5. ASSETS HELD FOR SALE (a) In November and December 2007, MEC
entered into sale agreements for three parcels of excess real
estate comprising approximately 825 acres in Porter, New York,
subject to the completion of due diligence by the purchasers and
customary closing conditions. The sale of one parcel was completed
in December 2007 for cash consideration of $0.3 million, net of
transaction costs, and the sales of the two remaining parcels were
completed in January 2008 for total cash consideration of $1.5
million, net of transaction costs. At December 31, 2007, the two
parcels of excess real estate for which the sale had not been
completed were included in MEC's "assets held for sale" on the
Company's consolidated balance sheet. The net proceeds received on
closing were used to repay a portion of the MEC Bridge Loan (note
18). (b) On December 21, 2007, MEC entered into an agreement to
sell 225 acres of excess real estate located in Ebreichsdorf,
Austria to a subsidiary of Magna, a related party, for a purchase
price of 20.0 million euros ($31.5 million), net of transaction
costs. The closing of the transaction occurred in April 2008 and
MEC used 7.5 million euros of the net proceeds to repay a portion
of a 15.0 million euro term loan facility with a European financial
institution and the remaining portion of the net proceeds to repay
$19.8 million of the MEC Bridge Loan (note 18). (c) On August 9,
2007, MEC announced its intention to sell a real estate property
located in Dixon, California. In addition, in March 2008, MEC
committed to a plan to sell excess real estate in Oberwaltersdorf,
Austria. MEC is marketing these properties for sale and has listed
them with real estate brokers. On August 9, 2007, MEC also
announced its intention to sell a real estate property located in
Ocala, Florida. MEC is marketing this property for sale and is in
negotiations with a potential buyer. Under the terms of the MEC
Bridge Loan, MEC is required to use the net proceeds from the sale
of these properties, after repayment of certain prior ranking
indebtedness of MEC, to pay down principal amounts outstanding
under the MEC Bridge Loan and the amount of such net proceeds will
permanently reduce the committed amount of the MEC Bridge Loan. (d)
The MEC Debt Elimination Plan also contemplates the sale of real
estate properties located in Aventura and Hallandale, Florida, both
adjacent to Gulfstream Park, and Anne Arundel County, Maryland,
adjacent to Laurel Park. MEC has also announced that it intends to
explore selling its membership interests in the mixed-use
developments at Gulfstream Park racetrack in Florida and Santa
Anita Park racetrack in California that it is pursuing under joint
venture arrangements with Forest City Enterprises, Inc. ("Forest
City") and Caruso Affiliated ("Caruso"), respectively. MEC has also
announced that it intends to explore other strategic transactions
involving other racing, gaming and technology operations. These
potential transactions may include: 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 other MEC racetracks that currently do not
have gaming operations; and transactions involving MEC's technology
operations, which may include one or more of the assets that
comprise MEC's PariMax business. At June 30, 2008, all of the
criteria required to classify an asset as held for sale, or
operations as discontinued operations (note 4), in accordance with
GAAP were not met in relation to the assets and operations
described in the preceding paragraph and, accordingly, these assets
and operations continue to be classified as held and in use. MEC's
assets classified as held for sale and corresponding liabilities,
related to the transactions described in sections (a), (b) and (c)
above, at June 30, 2008 and December 31, 2007, are shown in the
table below. (restated - note 5(c)) June December As at 30, 2008
31, 2007
-------------------------------------------------------------------------
ASSETS Current assets: Real estate properties, net Porter, New York
$ - $ 1,493
-------------------------------------------------------------------------
Real estate properties, net Dixon, California (note 6) 14,139
19,139 Ocala, Florida 8,407 8,407 Oberwaltersdorf, Austria 4,797
4,482 Ebreichsdorf, Austria - 6,619
-------------------------------------------------------------------------
27,343 38,647
-------------------------------------------------------------------------
$ 27,343 $ 40,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES Current liabilities Future tax liabilities $ - $ 171
-------------------------------------------------------------------------
Future tax liabilities 876 876
-------------------------------------------------------------------------
$ 876 $ 1,047
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. WRITE-DOWN OF MEC'S LONG-LIVED ASSETS When long-lived assets are
identified as held for sale, the carrying value is reduced, if
necessary, to the estimated net realizable value. Net realizable
value is evaluated at each interim reporting period based on
discounted net future cash flows of the assets and, if appropriate,
appraisals and/or estimated net sales proceeds from pending offers.
Write-downs relating to long-lived assets have been recognized as
follows:
-------------------------------------------------------------------------
Three Months Six Months Ended June 30, Ended June 30,
------------------------- ------------------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
Assets Held For Sale (note 5) Dixon, California(i) $ - $ - $ 5,000
$ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discontinued Operations (note 4) Magna Racino(TM)(ii) $ - $ - $
29,195 $ - Portland Meadows(iii) - - 3,099 -
-------------------------------------------------------------------------
$ - $ - $ 32,294 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As a result of significant weakness in the Northern California
real estate market and the U.S. financial market, MEC recorded an
impairment charge of $5.0 million related to the Dixon, California
real estate property in the six months ended June 30, 2008, which
represents the excess of the carrying value of the asset over the
estimated net realizable value. (ii) As a result of the
classification of Magna Racino(TM) as discontinued operations, MEC
recorded an impairment charge, included in discontinued operations,
of $29.2 million in six months ended June 30, 2008, which
represents the excess of the carrying value of the assets over the
estimated net realizable value. (iii) In June 2003, the Oregon
Racing Commission ("ORC") adopted regulations that permitted
wagering through instant racing terminals as a form of pari-mutuel
wagering at Portland Meadows (the "Instant Racing Rules"). In
September 2006, the ORC granted a request by Portland Meadows to
offer instant racing under its 2006- 2007 race meet licence. In
June 2007, the ORC, acting under the advice of the Oregon Attorney
General, temporarily suspended and began proceedings to repeal the
Instant Racing Rules. In September 2007, the ORC denied a request
by Portland Meadows to offer instant racing under its 2007-2008
race meet licence. In response to this denial, MEC requested the
holding of a contested case hearing, which took place in January
2008. On February 27, 2008, the Office of Administrative Hearings
released a proposed order in MEC's favour, approving instant racing
as a legal form of wager at Portland Meadows. However, on April 25,
2008, the ORC issued an order rejecting that recommendation. Based
primarily on the ORC's order to reject the Office of Administrative
Hearings' recommendation, MEC recorded an impairment charge of $3.1
million, included in discontinued operations, in the six months
ended June 30, 2008 related to the instant racing terminals and
build-out of the instant racing facility. 7. EARNINGS (LOSS) PER
SHARE Diluted earnings (loss) per share for the three-month and
six-month periods ended June 30, 2008 and 2007 are computed as
follows:
-------------------------------------------------------------------------
Three Months Six Months Ended June 30, Ended June 30,
------------------------- ------------------------- (restated
(restated - note 4) - note 4) 2008 2007 2008 2007
-------------------------------------------------------------------------
Income from continuing operations $ 26,361 $ 8,537 $ 50,238 $
32,860 Income (loss) from discontinued operations 1,680 (982)
(15,600) (2,022)
-------------------------------------------------------------------------
Net income $ 28,041 $ 7,555 $ 34,638 $ 30,838
