other 453 1,424 318 (512)
Accounts payable and accrued liabilities 1,713 7,130 4,621 8,657
Income taxes payable (926) 9,113 3,536 1,666
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(46) 14,981 13,917 6,318
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MEC Restricted cash 1,382 (3,517) (752) (4,757) Accounts receivable
(5,151) 2,430 (9,534) 14,945 Prepaid expenses and other 6,849 4,421
740 2,887 Accounts payable and accrued liabilities (12,208) 17,230
10,984 (3,237) Deferred revenue 16,287 2,203 8,654 5,411 Income
taxes receivable/payable 3,976 1,307 (17) (1,571)
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11,135 24,074 10,075 13,678
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Consolidated $ 11,089 $ 39,055 $ 23,992 $ 19,996
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14. SEGMENTED INFORMATION The Company's reportable segments reflect
how the Company is organized and managed by senior management. The
Company's operations are segmented in the Company's internal
financial reports between wholly owned operations (the Real Estate
Business) and publicly traded operations (MEC). The segregation of
operations between wholly owned and publicly traded operations
recognizes the fact that in the case of the Real Estate Business,
the Company's management has direct responsibility for the key
operating, financing and resource allocation decisions, whereas in
the case of MEC, such responsibility resides with its separate
board of directors and executive management. The Company's
reporting segments are as follows: Real Estate Business The Real
Estate Business owns real estate assets in Canada, Austria, the
United States, Germany, Mexico, the United Kingdom, Poland, the
Czech Republic, Belgium and Spain. Substantially all these real
estate assets are leased to, or are under development for
subsequent lease to, Magna's automotive operating units. The Real
Estate Business also owns certain properties that are being held
for future development or sale. MEC Throughout 2004, MEC operated
or managed twelve thoroughbred racetracks, two standardbred
racetracks, one racetrack that runs both thoroughbred and
standardbred meets, one greyhound track, and three thoroughbred
training centres. In addition, MEC operates off-track betting
facilities, XpressBet(R), a national Internet and telephone account
wagering business, owns and operates HorseRacing TV(TM), a
television channel focused exclusively on horse racing, and owns a
30% equity investment in AmTote. In 2004, MEC launched RaceONTV(TM)
in Europe to provide North American racing content from MEC's
racetracks and other U.S. racetracks that have agreed to
participate in MEC's international distribution network to
locations outside North America. MEC also owns and operates
production facilities in Austria and in North Carolina for
StreuFex(TM), a straw-based horse bedding product. In addition to
racetracks, MEC's real estate portfolio includes two golf courses
and related recreational facilities in Austria and Canada, and
three residential developments in various stages of development in
Austria, the United States and Canada. The Company's interim
consolidated statements of income (loss), consolidated statements
of cash flows, and consolidated balance sheets have been arranged
so as to provide detailed, discrete financial information on the
Real Estate Business and MEC reporting segments. 15. TRANSACTIONS
WITH RELATED PARTIES Mr. F. Stronach, Magna's Chairman of the
Board, and three other members of his family are trustees of the
Stronach Trust. The Stronach Trust controls the Company through the
right to direct the votes attaching to 66% of the Company's Class B
Shares. The Stronach Trust also controls Magna through the right to
direct the votes attaching to 66% of Magna's Class B Shares. Since
the Company and Magna are under the common control of the Stronach
Trust, they are considered to be related parties for accounting
purposes. (a) Loan receivable from MEC On December 9, 2004, MID
entered into a loan agreement to provide project financing
facilities to MEC of $115.0 million for the reconstruction of
facilities at Gulfstream Park racetrack in Florida and $77.0
million for the reconstruction and development of The Meadows
racetrack and slot facility in Pennsylvania. The project financing
will be made available through two separate facilities provided by
wholly owned subsidiaries of MID to wholly owned subsidiaries of
MEC that own and/or operate Gulfstream Park and The Meadows.
Advances under the facilities are made available by way of progress
draw advances to fund reconstruction of the clubhouse/grandstand
facility, backstretch and related site works at Gulfstream Park,
and reconstruction of the clubhouse/grandstand facility, slot
machine facility and related site works at The Meadows. The project
financing facilities have terms of 10 years from the relevant
completion dates for the construction projects at Gulfstream Park
and The Meadows. The anticipated completion dates for Gulfstream
Park and The Meadows are the first and fourth quarters of 2006,
respectively. Prior to the relevant completion dates, amounts
outstanding under each facility will bear interest at a floating
rate equal to 2.55% above MID's per annum notional cost of
borrowing under its floating rate credit facility, compounded
monthly. At December 31, 2004, the interest rate applicable to the
project financing facilities was 5.8%. After the relevant
completion date, amounts outstanding under each facility will bear
interest at a fixed rate of 10.5% per annum, compounded
semi-annually. Prior to January 1, 2008, payment of interest will
be deferred. Commencing January 1, 2008, MID will receive monthly
blended payments of principal and interest based on a 25-year
amortization period commencing on the relevant completion date. The
project financing facilities contain cross-guarantee, cross-default
and cross-collateralization provisions. Each facility is secured
principally by first-ranking security over the lands forming part
of the relevant racetrack operations at Gulfstream Park and The
Meadows and certain lands adjacent to the racetrack operations at
Gulfstream Park and over all other assets of the relevant borrower,
excluding licenses and permits. In addition, each borrower
covenants not to pledge any licenses or permits held by it and MEC
has agreed not to pledge the shares of the borrowers. The Meadows
project will require additional financing to fund the cost of other
slot related expenditures (slot license and machines, furnishings
and equipment), which MEC is expected to seek from third party
lenders or investors. MID has agreed, subject to entering into a
satisfactory intercreditor agreement, to subordinate its security
in The Meadows facility to the third party lender up to a maximum
amount of $110.0 million. As at December 31, 2004, MID had a
balance of $26.4 million due from MEC under the Gulfstream Park
project facility including $0.1 million of accrued interest. No
amount had been advanced under The Meadows project facility as at
December 31, 2004. Approximately $3.0 million of costs have been
incurred by MEC in association with the project financing. These
costs are recognized by MEC as deferred financing costs. At a
consolidated level, such costs, and any portion thereof capitalized
by MEC, are charged to general and administrative expenses. All
interest charged by the Company to MEC on the project financing,
and any capitalization thereof by MEC, is eliminated from the
Company's consolidated results of operation and financial position.
(b) Proposed offer to take MEC private On July 13, 2004, the
Company announced an intention to make an offer to acquire all the
outstanding shares of Class A Subordinate Voting Stock of MEC not
owned by MID. On September 16, 2004, the Company announced that it
would not proceed with the offer. In the three months ended
September 30, 2004, the Company incurred costs related to this
proposed offer of $2.7 million which have been included in general
and administrative expenses of the Real Estate Business. In
connection with the intended offer, the Company entered into a
share purchase agreement dated July 12, 2004 (the "Share Purchase
Agreement") with Fair Enterprise Limited ("Fair Enterprise"), a
company controlled by Mr. F. Stronach. Pursuant to the Share
Purchase Agreement, the Company purchased from Fair Enterprise
3,682,515 shares of Class A Subordinate Voting Stock of MEC for
aggregate consideration of $3.3 million in cash and the issuance,
subject to regulatory approval, of 707,725 of the Company's Class A
Shares. The Share Purchase Agreement provided Fair Enterprise with
an option to repurchase the MEC shares from the Company in the
event that, among other things, prior to December 30, 2004, the
Company publicly announced that it would not be proceeding with the
offer. As a result of the Company not proceeding with the offer, on
September 16, 2004 Fair Enterprise exercised its option under the
Share Purchase Agreement and repurchased the MEC shares from the
Company in consideration for the termination of the Company's
obligation to issue the 707,725 Class A Shares and pay the cash
consideration (which shares had not been issued and cash
consideration had not been paid on such date). The Company has
recorded an increased amount of the net loss of MEC during the
period that the Company owned these additional MEC shares. The
recovery of minority interest expense in the Company's consolidated
statement of income (loss) for the three months ended September 30,
2004, and year ended December 31, 2004, has been reduced by
approximately $1.0 million to reflect the increased amount of MEC
losses attributable to the Company during the period of ownership.
Also included in the Company's consolidated statement of income
(loss), in dilution losses and other gains, for the three months
ended September 30, 2004, and year ended December 31, 2004, is a
non-cash gain on disposal of approximately $1.0 million as a result
of the Fair Enterprise repurchase of the MEC shares on September
16, 2004. (c) MEC option In September 2004, a subsidiary of MEC
entered into an option agreement with MID and one of its
subsidiaries to acquire 100% of the shares of the MID subsidiary
that owns land in Romulus, Michigan, for $33.5 million, which may
serve as the site of MEC's proposed racetrack in, Romulus,
Michigan. MEC paid the Company $10 thousand for this option. If MEC
is unable to obtain a racing license for this site, then MEC would
incur a write-down of the costs that have been incurred with
respect to entitlements on this property and in pursuit of this
license. At December 31, 2004, MEC has incurred approximately $2.8
million of costs related to this property and in pursuit of the
license. (d) Charges to Magna Substantially all of the Company's
rental revenue relates to leases with Magna and its wholly owned
and publicly traded subsidiaries. On November 1, 2004, a wholly
owned subsidiary of MEC entered into an access agreement with Magna
and one of its subsidiaries for their use of the golf course and
the clubhouse meeting, dining and other facilities at the Magna
Golf Club in Aurora, Ontario. The agreement, which expires on
December 31, 2014, stipulates an annual fee of $4.2 million (Cdn.