-------------------------------------------------------------------------
Weighted average number of Class A Subordinate Voting and Class B
Shares outstanding during the period (thousands) 46,708 48,369
46,708 48,360 Stock options (thousands) - 50 - 56
-------------------------------------------------------------------------
46,708 48,419 46,708 48,416
-------------------------------------------------------------------------
Diluted earnings (loss) per Class A Subordinate Voting or Class B
Share - from continuing operations $ 0.56 $ 0.18 $ 1.07 $ 0.68 -
from discontinued operations 0.04 (0.02) (0.33) (0.04)
-------------------------------------------------------------------------
$ 0.60 $ 0.16 $ 0.74 $ 0.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The computation of diluted earnings (loss) per share for the
three-month and six-month periods ended June 30, 2008 excludes the
effect of the potential exercise of 516,544 (2007 - nil) options to
acquire Class A Subordinate Voting Shares of the Company because
the effect would be anti-dilutive. 8. REAL ESTATE PROPERTIES (a)
Real estate properties consist of: (restated - notes 4, 5) June
December As at 30, 2008 31, 2007
-------------------------------------------------------------------------
Real Estate Business Revenue-producing properties Land $ 234,116 $
226,269 Buildings, parking lots and roadways - cost 1,482,107
1,444,241 Buildings, parking lots and roadways - accumulated
depreciation (375,895) (345,825)
-------------------------------------------------------------------------
1,340,328 1,324,685
-------------------------------------------------------------------------
Development properties Land and improvements 226,119 226,248
Properties under development 6,139 9,541
-------------------------------------------------------------------------
232,258 235,789
-------------------------------------------------------------------------
Properties held for sale 527 1,447
-------------------------------------------------------------------------
1,573,113 1,561,921
-------------------------------------------------------------------------
MEC Revenue-producing racetrack properties Land and improvements
164,865 164,856 Buildings - cost 550,790 544,543 Buildings -
accumulated depreciation (125,041) (113,620) Construction in
progress 51,419 42,666
-------------------------------------------------------------------------
642,033 638,445
-------------------------------------------------------------------------
Under-utilized racetrack real estate 76,128 76,130
-------------------------------------------------------------------------
Revenue-producing non-racetrack properties Land and improvements
183 2,015 Buildings - cost 3,446 2,123 Buildings - accumulated
depreciation (107) (93)
-------------------------------------------------------------------------
3,522 4,045
-------------------------------------------------------------------------
721,683 718,620
-------------------------------------------------------------------------
Eliminations (note 18) (55,301) (55,387)
-------------------------------------------------------------------------
Consolidated $ 2,239,495 $ 2,225,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) During the three months ended June 30, 2008, the Real Estate
Business determined that the plan of sale criteria under generally
accepted accounting principles was no longer met for one property
included in "properties held for sale" at December 31, 2007, as the
Company intends to lease the property to a third party tenant.
Accordingly, the property, consisting of land and a vacant building
with an aggregate carrying value of $1.3 million, has been
reclassified into "revenue-producing properties" at June 30, 2008.
(c) During the three months ended June 30, 2008, the Real Estate
Business determined that one property included in
"revenue-producing properties" at December 31, 2007 is expected to
be sold after the existing lease expires in September 2008.
Accordingly, the property, consisting of land and a vacant building
with an aggregate carrying value of $0.5 million (net of a $0.5
million write-down to the property's estimated net realizable value
in the three months ended June 30, 2008), has been reclassified
into "properties held for sale" at June 30, 2008. 9. BANK
INDEBTEDNESS AND LONG-TERM DEBT (a) During the six months ended
June 30, 2008, the maturity date of the $40.0 million MEC Credit
Facility was extended from March 31, 2008 to July 30, 2008 (subject
to certain acceleration provisions that are no longer applicable).
Subsequent to quarter-end, the maturity date was further extended
to August 15, 2008. Borrowings under the MEC Credit Facility are
available by way of U.S. dollar loans and letters of credit, each
bearing interest at the U.S. base rate plus 5.0% or the London
Interbank Offered Rate ("LIBOR") plus 6.0%. Loans under the MEC
Credit Facility are collateralized 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 of MEC's subsidiaries. At
June 30, 2008, MEC had borrowed $36.5 million (December 31, 2007 -
$34.9 million) under the MEC Credit Facility and had issued letters
of credit totalling $3.4 million (December 31, 2007 - $4.3
million), such that $0.1 million was unused and available. The
weighted average interest rate on the borrowings outstanding under
the MEC Credit Facility at June 30, 2008 was 8.5% (December 31,
2007 - 11.0%). (b) At December 31, 2007, MEC's wholly-owned
subsidiary AmTote International, Inc. ("AmTote") had three
financing arrangements with a U.S. financial institution: (i) a
$3.0 million revolving credit facility to finance working capital
requirements (the "AmTote Credit Facility"), (ii) a $4.2 million
term loan (the "AmTote Term Loan") and (iii) a term loan of up to
$10.0 million to finance up to 80% of eligible capital costs
related to tote service contracts (the "AmTote Equipment Term
Loan"). The AmTote Credit Facility, AmTote Term Loan and AmTote
Equipment Term Loan were scheduled to mature on May 1, 2008, May
11, 2011 and May 11, 2012, respectively, but on April 30, 2008, the
maturity dates were amended to May 30, 2008 for the AmTote Credit
Facility and May 30, 2009 for both term loan facilities. On May 30,
2008, the AmTote Credit Facility was fully repaid and terminated.
Borrowings under the AmTote Term Loan and the AmTote Equipment Term
Loan bear interest at LIBOR plus 3.0%. Both term loan facilities
are collateralized by a first charge on AmTote's assets and a
pledge of the stock of AmTote. At June 30, 2008, $2.8 million and
$2.6 million (December 31, 2008 - $3.3 million and $2.0 million)
were outstanding under the AmTote Term Loan and the AmTote
Equipment Term Loan, respectively. As a result of the amendments to
the maturity dates, amounts outstanding under the AmTote Term Loan
and the AmTote Equipment Term Loan are reflected in MEC's
"long-term debt due within one year" on the Company's unaudited
interim consolidated balance sheet at June 30, 2008. (c) Two of
MEC's wholly-owned subsidiaries that own and operate Pimlico Race
Course and Laurel Park had borrowings of $9.0 million outstanding
at June 30, 2008 under term loan credit facilities with a U.S.
financial institution. At June 30, 2008, MEC was not in compliance
with one of the financial covenants contained in those credit
agreements. MEC obtained a waiver from the lender on August 5, 2008
for this financial covenant breach at June 30, 2008 and the loan
facilities were amended to temporarily modify this financial
covenant as at September 30, 2008. One of these MEC subsidiaries,
Pimlico Racing Association, Inc., has a revolving term loan
facility with the same U.S. financial institution that permits the
prepayment of outstanding principal without penalty. This facility
matures on December 1, 2013, bears interest at either the U.S.
prime rate or LIBOR plus 2.6% per annum and is collateralized by
deeds of trust on land, buildings and improvements and security
interests in all other assets of the subsidiary and certain
affiliates of The Maryland Jockey Club ("MJC"). At June 30, 2008,
there were no drawings on this facility. On August 5, 2008, the
revolving term loan facility was amended to reduce the maximum
undrawn availability from $7.7 million to $4.5 million. (d) One of
MEC's European wholly-owned subsidiaries had a bank term loan with
a European financial institution of up to 3.5 million euros bearing
interest at the Euro Overnight Index Average Rate plus 3.8% per
annum (7.8% at June 30, 2008). At June 30, 2008, there was a
nominal amount outstanding under this bank term loan facility,
which was fully repaid when the facility expired on July 31, 2008.