$5.0 million), retroactive to January 1, 2004. During the three
months and year ended December 31, 2004, $3.9 million has been
recognized in revenue related to this agreement. During the three
months and year ended December 31, 2003, $1.1 million and $3.2
million, respectively, were recognized in revenue related to an
access agreement that expired on December 31, 2003. On November 1,
2004, a wholly owned subsidiary of MEC entered into an access
agreement with Magna and one of its subsidiaries for their use of
the golf course and the clubhouse meeting, dining and other
facilities at Fontana Sports in Oberwaltersdorf, Austria. The
agreement, which expires on December 31, 2014 stipulates an annual
fee amounting to $3.4 million (2.5 million euros), retroactive to
March 1, 2004. During the three months and year ended December 31,
2004, $2.7 million and $3.2 million has been recognized in revenue
related to this agreement. During the three months and year ended
December 31, 2003, $0.7 million and $3.1 million, respectively,
were recognized in revenue related to an access agreement that
expired on March 1, 2004. MEC has granted Magna a right of first
refusal to purchase its two golf courses. At December 31, 2004, the
Real Estate Business had $2.2 million due from Magna and its
subsidiaries (2003 - $10.0 million). (e) Charges from Magna Magna
charges the Company for certain administrative services which have
continued to be provided following the spin-off of the Company from
Magna. In the three months and year ended December 31, 2004, these
charges totalled $0.1 million and $0.3 million, respectively (three
months and year ended December 31, 2003 - $0.3 million) and are
included in the Real Estate Business' general and administrative
expenses. During the year ended December 31, 2004, MEC incurred
$2.7 million (2003 - $1.2 million) of rent for facilities and
central shared services to Magna and one of its subsidiaries.
Included in the Real Estate Business' accounts payable and accrued
liabilities at December 31, 2004 are amounts due to Magna and its
subsidiaries totaling $0.7 million (2003 - $2.9 million). Included
in MEC's accounts payable and accrued liabilities at December 31,
2004 are amounts due to Magna and its subsidiaries totaling $0.6
million (2003 - nil). During the nine months ended September 30,
2003, the Company incurred $24.8 million of interest charges from
Magna. No interest charges from Magna were incurred subsequent to
August 29, 2003, the date when Magna's net investment was exchanged
for Class A Subordinate Voting Shares of the Company as part of the
Company's spin-off from Magna (see note 6(e)). (f) Transactions
with Amtote MEC paid $2.0 million during the year ended December
31, 2004 (2003 - $2.8 million), of rent for totalisator equipment
and fees for totalisator services to AmTote, a company in which MEC
has a 30% equity interest. (g) Indemnifications by Magna and
subsidiaries One of MEC's subsidiaries has been named as a
defendant in a class action brought in a United States District
Court by various plaintiffs. The plaintiffs in this action claim
unspecified compensatory and punitive damages, for restitution and
disgorgement of profits, all in relation to forced labour performed
by the plaintiffs for such subsidiary and certain other Austrian
and German corporate defendants at their facilities in Europe
during World War II and certain property right claims. As a result
of a reorganization in prior years, MEC acquired the shares of such
subsidiary. Under Austrian law, such subsidiary would be jointly
and severally liable for the damages awarded in respect of these
class action claims. An Austrian subsidiary of Magna has agreed to
indemnify such subsidiary for any damages or expenses associated
with this case. (h) Purchases of real estate from Magna On December
30, 2004, the Company acquired a 938,000 square foot greenfield
facility in Bowling Green, Kentucky from Magna for cash
consideration of $45.6 million and the assumption of related
development liabilities of $15.3 million. The property was
purchased at approximately Magna's carrying value and recorded at
the transaction amount. 16. COMMITMENTS AND CONTINGENCIES (a) 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. (b) MEC 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. (c) At December 31, 2004, the Company had $7.6
million (Real Estate Business - $3.0 million; MEC - $4.6 million)
letters of credit issued with various financial institutions to
guarantee various of its construction projects. These letters of
credit are secured by cash deposits of the Company. (d) MEC 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. As at December 31, 2004, these
indemnities amounted to $9.0 million with expiration dates through
2005. (e) In connection with its acquisition of a controlling
interest in The Maryland Jockey Club, Maryland Racing, Inc.