10. SHARE CAPITAL Changes in the Company's Class A Subordinate
Voting Shares and Class B Shares are shown in the following table:
Class A Subordinate Voting Shares Class B Shares
------------------------- ------------------------- Stated Stated
Number Value Number Value
-------------------------------------------------------------------------
Shares issued and outstanding, December 31, 2006 47,782,908 $
1,559,476 547,413 $ 17,866 Issued on exercise of stock options
38,456 1,303 - -
-------------------------------------------------------------------------
Shares issued and outstanding, March 31, 2007 and June 30, 2007
47,821,364 1,560,779 547,413 17,866 Shares purchased for
cancellation (485,700) (15,853) - -
-------------------------------------------------------------------------
Shares issued and outstanding, September 30, 2007 47,335,664
1,544,926 547,413 17,866 Shares purchased for cancellation
(1,175,100) (38,352) - -
-------------------------------------------------------------------------
Shares issued and outstanding, December 31, 2007, March 31, 2008
and June 30, 2008 46,160,564 $ 1,506,574 547,413 $ 17,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total ------------------------ Stated Number Value
----------------------------------------------- Shares issued and
outstanding, December 31, 2006 48,330,321 $ 1,577,342 Issued on
exercise of stock options 38,456 1,303
----------------------------------------------- Shares issued and
outstanding, March 31, 2007 and June 30, 2007 48,368,777 1,578,645
Shares purchased for cancellation (485,700) (15,853)
----------------------------------------------- Shares issued and
outstanding, September 30, 2007 47,883,077 1,562,792 Shares
purchased for cancellation (1,175,100) (38,352)
----------------------------------------------- Shares issued and
outstanding, December 31, 2007, March 31, 2008 and June 30, 2008
46,707,977 $ 1,524,440
-----------------------------------------------
----------------------------------------------- Pursuant to the
terms of a normal course issuer bid program for which the Company
received approval from the Toronto Stock Exchange ("TSX") on
September 29, 2006, the Company was authorized, from October 4,
2006 to October 3, 2007, to purchase for cancellation, through the
facilities of the TSX and the New York Stock Exchange ("NYSE"), up
to 3,257,895 Class A Subordinate Voting Shares, being 10% of the
Public Float, as such term is defined by the TSX. Pursuant to the
terms of a normal course issuer bid program for which the Company
received approval from the TSX on October 2, 2007, the Company is
authorized, during the 12-month period commencing October 8, 2007
and ending October 7, 2008, to purchase for cancellation, through
the facilities of the TSX and the NYSE, up to 2,531,354 Class A
Subordinate Voting Shares, being 10% of the Public Float. During
2007, the Company purchased an aggregate of 1,660,800 Class A
Subordinate Voting Shares for cancellation under these programs.
The price that MID pays for shares purchased pursuant to the bids
is the market price at the time of acquisition. No shares have been
purchased thus far for cancellation in 2008 and the Company remains
authorized to purchase for cancellation up to 1,696,654 Class A
Subordinate Voting Shares under the normal course issuer bid
program ending October 7, 2008. 11. CONTRIBUTED SURPLUS Changes in
the Company's contributed surplus are shown in the following table:
Three Months Six Months Ended June 30, Ended June 30,
------------------------- ------------------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
Contributed surplus, beginning of period $ 27,648 $ 2,547 $ 27,517
$ 2,667 Stock-based compensation 131 127 262 252 Transfer to share
capital on exercise of stock options - - - (245)
-------------------------------------------------------------------------
Contributed surplus, end of period $ 27,779 $ 2,674 $ 27,779 $
2,674
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. ACCUMULATED OTHER COMPREHENSIVE INCOME Changes in the Company's
accumulated other comprehensive income are shown in the following
table: Three Months Six Months Ended June 30, Ended June 30,
------------------------- ------------------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
Accumulated other comprehensive income, beginning of period $
276,778 $ 176,205 $ 241,939 $ 166,553 Change in fair value of
interest rate swaps, net of taxes and minority interest 361 3 29
(56) Foreign currency translation adjustment, net of minority
interest (i) 552 24,485 35,723 34,848 Recognition of foreign
currency translation translation loss (gain) in net income (loss)
(ii) 105 - 105 (652)
-------------------------------------------------------------------------
Accumulated other comprehensive income, end of period (iii) $
277,796 $ 200,693 $ 277,796 $ 200,693
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the three-month and six-month periods ended June 30,
2008 and 2007, the Company reported unrealized foreign currency
translation net gains related to its self-sustaining operations
having functional currencies other than the U.S. dollar. The gain
in the three months ended June 30, 2008 is primarily due to the
strengthening against the U.S. dollar of the Canadian dollar. The
gain from the appreciation of the euro against the U.S. dollar in
the six months ended June 30, 2008 was partially offset by
unrealized foreign currency translation losses related to the
reporting of the Company's Canadian operations due to the weakening
of the Canadian dollar against the U.S. dollar during this period.
The gain in the three and six months ended June 30, 2007 is
primarily due to the strengthening against the U.S. dollar of the
euro and the Canadian dollar. (ii) Included in the Real Estate
Business' "other losses" and "other gains, net" for the three and
six months ended June 30, 2008, respectively, is a $0.1 million
currency translation loss (six months ended June 30, 2007 - $0.7
million gain) realized from capital transactions that gave rise to
a reduction in the net investment in certain foreign operations.
(iii) Accumulated other comprehensive income consists of: June
December As at 30, 2008 31, 2007
-------------------------------------------------------------------------
Foreign currency translation adjustment, net of minority interest $
278,189 $ 242,369 Fair value of interest rate swaps, net of taxes
and minority interest (393) (430)
-------------------------------------------------------------------------
$ 277,796 $ 241,939
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. 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. Amendments to the MID Plan were approved by the
Company's shareholders at the May 11, 2007 Annual and Special
Meeting, and became effective on June 6, 2007. At December 31,
2007, a maximum of 2.61 million MID Class A Subordinate Voting
Shares are available to be issued under the MID Plan. MID has
granted stock options to certain directors and officers to purchase
MID's Class A Subordinate Voting Shares. Such options have
generally been granted with 1/5th of the options vesting on the
date of grant and the remaining options vesting over a period of
four 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. A reconciliation of the changes in stock options
outstanding is presented below: 2008 2007 -------------------------
------------------------- Weighted Weighted Average Average
Exercise Exercise Price Price Number (Cdn. $) Number (Cdn. $)
-------------------------------------------------------------------------
Stock options outstanding, January 1 516,544 35.09 465,000 36.08
Exercised - - (38,456) 32.19
-------------------------------------------------------------------------
Stock options outstanding, March 31 516,544 35.09 426,544 36.43
Expired (10,000) 41.17 - -
-------------------------------------------------------------------------
Stock options outstanding, June 30 506,544 34.97 426,544 36.43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options exercisable, June 30 316,544 34.45 216,544 34.92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company estimates the fair value of stock options granted at
the date of grant using the Black-Scholes option valuation model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of freely traded options, which are fully
transferable and have no vesting restrictions. In addition, this
model requires the input of subjective assumptions, including
expected dividend yields, future stock price volatility and
expected time until exercise. Although the assumptions used reflect
management's best estimates, they involve inherent uncertainties
based on market conditions outside of the Company's control.
Because the Company's outstanding stock options have
characteristics that are significantly different from those of
traded options, and because changes in any of the assumptions can
materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide the only measure of
the fair value of the Company's stock options. Effective November
3, 2003, MID established a Non-Employee Director Share-Based
Compensation Plan (the "DSP"), which provides for a deferral of up
to 100% of each outside director's total annual remuneration from
the Company, at specified levels elected by each director, until
such director ceases to be a director of the Company. The amounts
deferred are reflected by notional deferred share units ("DSUs")
whose value reflects the market price of the Company's Class A
Subordinate Voting Shares at the time that the particular payment
(s) to the director is determined. The value of a DSU will
appreciate or depreciate with changes in the market price of the
Class A Subordinate Voting Shares. The DSP also takes into account
any dividends paid on the Class A Subordinate Voting Shares.