("MRI"), a wholly owned subsidiary of MEC, agreed with the Maryland
Racing Commission to spend a minimum of $5.0 million by August 31,
2003, an additional $5.0 million by December 31, 2003, and an
additional $5.0 million by June 30, 2004 on capital expenditures
and renovations at the Pimlico Race Course, Laurel Park, Bowie
Training Center and their related facilities and operations. As at
December 31, 2004, this commitment was fulfilled. (f) At December
31, 2004, the Company's contractual commitments related to
construction and development projects outstanding amounted to
approximately $93.8 million (Real Estate Business - $15.2 million;
MEC - $78.6 million). (g) The Maryland Jockey Club is 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
replaced a previous agreement (the "Maryland Revenue Sharing
Agreement"), which was effective as of January 1, 2000 and expired
on April 18, 2004. The Maryland Operating Agreement has been in
effect since June 9, 2004, and expires on June 30, 2005, unless
extended by both parties. The Maryland Revenue Sharing Agreement
enabled wagering to be conducted, both day and evening, on live and
simulcast thoroughbred and harness races at Pimlico, Laurel Park
and Rosecroft and the three Maryland off-track betting facilities
operated by them. Under the agreement, wagering revenue from these
sources was pooled and certain expenses and obligations were pooled
and paid from those revenues to generate net wagering revenue. This
net wagering revenue was then distributed 80% to The Maryland
Jockey Club and 20% to Rosecroft. Commencing April 19, 2004, The
Maryland Jockey Club and Rosecroft are no longer pooling their
wagering revenue and distributing net wagering revenue as they did
under the Maryland Revenue Sharing Agreement. From April 19, 2004
until June 9, 2004, they operated under a state law which precluded
The Maryland Jockey Club from operating after 6:15 p.m. without
Rosecroft's consent, and the federal Interstate Horseracing Act,
which provides that, without the consent of The Maryland Jockey
Club, Rosecroft cannot accept simulcast wagering on horse racing
during the times that Pimlico or Laurel Park are running live
races. Since coming into effect on June 9, 2004, 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 agrees 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 agrees to pay Cloverleaf a 12% premium
on pari-mutuel wagering (net of refunds) conducted at Pimlico and
Laurel Park on all standardbred race signals. Under the Maryland
Operating Agreement, the parties have agreed to make a good faith
effort to reach a long-term agreement on cross-breed simulcasting
and off-track betting facilities in the State of Maryland. Without
an arrangement similar in effect to the Maryland Revenue Sharing
Agreement or the Maryland Operating Agreement, there would be a
material decline in the revenues, earnings and purses of The
Maryland Jockey Club. At this time, MEC is uncertain as to the
likelihood of renewal of this agreement on comparable terms. (h)
MEC's Bay Meadows lease expired on December 31, 2004 and, as a
result, certain fixed assets were disposed of for $1.0 million,
which resulted in a loss of $0.1 million being recognized on this
transaction in the year ended December 31, 2004. MEC is exploring
alternative venues, including vacant land that has been purchased
in Dixon, California for future development of a thoroughbred
racetrack with an associated retail shopping and entertainment
complex. This project is still in the early stages of planning and
is subject to regulatory and other approvals. MEC's operating
results will be materially adversely affected at least until such
time as an alternative venue can be opened or additional revenue
source arrangements secured. There can be no assurance that
operating at an alternative venue in the future will be as
profitable as the Bay Meadows operation has been. Bay Meadows'
earnings before income taxes and minority interest for the year
ended December 31, 2004 were $3.1 million. (i) On December 23,
2004, MEC announced that it would not renew its lease of the
Multnomah Greyhound Park in Portland, Oregon when the lease expired
on December 31, 2004. The Company purchased the operating rights
for the greyhound track in October 2001. Multnomah Greyhound Park
had a loss before income taxes for the year ended December 31, 2004
of $2.6 million. (j) MEC is considering a redevelopment of the
entire stable area at Laurel Park (the "Laurel Park
Redevelopment"). In the event this redevelopment were to proceed as
currently contemplated, the Laurel Park Redevelopment would include
the construction of new barns, dormitories and grooms' quarters.
The aggregate carrying value at December 31, 2004 of the assets
that would be demolished if the Laurel Park Redevelopment is
completed is approximately $3.1 million. If MEC decides to proceed
with the Laurel Park Redevelopment and obtains the approval of its
Board of Directors, a reduction in the expected life of the
existing assets would occur and a write-down would be necessary. If
MEC proceeds, the project would be scheduled to minimize any
interference with Laurel Park's racing season, however, with a
project of this magnitude, there will likely be a temporary
disruption of Laurel Park's operations during a racing season and
there is risk that the redevelopment will not be completed
according to schedule. Any interference with the racing operations
would result in a reduction in the revenues and earnings generated
at Laurel Park during that season. (k) MEC is considering a
redevelopment of the clubhouse/grandstand at The Meadows ("The
Meadows Redevelopment"). In the event MEC obtains a slot machine
license for The Meadows and this development were to proceed as
currently contemplated, The Meadows Redevelopment would include the
construction of a new clubhouse/grandstand with a facility to house
slot machines. The aggregate carrying value at December 31, 2004 of
the assets that would be demolished if The Meadows Redevelopment is
completed is approximately $8.3 million. If MEC decides to proceed
with The Meadows Redevelopment and obtains approval of its Board of
Directors, a reduction in the expected life of the existing assets
would occur and a write-down would be necessary. If MEC proceeds,
MEC's goal would be to minimize any interference with The Meadows'
operations, however, with a project of this magnitude, there will
likely be a temporary disruption of The Meadows' operations and
there is risk that the redevelopment will not be completed
according to schedule. Any interference with the racing operations
would result in a reduction in the revenues and earnings at The
Meadows. (l) In June 2003, MEC purchased an approximately 22%
interest in the real property upon which Portland Meadows is
located, and also purchased the long-term rights to operate the
facility pursuant to an operating lease. The operating lease
requires MEC to pay rent equal to one percent of the wagers made at
the track (including wagers on both live and import races), and
also an additional percentage of revenues for other activities as
follows: (a) one percent of revenues for horse-related activities,
including simulcasting of horse races during the non-live season,
(b) five percent of revenues not related to horse racing up to $0.8
million, and (c) three percent of revenues not related to horse
racing in excess of $0.8 million. As the owner of an approximately
22% interest in the real property, MEC receives approximately 22%
of the rent payments, which are applied to the rental payments made
by MEC in order to reduce rent expense, which is reflected in MEC's
operating costs on the consolidated statements of income (loss).
(m) In October 2003, MEC 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. In April 2004, MEC signed a
Pre-Development Management Agreement (the "Agreement"), which
governs the activities of the parties and obligates the parties to
work together to plan, design, entitle, pre-lease, contract to
construct and finance a project. The Agreement also contemplates a
conceptual development and business plan for the project. Upon
execution of this Agreement, Forest City paid $1.0 million to MEC
in consideration for its right to work exclusively with MEC on this
project and to secure the performance of its obligations under the
Agreement. Forest City and MEC then collectively developed a
business plan and Forest City provided an additional $1.0 million
to MEC. These two deposits have been included in MEC's accounts
payable and accrued liabilities on the Company's consolidated
balance sheets. Under certain conditions, these deposits may be
refundable to Forest City. Under the terms of the Letter of Intent
and also the Agreement, MEC may be responsible for additional
equity contributions, however to December 31, 2004, MEC has not
made any such contributions. (n) In April 2004, MEC signed a Letter
of Intent to explore the possibility of joint ventures between
Caruso Affiliates Holdings and various affiliates of MEC to develop
certain undeveloped lands surrounding Santa Anita Park and Golden
Gate Fields racetracks. Upon execution of this Letter of Intent,
MEC deposited $0.2 million into a joint account to be used for the
purpose of co-funding the development of a business plan for each
of these projects, with the goal of entering into Operating
Agreements by May 31, 2005. MEC has contributed an additional $0.2
million in 2004. The deposits have been included in MEC's other
assets on the Company's consolidated balance sheets. MEC is
continuing to explore these developmental opportunities but to
December 31, 2004 has not entered into definitive Operating
Agreements on either of these potential developments. Under the
terms of the Letter of Intent, MEC may be responsible for
additional equity contributions, however to December 31, 2004, MEC
has not made any such contributions. 17. SUBSEQUENT EVENTS On
January 18, 2005, MID received a letter from a shareholder
requisitioning a shareholders' meeting to consider proposals that
the MID Board of Directors consider having MID dispose of its
equity stake in MEC and convert into a real estate investment
trust. The Board of Directors of MID has formed a Special Committee
of independent directors of MID to consider these proposals, and
has called an annual and special meeting of shareholders for May 4,
2005 at which the proposals will be discussed. On February 18,
2005, one of MEC's Canadian subsidiaries entered into a financing
arrangement which is collateralized by an assignment of the future
amounts receivable under the Magna Golf Club access agreement. MEC
received proceeds of $11.1 million (Cdn. $13.7 million) that is
repayable in three annual installments of Cdn. $5.0 million
commencing January 1, 2006 until the third installment has been
made in 2008. The interest rate implicit in the arrangement is
5.1%. Pro Forma Consolidated Statements of Income (Loss) (U.S.