Effective January 1, 2005, all directors were required to receive
at least 50% of their Board and Committee compensation fees
(excluding Special Committee fees, effective January 1, 2006) in
DSUs. On January 1, 2008, the DSP was amended such that this 50%
minimum requirement is only applicable to Board retainer fees.
Under the DSP, when a director leaves the Board, the director
receives a cash payment at an elected date equal to the value of
the accrued DSUs at such date. There is no option under the DSP for
directors to receive Class A Subordinate Voting Shares in exchange
for DSUs. A reconciliation of the changes in DSUs outstanding is
presented below: 2008 2007
---------------------------------------------------------------------
DSUs outstanding, January 1 41,452 27,319 Granted 6,012 4,241
---------------------------------------------------------------------
DSUs outstanding, March 31 47,464 31,560 Granted 5,579 3,025
---------------------------------------------------------------------
DSUs outstanding, June 30 53,043 34,585
---------------------------------------------------------------------
---------------------------------------------------------------------
During the three and six months ended June 30, 2008, the Real
Estate Business recognized stock-based compensation expense of $0.1
million (2007 - $0.2 million) and $0.3 million (2007 - $0.5
million), respectively, which includes a $9 thousand net recovery
(2007 - $0.1 million expense) and a $24 thousand net expense (2007
- $0.3 million expense), respectively, pertaining to DSUs. (b)
Subsequent to quarter-end, MEC completed a reverse stock split
whereby every twenty shares of MEC Class A Stock and MEC Class B
Stock have been consolidated into one share of MEC Class A Stock
and MEC Class B Stock, respectively (note 19(n)). In addition, the
number of, and exercise price for, all MEC stock options were
adjusted to reflect the 1:20 consolidation. Accordingly, all of the
disclosures below pertaining to MEC's long-term incentive plan,
performance share awards and options to purchase shares have been
restated as of June 30, 2008 and for all retroactive periods to
reflect the effect of the reverse stock split. MEC has a long-term
incentive plan (the "MEC Plan"), adopted in 2000 and amended in
2007, which allows for the grant of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted
stock, bonus stock and performance shares to MEC's directors,
officers, employees, consultants, independent contractors and
agents. A maximum of 440 thousand shares of MEC Class A Stock are
available to be issued under the MEC Plan, of which 390 thousand
are available for issuance pursuant to stock options and tandem
stock appreciation rights and 50 thousand are available for
issuance pursuant to any other type of award under the MEC Plan.
Under a 2005 incentive compensation program (the "MEC Program"),
MEC awarded performance shares of MEC Class A Stock to certain of
MEC's officers and key employees. The number of shares of MEC Class
A Stock underlying the 2005 Performance Share Awards was based
either on a percentage of a guaranteed bonus or a percentage of
total 2005 compensation divided by the market value of the stock on
the date the MEC Program was approved by the Compensation Committee
of MEC's Board of Directors. The 2005 Performance Share Awards
vested over a six or eight month period to December 31, 2005 and
were distributed, subject to certain conditions, in two equal
instalments. The first distribution date occurred in March 2006 and
the second distribution date occurred in March 2007. For 2006, MEC
continued the MEC Program as described in the preceding paragraph.
The program was similar in all respects except that the performance
shares granted in 2006 vested over a 12-month period to December
31, 2006 and were distributed, subject to certain conditions, prior
to March 31, 2007. Accordingly, for the six months ended June 30,
2007, MEC issued 8,737 of these vested performance share awards
with a stated value of $0.6 million and 324 performance share
awards were forfeited. No performance share awards remain to be
issued under the 2005 and 2006 incentive compensation arrangements
subsequent to March 31, 2007. MEC did not continue its performance
share award program subsequent to 2006. During the three and six
months ended June 30, 2008, MEC issued 21,687 shares (six months
ended June 30, 2007 - 1,547) of MEC Class A Stock with a stated
value of $0.2 million (six months ended June 30, 2007 - $0.1
million) to MEC's directors in payment of services rendered. As a
result, the Company recognized a dilution loss of $0.4 million in
the three-month period (included in "other losses") and six-month
period (included in "other gains, net") ended June 30, 2008 (six
months ended June 30, 2007 - $4 thousand dilution gain included in
"other gains, net"). MEC grants stock options ("MEC Stock Options")
to certain directors, officers, key employees and consultants to
purchase shares of MEC Class A Stock. All MEC Stock Options give
the grantee the right to purchase MEC Class A Stock at a price no
less than the fair market value of such stock at the date of grant.
Generally, MEC 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 MEC Stock Options. A
reconciliation of the changes in MEC Stock Options outstanding is
presented below: 2008 2007 -------------------------
------------------------- Weighted Weighted Average Average
Exercise Exercise Number Price $ Number Price $
-------------------------------------------------------------------------
MEC Stock Options outstanding, January 1 247,500 116.40 245,250
121.60 Forfeited or expired (10,000) 111.20 (8,300) 134.80
-------------------------------------------------------------------------
MEC Stock Options outstanding, March 31 237,500 116.60 236,950
121.20 Forfeited or expired (550) 133.20 (1,250) 114.20
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MEC Stock Options outstanding, June 30 236,950 116.55 235,700
121.40
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MEC Stock Options exercisable, June 30 217,902 119.80 217,583
121.40
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The fair value of MEC Stock Options granted is estimated at the
date of grant using the Black-Scholes option valuation model, which
requires the use of subjective assumptions and may not necessarily
provide the only measure of the fair value of MEC Stock Options (as
described further in note 13(a)). During the three and six months
ended June 30, 2008, MEC recognized total stock-based compensation
expense of $0.2 million (2007 - $0.1 million) and $0.2 (2007 - $0.3
million), respectively, relating to performance share awards,
director compensation and stock options under the MEC Plan. 14.