dollars in thousands, except per share figures) (Unaudited) Real
Estate Magna Consolidated Business Entertainment Corp.
------------------- ------------------- ------------------- Three
Months Ended Three Months Ended Three Months Ended December 31,
December 31, December 31, ------------------- -------------------
------------------- 2004(1) 2003(1) 2004(1) 2003(1) 2004(1) 2003(1)
-------------------------------------------------------------------------
Revenues Rental revenue $ 33,911 $ 30,969 $ 33,911 $ 30,969 $ - $ -
Racing and other 135,467 134,929 - - 135,467 134,929 Interest
income from MEC (note 1) - - 85 - - -
-------------------------------------------------------------------------
169,378 165,898 33,996 30,969 135,467 134,929
-------------------------------------------------------------------------
Operating costs and expenses Purses, awards and other 58,114 59,042
- - 58,114 59,042 Operating costs 81,865 68,687 - - 81,865 68,687
General and administrative (note 1) 27,188 25,439 4,064 4,916
20,163 20,523 Depreciation and amortization 19,109 17,317 8,806
8,577 10,303 8,740 Interest expense (income), net 6,570 4,883 (321)
(29) 6,891 4,912 Write-down of MEC's long- lived and intangibles
assets - 134,856 - - - 134,856
-------------------------------------------------------------------------
Operating income (loss) (23,468) (144,326) 21,447 17,505 (41,869)
(161,831) Gain (loss) on disposal of real estate - 51 - 20 - 31
-------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (23,468)
(144,275) 21,447 17,525 (41,869) (161,800) Income tax expense
(recovery) 10,349 (51,025) 3,871 7,194 6,478 (58,219) Minority
interest (20,049) (42,844) - - (20,049) (42,844)
-------------------------------------------------------------------------
Net income (loss) $(13,768) $(50,406) $ 17,576 $ 10,331 $(28,298)
$(60,737)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted loss per Class A Subordinate Voting or Class B
Share (note 5) $ (0.29) $ (1.05) ---------------------------------
--------------------------------- (1) No pro forma adjustments have
been made to results for the three month periods ended December 31,
2003 and 2004. Pro Forma Consolidated Statements of Income (Loss)
(U.S. dollars in thousands, except per share figures) (Unaudited)
Real Estate Magna Consolidated Business Entertainment Corp.
------------------- ------------------- ------------------- Year
Ended Year Ended Year Ended December 31, December 31, December 31,
------------------- ------------------- ------------------- 2004(1)
2003(2) 2004(1) 2003(2) 2004(1) 2003(2)
-------------------------------------------------------------------------
Revenues Rental revenue $128,687 $116,356 $128,687 $116,356 $ - $ -
Racing, real estate and other 725,188 705,115 - - 725,188 705,115
Interest income from MEC - - 85 - - -
-------------------------------------------------------------------------
853,875 821,471 128,772 116,356 725,188 705,115
-------------------------------------------------------------------------
Operating costs and expenses Purses, awards and other 339,991
338,996 - - 339,991 338,996 Operating costs 333,935 277,717 - -
333,935 277,717 General and adminis- trative 98,544 82,284 25,502
11,826 70,081 70,458 Depreciation and amortization 72,466 64,143
34,211 32,122 38,255 32,021 Interest expense (income), net 25,224
21,122 (963) (29) 26,187 21,151 Write-down of MEC's long- lived
assets 26,685 134,856 - - 26,685 134,856
-------------------------------------------------------------------------
Operating income (loss) (42,970) (97,647) 70,022 72,437 (109,946)
(170,084) Gain (loss) on disposal of real estate 9,842 (83) 216
(114) 9,626 31 Dilution (losses) and other gains 883 - - - 883 -
-------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (32,245)
(97,730) 70,238 72,323 (99,437) (170,053) Income tax expense
(recovery) 16,030 (37,868) 17,975 22,489 (1,945) (60,357) Minority
interest (39,775) (45,373) - - (39,775) (45,373)
-------------------------------------------------------------------------
Net income (loss) $ (8,500) $(14,489) $ 52,263 $ 49,834 $(57,717)
$(64,323)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per Class A Subordinate Voting or Class
B Share $ (0.18) $ (0.30) ---------------------------------
--------------------------------- (1) No pro forma adjustments have
been made to results for the year ended December 31 2004. (2) See
note 2 to the pro forma consolidated statements of income (loss)
for details of pro forma adjustments made to the statements of
income (loss) for the year ended December 31, 2003. Notes to Pro
Forma Consolidated Statements of Income (Loss) (All amounts in U.S.
dollars and all tabular amounts in thousands unless otherwise
noted) (Unaudited) 1. BASIS OF PRESENTATION The unaudited pro forma
consolidated statements of income (loss) of MI Developments Inc.
(the "Company") have been prepared from the Company's consolidated
statements of income (loss) for the three months and year ended
December 31, 2003. The pro forma consolidated statements of income
(loss) have been prepared on the basis of the assumptions and
adjustments described in note 2 below and should be read in
conjunction with the interim consolidated financial statements as
at and for the three months and year ended December 31, 2004 and
2003 ("Consolidated Financial Statements") of the Company,
including the related notes thereto. The pro forma consolidated
statements of income (loss) have been prepared in accordance with
Canadian generally accepted accounting principles ("Canadian
GAAP"). Pro forma adjustments apply only to results for the nine
months ended September 30, 2003. No pro forma adjustments were
required for the three months ended December 31, 2003 and the three
months and year ended December 31, 2004. The pro forma consolidated
statements of income (loss) are not necessarily indicative of the
results of operations that would have resulted had the relevant
transactions taken place at the respective dates referred to below.
Financial data and related measurements are presented on the pro
forma consolidated statements of income (loss), in two categories,
"Real Estate Business" and "Magna Entertainment Corp.", which
correspond to the Company's reporting segments. Related party
transactions and balances between the "Real Estate Business" and
"Magna Entertainment Corp." have not been eliminated in the
presentation of each segment's financial data and related
measurements. However, the effects of transactions between these
two segments are eliminated in the pro forma consolidated results
of operations of the Company. 2. PRO FORMA ASSUMPTIONS AND
ADJUSTMENTS The following tables illustrate the pro forma
adjustments made to the statements of income (loss) for the year
ended December 31, 2003. Pro Forma Adjustments
--------------------- Real Magna Pro Forma Year Ended Consol-
Estate Entertainment Consol- December 31, 2003 idated Business
Corp. idated
-------------------------------------------------------------------------
Note 2(a) Note 2(b) Revenues Rental revenue $ 116,180 $ 176(i) $ -
$ 116,356 Racing, real estate and other 697,786 - 7,329(i) 705,115
-------------------------------------------------------------------------
813,966 176 7,329 821,471
-------------------------------------------------------------------------
Operating costs and expenses Purses, awards and other 336,770 -
2,226(i) 338,996 Operating costs 275,114 - 2,603(i) 277,717 General
and administrative 79,975 864(ii) 1,445(i)(ii) 82,284 Depreciation
and amortization 63,983 36(i) 124 64,143 Interest expense (income),
net 40,178 (25,061)(iii) 6,005(i)(ii) 21,122 Write-down of MEC's
long-lived and intangible assets 134,856 - - 134,856
-------------------------------------------------------------------------
Operating income (loss) (116,910) 24,337 (5,074) (97,647) Loss on
disposal of real estate (83) - - (83)
-------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (116,993)
24,337 (5,074) (97,730) Income tax expense (recovery) (40,692)
4,475(iv) (1,651)(i)(ii) (37,686) Minority interest (43,957) -
(1,416)(iii) (45,373)
-------------------------------------------------------------------------
Net income (loss) $ (32,344) $ 19,862 $ (2,007) $ (14,489)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The pro forma consolidated statements of income (loss) have been
presented assuming that Magna International Inc. ("Magna")
completed the spin-off of the Company as a separate public company
as of January 1, 2002, and give effect to the following items as of
these respective dates: (a) Real Estate Business (i) Tesma
facilities On January 31, 2003, the Company purchased three
properties from Tesma International Inc. ("Tesma"), a subsidiary of
Magna, for cash consideration of $25.0 million and leased them back
to Tesma under operating leases. The pro forma consolidated
statement of income (loss) year ended December 31, 2003 includes
adjustments to revenues of $176 thousand and depreciation expense
of $36 thousand related to these properties. (ii) General and
administrative expenses General and administrative expenses have
been adjusted to reflect incremental committed executive
compensation costs. (iii) Elimination of historical intercompany
interest The adjustments to interest expense in the pro forma