CAPITAL MANAGEMENT AND LIQUIDITY The capital resources managed by
the Company include: - cash and cash equivalents; - credit
facilities; - long-term debt; - additional borrowing capacity; and
- shareholders' equity. Each of the Company's reportable segments
(note 17) has different capital management objectives. Real Estate
Business The Real Estate Business' objectives when managing capital
include ensuring that there are adequate capital resources to
sustain operations and maintaining a capital structure that allows
the Real Estate Business to take advantage of suitable investment
opportunities as they arise. The Real Estate Business monitors its
capital based on its ratio of debt to total capitalization, which
it regards as a measure of its ability to access additional capital
as required. The Real Estate Business must also comply with the
terms of its debt agreements, including its $50.0 million unsecured
revolving credit facility (the "MID Credit Facility") and the trust
indenture for its Cdn. $265.0 million senior unsecured debentures
(the "Debentures"), which include the following limitations: -
secured indebtedness not to exceed 15% of net tangible assets; -
funded debt not to exceed 40% of total capitalization; and - total
interest coverage of no less than 3:1. At June 30, 2008 and
December 31, 2007, the Company had no borrowings under the MID
Credit Facility, which expires on December 21, 2008, but had issued
letters of credit totalling $0.3 million. As at June 30, 2008, the
Real Estate Business' debt to total capitalization was 14%
(December 31, 2007 - 15%) and the Real Estate Business was in
compliance with all of its covenants. The outstanding total debt at
June 30, 2008 was $265.5 million (December 31, 2007 - $274.7
million), which is comprised of $258.8 million (December 31, 2007 -
$267.6 million) of the Debentures and $6.7 million (December 31,
2007 - $7.1 million) of mortgages payable on two properties. The
Real Estate Business' total capitalization at June 30, 2008 was
$1.93 billion (December 31, 2007 - $1.86 billion). The Real Estate
Business generated cash flows from operating activities of $89.5
million in the six months ended June 30, 2008 and had cash and cash
equivalents of $147.2 million at June 30, 2008. The Real Estate
Business' strategy for managing its liquidity needs includes (i)
using its cash resources and cash flows from operating activities,
(ii) drawing on the MID Credit Facility if and as needed and (iii)
accessing additional capital by issuing debt, equity or a
combination of securities as required to finance its operations and
capital expenditures. The capital requirements to finance
additional acquisition and development activity will depend on the
availability of suitable investment opportunities and related
funding sources. As disclosed in note 3, MID is reviewing the
reorganization proposal and is also continuing to explore a range
of alternatives in respect of its MEC investment, including
evaluating whether or to what extent MID might participate in a
recapitalization or restructuring of MEC. The participation by MID
in any such transaction could result in a significant increase in
the Company's financial leverage, change the risk profile of the
Real Estate Business and/or limit its financial flexibility to take
advantage of certain investment opportunities. In addition, if the
Real Estate Business' funded debt were to exceed 40% of its total
capitalization as a result of these changes, the Company might be
required to repay the Debentures and potentially pay a prepayment
premium determined in accordance with the terms of the applicable
trust indenture, as described in note 11 to the annual consolidated
financial statements for the year ended December 31, 2007. MEC
MEC's capital is monitored by its separate Board of Directors and
management team based on its level of net debt. MEC must also
comply with the terms of its debt agreements. Many of these debt
arrangements are obligations of individual MEC business units and
require compliance with numerous financial and other covenants. As
at June 30, 2008, MEC's net debt was $586.1 million (December 31,
2007 - $564.5 million) and MEC was in compliance with all of its
covenants except as disclosed in note 9. MID's Real Estate Business
has not guaranteed any of MEC's indebtedness. Under the MEC Debt
Elimination Plan (note 1), MEC's capital management objective is to
significantly reduce or eliminate its net debt by generating funds
from the sale of assets (notes 4 and 5), entering into strategic
transactions involving certain of MEC's racing, gaming and
technology operations, and a possible future equity issuance. These
proceeds are to be used to fund MEC's operations and applied to
eliminate MEC's net debt, including amounts owed to the MID Lender
(note 18). Although MEC continues to take steps to implement its
plan, MEC does not expect to execute the MEC Debt Elimination Plan
on the originally contemplated time schedule, if at all. In order
for MEC to fund its ongoing operations and provide sufficient time
to implement the MEC Debt Elimination Plan, MEC will again need to
seek extensions from existing lenders, including the Company, the
availability of which is not yet determinable. As discussed in note
1, MEC's ability to continue as a going concern is in substantial
doubt and is dependent on MEC generating cash flows that are
adequate to sustain the operations of the business, renewing or
extending current financing arrangements and meeting its
obligations with respect to secured and unsecured creditors, none
of which is assured. If MEC is unable to repay its obligations when
due or satisfy required covenants in its debt agreements,
substantially all of its current and long-term debt will also
become due on demand as a result of cross- default provisions
within its loan agreements, unless MEC is able to obtain waivers,
modifications or extensions. The availability of such waivers,
modifications or extensions is not assured and, if available, the
terms thereof are not yet determinable. 15. DETAILS OF CASH FROM
OPERATING ACTIVITIES (a) Items not involving current cash flows:
Three Months Six Months Ended June 30, Ended June 30,
------------------------- ------------------------- (restated
(restated - note 4) - note 4) 2008 2007 2008 2007
-------------------------------------------------------------------------
Real Estate Business Straight-line rent adjustment $ (91) $ 145 $
(34) $ 237 Interest and other income from MEC (1,442) (75) (2,528)
(143) Stock-based compensation expense 122 207 286 537 Depreciation
and amortization 11,356 10,216 22,403 20,147 Write-down of
long-lived assets 450 - 450 - Gain on disposal of real estate -
(1,357) - (1,382) Future income taxes 781 587 2,647 1,855 Other
losses (gains) 105 - 105 (652) Other 87 81 175 156
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11,368 9,804 23,504 20,755
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MEC Stock-based compensation expense 187 70 231 272 Interest
expense with MID - 75 - 75 Depreciation and amortization 11,099
8,938 22,039 17,464 Amortization of debt issuance costs 2,638 434
5,150 852 Write-down of MEC's long-lived assets - - 5,000 - Gain on
disposal of real estate (24,340) (17,587) (24,340) (48,654) Other
losses (gains) 443 - (1,570) (4) Future income taxes (79) (190)
1,562 (1,568) Minority interest 362 (8,654) (5,950) (6,452) Other
1,478 (380) 2,358 (988)
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(8,212) (17,294) 4,480 (39,003)
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Eliminations (note 18) (967) 17,400 (2,164) 49,708
-------------------------------------------------------------------------
Consolidated $ 2,189 $ 9,910 $ 25,820 $ 31,460
-------------------------------------------------------------------------
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(b) Changes in non-cash balances: Three Months Six Months Ended
June 30, Ended June 30, -------------------------
------------------------- (restated (restated - note 4) - note 4)
2008 2007 2008 2007
-------------------------------------------------------------------------
Real Estate Business Accounts receivable $ 2,564 $ 1,136 $ 741 $
694 Loans receivable from MEC, net (274) - (333) - Prepaid expenses
and other (398) 123 129 45 Accounts payable and accrued liabilities
1,143 (2,408) 4,980 2,060 Income taxes 1,293 2,468 1,619 5,015
Deferred revenue 1,896 (929) 1,174 273
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3,638 390 8,310 8,087
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MEC Restricted cash 13,924 20,558 16,531 18,630 Accounts receivable
20,096 24,581 (1,242) (6,174) Prepaid expenses and other (3,008)
(23) (7,217) (3,984) Accounts payable and accrued liabilities
(39,861) (31,303) (28,695) (26,746) Income taxes 92 3,708 1,541
1,516 Loans Payable to MID, net 274 - 333 - Deferred revenue
(3,911) (2,915) (1,567) 312
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(12,394) 14,606 (20,316) (16,446)
-------------------------------------------------------------------------
Eliminations (note 18) 71 22 282 (171)
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Consolidated $ (8,685) $ 15,018 $ (11,724) $ (8,530)
-------------------------------------------------------------------------
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16. FINANCIAL INSTRUMENTS (a) Interest Rate Risk The Company's
consolidated results of operations are primarily exposed to
interest rate risk on its credit facilities and MEC's variable-rate
long-term debt. Based on the balances of these financial
liabilities outstanding as at June 30, 2008, a 50 basis point
change in annual interest rates, with all other variables held
constant, would have impacted consolidated "interest expense, net"
for the six months ended June 30, 2008 by approximately $2.4
million. The Company is also exposed to interest rate risk on
short-term investments with maturities of up to three months from
the date of acquisition that are included in "cash and cash
equivalents" and "restricted cash" on the Company's consolidated
balance sheets. The balance of the Company's short-term investments
fluctuates depending on the timing of the Company's operating cash
flows, capital expenditures and other liquidity requirements.
Assuming the balance of short-term investments at June 30, 2008
were outstanding throughout the entire six months then ended, a 50
basis point change in annual interest rates, with all other
variables held constant, would have impacted consolidated "interest
expense, net" by approximately $0.3 million for the six months
ended June 30, 2008. MEC occasionally utilizes interest rate swap
contracts to hedge exposure to interest rate fluctuations on
variable rate debt. At March 31, 2008, MEC had four interest rate
swap contracts outstanding in connection with a LIBOR-based term
loan facility described in note 18(c) to the annual consolidated
financial statements for the year ended December 31, 2007. Based on
the interest rate swap contracts in place at June 30, 2008, a 50
basis point change in interest rates would have impacted other
comprehensive income (excluding related minority interest and tax
effects) by approximately $0.6 million for the six months ended
June 30, 2008. (b) Currency Risk The Company is structured such
that its foreign operations are self- sustaining. As a result, the
Company's currency risk associated with financial instruments is
limited as its financial assets and liabilities are generally
denominated in the functional currency of the subsidiary that holds
the financial instrument. However, the Real Estate Business'
corporate operations, which utilize the Canadian dollar as the
functional currency, have exposure to U.S. dollar and euro
denominated financial assets and liabilities. Similarly, MEC's
operations, which utilize the U.S. dollar as the functional
currency, have exposure to Canadian dollar denominated financial
liabilities. Based on the balance of these financial instruments at
June 30, 2008, a 5% change in exchange rates between the Canadian
dollar and the relevant currencies at June 30, 2008 would not have
had a material impact on the Company's consolidated net income for
the six months ended June 30, 2008. (c) Credit Risk MEC, in the
normal course of business, settles wagers for racetracks that it
does not operate or manage and is thereby exposed to credit risk.
However, these receivables are generally not a significant portion
of the Company's total assets and are comprised of a large number
of accounts. At June 30, 2008, MEC's "accounts receivable" included
on the Company's consolidated balance sheet are net of an allowance
for doubtful accounts of $1.8 million (December 31, 2007 - $1.8
million), which is estimated based on a review of specific customer
balances and related historical collection experience. For the
three and six months ended June 30, 2008, MEC incurred a bad debt
expense of $0.2 million (2007 - $31 thousand) and $0.3 million
(2007 - $0.3 million), respectively. 17. 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 (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 Board
of Directors and executive management have direct responsibility
for the key operating, financing and resource allocation decisions,
whereas, in the case of MEC, such responsibility resides with MEC's
separate Board of Directors and executive management. The Company's
reporting segments are as follows: Real Estate Business At June 30,
2008, the Real Estate Business owns real estate assets in Canada,
Austria, the United States, Germany, Mexico, the Czech Republic,
the United Kingdom, Spain and Poland. Substantially all of 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 MEC operates or manages seven
thoroughbred racetracks, one standardbred racetrack and two
racetracks that run both thoroughbred and quarter horse meets, as
well as the simulcast wagering venues at these tracks. Also, MEC
used to manage the thoroughbred and standardbred racing at Magna
Racino(TM), but a local operator is now managing meets at that
facility. Three of the racetracks owned or operated by MEC (two in
the United States and one in Austria) include casino operations
with alternative gaming machines. In addition, MEC operates
off-track betting ("OTB") facilities, a United States based
national account wagering business known as XpressBet(R) and a
European account wagering service known as MagnaBet(TM). Under a
series of March 2007 agreements with Churchill Downs Incorporated
("CDI"), MEC owns a 50% interest in a joint venture, TrackNet Media
Group, LLC ("TrackNet Media"), a content management company formed
for distribution of the full breadth of MEC's and CDI's horseracing
content (note 19). A separate joint venture with CDI, "HRTV, LLC",
also involves the ownership by each of MEC and CDI of 50% shares in
HorseRacing TV(R) ("HRTV(R)"), a television network focused on
horseracing that MEC initially launched on the Racetrack Television
Network. MEC also owns AmTote, a provider of totalisator services
to the pari-mutuel industry. To support certain of MEC's
thoroughbred racetracks, MEC owns and operates thoroughbred
training centres in Palm Beach County, Florida and in the
Baltimore, Maryland area and, under a triple-net lease agreement
with MID, operates an additional thoroughbred training centre
situated near San Diego, California. 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 a residential
development in Austria. As described in note 1, the Company's
consolidated statements of income (loss), consolidated statements
of cash flows and consolidated balance sheets have been arranged to
provide detailed, discrete financial information on the Real Estate
Business and MEC reporting segments. 18. TRANSACTIONS WITH RELATED
PARTIES Mr. Frank Stronach, the Company's Chairman, the Chairman of
Magna, and the Chairman and Chief Executive Officer of MEC, 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.
Magna is controlled by M Unicar Inc. ("M Unicar"), a Canadian
holding company whose shareholders consist of the Stronach Trust,
OJSC Russian Machines ("Russian Machines") and certain members of
Magna's management. M Unicar indirectly owns Magna Class A
Subordinate Voting Shares and Class B Shares representing in
aggregate approximately 71% of the total voting power attaching to
all Magna's shares. The Stronach Trust indirectly owns the shares
carrying the majority of the votes of M Unicar. Magna is governed
by a board of directors on which each of the Stronach Trust and
Russian Machines (indirectly through M Unicar) has the right to
designate an equal number of nominees, in addition to Magna's
current co-chief executive officers. As the Company and Magna may
be considered to be under the common control of the Stronach Trust,
they are considered to be related parties for accounting purposes.
(a) Bridge Loans and Project Financings On September 13, 2007, MID
announced that the MID Lender had agreed to provide MEC with the
MEC Bridge Loan of up to $80.0 million (subsequently increased to
$110.0 million as discussed below). The MEC Bridge Loan, together
with a $20.0 million private placement of MEC Class A Stock to FEL
(the "FEL Equity Investment") completed in October 2007, is
intended to provide short-term funding to MEC as it implements the
MEC Debt Elimination Plan (note 1). At that time, the MID Lender
also agreed to amend the MEC Project Financing Facilities (as
defined below) by, among other things, requiring repayment of at
least $100.0 million under the Gulfstream Park project financing
facility on or prior to May 31, 2008 (subsequently extended to
August 31, 2008 as discussed below) and waiving the make-whole
payment, if applicable, for any repayments made under either of the
MEC Project Financing Facilities prior to that date. Pursuant to a
consulting agreement between MID and MEC, which requires MEC to
reimburse MID for its expenses, MID management has provided
assistance to MEC in implementing the MEC Debt Elimination Plan.
(i) MEC Bridge Loan The MEC Bridge Loan, initially of up to $80.0
million, has been made available through a non-revolving facility
provided by the MID Lender. The MEC Bridge Loan proceeds may only
be used by MEC in accordance with the MEC Debt Elimination Plan and
are available solely to fund: (i) operations; (ii) payments of
principal, interest and costs, fees and expenses due under the MEC
Bridge Loan and the MEC Project Financing Facilities; (iii)
mandatory payments of interest in connection with permitted debt
under the MEC Bridge Loan; (iv) mandatory capital expenditures; and
(v) capital expenditures required pursuant to the terms of the
joint venture arrangements between MEC and Forest City and Caruso
(note 19). The MEC Bridge Loan initially had a maturity date of May
31, 2008 and bore interest at a rate per annum equal to LIBOR plus
10.0% prior to December 31, 2007, at which time the interest rate
on outstanding and subsequent advances was increased to LIBOR plus
11.0% (set at 16.2% at December 31, 2007). On February 29, 2008,
the interest rate on outstanding and subsequent advances under the
MEC Bridge Loan was increased by a further 1.0% (set at 14.5% at
June 30, 2008). On May 23, 2008, the maturity date of the MEC
Bridge Loan was extended from May 31, 2008 to August 31, 2008. At
the same time, the maximum commitment under the MEC Bridge Loan was
increased from $80.0 million to $110.0 million, and MEC was given
the ability to re-borrow the $21.5 million previously repaid from
proceeds of asset sales (note 5). The MEC Bridge Loan is secured by
certain assets of MEC, including first ranking security over the
Dixon, Ocala and Thistledown lands, second ranking security over
Golden Gate Fields and third ranking security over Santa Anita
Park. In addition, the MEC Bridge Loan is guaranteed by certain MEC
subsidiaries and MEC has pledged the shares and all other interests
MEC has in each of the guarantor subsidiaries (or provided negative
pledges where a pledge was not possible due to regulatory
constraints or due to a pledge to an existing third party lender).