consolidated statements of income (loss) give pro forma effect to
the elimination of interest expense on historical advances from
Magna since all intercompany advances were eliminated in the
initial capitalization of the Company. (iv) Tax adjustments The pro
forma consolidated statements of income (loss) reflect the tax
effect on the foregoing Real Estate Business adjustments, where
applicable, computed at assumed income tax rates as follows: For
the year ended December 31, 2003
---------------------------------------------------------------
Canada 36.6% United States 38.0% Mexico 34.0% Austria 34.0% Germany
40.1% Spain 35.0%
--------------------------------------------------------------- In
addition, in conjunction with the spin-off transactions, the legal
structure of the Company was amended. The pro forma consolidated
statements of income (loss) reflect the tax impact resulting from
this reorganization as if it had been implemented on January 1,
2002. (b) Magna Entertainment Corp. (i) Acquisitions The pro forma
consolidated statements of income (loss) reflect the April 16, 2003
transfer of the shares of Ontario Racing Inc., which acquired
Flamboro Downs ("Flamboro") in Hamilton, Ontario in October 2002,
to Magna Entertainment Corp. ("MEC") as if it had been completed
effective January 1, 2002. The pro forma consolidated statement of
income (loss) for the year ended December 31, 2003 includes
adjustments related to the Flamboro acquisition as follows: Year
ended December 31, 2003
---------------------------------------------------------------
Revenues $ 7,329 Purses, awards and other 2,226 Operating costs
2,603 General and administrative 1,129 Depreciation and
amortization 124 Interest expense, net 616
---------------------------------------------------------------
Operating income 631 Income tax expense 631
--------------------------------------------------------------- Net
income $ -
---------------------------------------------------------------
---------------------------------------------------------------
(ii) Convertible subordinated notes On June 2, 2003, MEC issued
$150.0 million of 8.55% convertible subordinated notes. The pro
forma consolidated statements of income (loss) reflect the MEC
convertible subordinated notes as if they were issued effective
January 1, 2002, including the tax effect on the foregoing
adjustment at the assumed income tax rate of 40%. The pro forma
consolidated statement of income (loss) for the year ended December
31, 2003 includes adjustments to general and administrative
expenses of $0.3 million, interest expense of $5.4 million and
income tax recovery of $2.3 million related to these convertible
subordinated notes. (iii) Minority interest expense The pro forma
consolidated statements of income (loss) include a minority
interest charge related to the MEC pro forma adjustments. Minority
interest expense has been recorded at 41.4% for the year ended
December 31, 2003. (c) Other The pro forma earnings per share for
the year ended December 31, 2003 are based on the assumption that
47,582,083 Class A Subordinate Voting Shares and 548,238 Class B
Shares were issued and outstanding during those periods. 3. REAL
ESTATE BUSINESS - PRO FORMA FUNDS FROM OPERATIONS The Company
measures and presents funds from operations for the Real Estate
Business because it is a measure that is widely used by analysts
and investors in evaluating the operating performance of real
estate companies. However, funds from operations does not have
standardized meaning under Canadian GAAP and therefore is unlikely
to be comparable to similar measures presented by other companies.
The Real Estate Business' funds from operations is based on pro
forma information prepared in accordance with Canadian GAAP as
follows: Three months ended Year ended December 31, December 31,
------------------- ------------------- 2004 2003 2004 2003
-------------------------------------------------------------------------
Net income $ 17,576 $ 10,331 $ 52,263 $ 49,834 Add back (deduct)
non-cash items: Depreciation and amortization 8,806 8,577 34,211
32,122 Future income taxes 193 3,718 4,350 7,526 Stock-based
compensation expense 275 - 1,833 - Straight-line rent adjustment
404 91 300 (2,313) Loss (gain) on disposal of real estate - (20)
(216) 114
-------------------------------------------------------------------------
Pro forma funds from operations $ 27,254 $ 22,697 $ 92,741 $ 87,283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
END FIRST AND FINAL ADD DATASOURCE: MI Developments Inc. CONTACT:
PRNewswire - - March 2
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