The MEC Bridge Loan is cross-defaulted to all other obligations of
MEC and its subsidiaries to the MID Lender, including the MEC
Project Financing Facilities. The MEC Bridge Loan must be repaid
with, and the commitment is reduced by, amounts equal to all net
proceeds realized by MEC from asset sales and issuances of equity
(other than the FEL Equity Investment) or debt, subject to amounts
required to be paid to MEC's existing lenders. Amounts repaid
subsequent to the May 2008 amendments cannot be re-borrowed. During
the three and six months ended June 30, 2008, $19.8 million and
$21.5 million, respectively, of the MEC Bridge Loan was repaid from
proceeds of MEC asset sales (note 5) and subsequent to June 30,
2008, MEC repaid a further $4.5 million from its sale of Great
Lakes Downs (note 5). The MID Lender received an arrangement fee of
$2.4 million (3% of the commitment) at closing and received an
additional arrangement fee of $0.8 million on February 29, 2008 (1%
of the then current commitment). In connection with the May 2008
amendments, the MID Lender received a fee of $1.1 million (1% of
the increased maximum commitment) and an additional $1.1 million on
August 1, 2008 (1% of the then current commitment) given that the
reorganization proposal (note 3) had not been approved by that
date. The MID Lender also receives an annual commitment fee equal
to 1% of the undrawn facility. All fees, expenses and closing costs
incurred by the MID Lender in connection with the MEC Bridge Loan
and the May 2008 amendments thereto were paid by MEC. At June 30,
2008, $68.6 million (December 31, 2007 - $36.9 million) due under
the MEC Bridge Loan was included in the Real Estate Business'
current portion of "loans receivable from MEC, net" on the
Company's consolidated balance sheet, net of $0.8 million (December
31, 2007 - $1.4 million) of unamortized deferred arrangement fees.
MEC's current portion of "loans payable to MID, net" on the
Company's consolidated balance sheet includes borrowings of $68.6
million (December 31, 2007 - $35.9 million), net of $0.8 million
(December 31, 2007 - $2.4 million) unamortized deferred financing
costs. This net balance will be accreted to its face value over the
remaining term to maturity of the MEC Bridge Loan. (ii) MEC Project
Financings The MID Lender has made available separate project
financing facilities to Gulfstream Park Racing Association, Inc.
("GPRA") and Remington Park, Inc., the wholly-owned subsidiaries of
MEC that own and/or operate Gulfstream Park and Remington Park,
respectively, in the amounts of $162.3 million and $34.2 million,
respectively, plus costs and capitalized interest in each case as
discussed below (together, the "MEC Project Financing Facilities").
The MEC Project Financing Facilities have a term of 10 years
(except as described below for the two slot machine tranches of the
Gulfstream Park project financing facility) from the relevant
completion dates for the construction projects at Gulfstream Park
and Remington Park, which occurred in February 2006 and November
2005, respectively. The Remington Park project financing and the
Gulfstream Park project financing contain cross-guarantee,
cross-default and cross-collateralization provisions. The Remington
Park project financing is secured by all assets of the borrower
(including first ranking security over the Remington Park leasehold
interest), excluding licences and permits, and is guaranteed by the
MEC subsidiaries that own Gulfstream Park and the Palm Meadows
Training Center. The security package also includes second ranking
security over the lands owned by Gulfstream Park and second ranking
security over the Palm Meadows Training Center and the shares of
the owner of the Palm Meadows Training Center (in each case, behind
security granted for the Gulfstream Park project financing). In
addition, the borrower has agreed not to pledge any licences or
permits held by it and MEC has agreed not to pledge the shares of
the borrower or the owner of Gulfstream Park. The Gulfstream Park
project financing is guaranteed by MEC's subsidiaries that own and
operate the Palm Meadows Training Center and Remington Park and is
secured principally by security over the lands (or, in the case of
Remington Park, over the leasehold interest) forming part of the
operations at Gulfstream Park, the Palm Meadows Training Center and
Remington Park and over all other assets of Gulfstream Park, the
Palm Meadows Training Center and Remington Park, excluding licences
and permits (which cannot be subject to security under applicable
legislation). In July 2006 and December 2006, the Gulfstream Park
project financing facility was amended to increase the amount
available from $115.0 million (plus costs and capitalized interest)
by adding new tranches of up to $25.8 million (plus costs and
capitalized interest) and $21.5 million (plus costs and capitalized
interest), respectively. Both tranches were established to fund
MEC's design and construction of slot machine facilities located in
the existing Gulfstream Park clubhouse building, as well as related
capital expenditures and start-up costs, including the acquisition
and installation of slot machines. The new tranches of the
Gulfstream Park project financing facility both mature on December
31, 2011. Interest under the December 2006 tranche was capitalized
until May 1, 2007, at which time monthly blended payments of
principal and interest became payable to the MID Lender based on a
25-year amortization period commencing on such date. Advances
relating to the slot machine tranches are made available by way of
progress draws and there is no make-whole payment associated with
the new tranches. Also in July 2006, the Gulfstream Park project
financing facility was further amended to introduce a mandatory
annual cash flow sweep of not less than 75% of Gulfstream Park's
total excess cash flow, after permitted capital expenditures and
debt service, which will be used to repay the additional principal
amounts being made available under the new tranches. The July 2006
and December 2006 amendments did not affect the fact that the
Gulfstream Park project financing facility continues to be
cross-guaranteed, cross-defaulted and cross-collateralized with the
Remington Park project financing facility. The consideration for
the July 2006 and December 2006 amendments was an arrangement fee
of 1% of the amount of each new tranche, which amounts are
capitalized under the Gulfstream Park project financing facility.
In September 2007, the terms of the Gulfstream Park project
financing facility were amended such that: (i) MEC was added as a
guarantor under that facility; (ii) the borrower and all of the
guarantors agreed to use commercially reasonable efforts to
implement the MEC Debt Elimination Plan (including the sale of
specific assets by the time periods listed in the MEC Debt
Elimination Plan); and (iii) the borrower became obligated to repay
at least $100.0 million under the Gulfstream Park project financing
facility on or prior to May 31, 2008. In consideration of these
amendments and subject to certain conditions, the MID Lender agreed
to waive the make-whole payment for any repayments made under the
MEC Project Financing Facilities on or prior to May 31, 2008 and
adjust the amortization schedule for the Gulfstream Park project
financing facility following receipt of the $100.0 million
repayment, provided that (i) repayments under the Gulfstream Park
project financing facility are first applied to the July 2006 slots
tranche, then to the December 2006 slots tranche (for each of which
there is no make-whole payment), and then to the original tranche
and (ii) no event of default exists under the MEC Project Financing
Facilities. In connection with the May 2008 amendments to the MEC
Bridge Loan, the MID Lender also agreed to amend the Gulfstream
Park project financing facility by extending the deadline for
repayment of at least $100.0 million from May 31, 2008 to August
31, 2008 (during which time any repayments made under either of the
MEC Project Financing Facilities will not be subject to a
make-whole payment). Since the relevant completion date (or since
inception for the July 2006 and December 2006 tranches of the
Gulfstream Park project financing facility), amounts outstanding
under each of the MEC Project Financing Facilities bear interest at
a fixed rate of 10.5% per annum, compounded semi-annually. Prior to
January 1, 2007, payment of interest was capitalized (except in
relation to the December 2006 tranche of the Gulfstream Park
project financing facility, for which the interest capitalization
period was extended to May 1, 2007). Commencing January 1, 2007
(May 1, 2007 for the December 2006 tranche of the Gulfstream Park
project financing facility), the MID Lender receives monthly
blended payments of principal and interest based on a 25-year
amortization period under each of the MEC Project Financing
Facilities. Since the completion date for Remington Park, there has
also been in place a mandatory annual cash flow sweep of not less
than 75% of Remington Park's total excess cash flow, after
permitted capital expenditures and debt service, which is used to
pay capitalized interest on the Remington Park project financing
facility plus a portion of the principal under the facility equal
to the capitalized interest on the Gulfstream Park project
financing facility. During the three and six months ended June 30,
2008, $1.5 million (2007 - $1.2 million) and $1.7 million (2007 -
$1.7 million), respectively, of such payments were made. During the
three months ended March 31, 2008, Remington Park agreed to
purchase 80 Class III slot machines from GPRA with funding from the
Remington Park project financing facility. Accordingly, $1.0
million was advanced under the existing Remington Park project
financing facility during the three months ended March 31, 2008. At
June 30, 2008, there were balances of $171.9 million (December 31,
2007 - $172.1 million), and $26.8 million (December 31, 2007 -
$27.7 million) due under the Gulfstream Park project financing
facility and the Remington Park project financing facility,
respectively. The current portion of the MEC Project Financing
Facilities included in the Real Estate Business' "loans receivable
from MEC, net" at June 30, 2008 was $102.0 million, including the
required $100.0 million repayment discussed above. The current and
non-current portions of the MEC Project Financing Facilities, as
reflected in MEC's "loans payable to MID, net" on the Company's
consolidated balance sheet, are $102.0 million (including $0.4
million in MEC's "discontinued operations" (note 4)) and $92.6
million (including $25.3 million in MEC's "discontinued operations"
(note 4)), respectively, with the non-current portion being net of
$4.1 million of unamortized deferred financing costs. This net
balance will be accreted to its face value over the remaining terms
to maturity of the MEC Project Financing Facilities. In connection
with the Gulfstream Park project financing facility, MEC has placed
into escrow (the "Gulfstream Escrow") with the MID Lender proceeds
from an asset sale which occurred in fiscal 2005 and certain
additional amounts necessary to ensure that any remaining
Gulfstream Park construction costs (including the settlement of
liens on the property) can be funded, which escrowed amount has
been and will be applied against any such construction costs. At
June 30, 2008, the amount held under the Gulfstream Escrow was $0.9
million (December 31, 2007 - $4.5 million). All funds in the
Gulfstream Escrow are reflected as the Real Estate Business'
"restricted cash" and "due to MEC" on the Company's consolidated
balance sheet. Approximately $8.6 million of external third party
costs have been incurred in association with the MEC Bridge Loan
and the MEC Project Financing Facilities. At the MEC segment level,
these costs are recognized as deferred financing costs and are
being amortized into interest expense (of which a portion has been
capitalized in the case of the MEC Project Financing Facilities)
over the respective term of the MEC Bridge Loan and each of the MEC
Project Financing Facilities. At a consolidated level, such costs
are charged to "general and administrative" expenses in the periods
in which they are incurred. All interest and fees charged by the
Real Estate Business relating to the MEC Bridge Loan and the MEC
Project Financing Facilities, including any capitalization and
subsequent amortization thereof by MEC, and any adjustments to
MEC's related deferred financing costs, are eliminated from the
Company's consolidated results of operations and financial
position. (b) MEC's Real Estate Sales to Magna In April 2008, MEC
completed the sale to a subsidiary of Magna of 225 acres of excess
real estate located in Ebreichsdorf, Austria for proceeds of 20.0
million euros ($31.5 million), net of transaction costs (note
5(b)). MEC recognized a gain in the three and six months ended June
30, 2008 of 15.5 million euros ($24.3 million), which is included
in MEC's "gain on disposal of real estate". (c) Magna Lease
Terminations During the three months ended March 31, 2008, the Real
Estate Business and Magna completed a lease termination agreement
(retroactive to May 31, 2007) on a property in the United Kingdom
that the Real Estate Business is seeking to redevelop for
residential purposes. In April 2008, the Real Estate Business paid
Magna $2.0 million to terminate the lease, and the termination
payment is included in the Real Estate Business' "real estate
properties, net" at June 30, 2008 on the Company's unaudited
interim consolidated balance sheet. The Real Estate Business had
not recognized any revenue under the lease of this property since
May 31, 2007. During the three months ended March 31, 2008, the
Real Estate Business and Magna also agreed to terminate the lease
on a property in Canada. In conjunction with the lease termination,
Magna agreed to pay the Company a fee of $3.9 million, which amount
was collected in April 2008 and has been recognized by the Real
Estate Business in "other gains, net" in the Company's unaudited
interim consolidated financial statements for the six months ended
June 30, 2008. (d) Sale of MEC Real Estate to Joint Venture On
April 2, 2008, one of MEC's European wholly-owned subsidiaries,
Fontana Beteiligungs GmbH ("Fontana"), entered into an agreement to
sell real estate with a carrying value of 0.2 million euros ($0.3
million) located in Oberwaltersdorf, Austria to Fontana Immobilien
GmbH, an entity in which Fontana has a 50% joint venture equity
interest, for 0.8 million euros ($1.2 million). The purchase price
was originally payable in instalments according to the sale of
apartment units by the joint venture and, in any event, was due no
later than April 2, 2009. On August 1, 2008, Fontana completed the
sale of its 50% joint venture equity interest in Fontana Immobilien
GmbH to a related party. The sale price included nominal cash
consideration equal to Fontana's initial capital contribution and a
future profit participation in Fontana Immobilien GmbH. Fontana and
Fontana Immobilien GmbH also agreed to amend the real estate sale
agreement such that payment of the purchase price to Fontana is
accelerated to August 7, 2008. This consideration will be
recognized when received. (e) MEC Real Estate Acquired by MID
During the first quarter of 2007, MID acquired all of MEC's
interests and rights in three real estate properties to be held for
future development: a 34 acre parcel in Aurora, Ontario; a 64 acre
parcel of excess land adjacent to MEC's racetrack at Laurel Park in
Howard County, Maryland; and a 157 acre parcel (together with
certain development rights) in Palm Beach County, Florida adjacent
to MEC's Palm Meadows Training Center. MID paid cash consideration
of approximately Cdn. $12.0 million ($10.1 million), $20.0 million
and $35.0 million, respectively, for these interests and rights. In
addition, MID granted MEC a profit participation right in respect
of each property, which entitles MEC to receive additional cash
proceeds equal to 15% of the net proceeds from any sale or
development of the applicable property after MID achieves a 15%
internal rate of return. During the second quarter of 2007, MID
acquired all of MEC's interest and rights in a 205 acre parcel of
land located in Bonsall, California for cash consideration of
approximately $24.0 million. The property currently houses the San
Luis Rey Downs Thoroughbred Training Facility operated by MEC. MID
is holding the property for future development and has agreed to
lease the property to MEC on a triple-net basis for nominal rent
while MID pursues the necessary entitlements and other approvals to
permit the development of the property. The term of the lease is
three years, subject to early termination by either party on four
months written notice. At the Real Estate Business and MEC segment
levels, these transactions have been recognized at the exchange
amount, resulting in MEC recognizing a gain in the three and six
months ended June 30, 2007 of $17.6 million and $48.7 million,
respectively, included in MEC's "gain on disposal of real estate".
The effects of these transactions are eliminated from the Company's
unaudited interim consolidated results of operations and financial
position, except that $0.2 million and $1.8 million of costs
incurred by the Real Estate Business and MEC in conjunction with
these transactions have been included in the consolidated "general
and administrative" expenses in the three and six months ended June
30, 2007, respectively. (f) Hurricane Katrina Relief Effort In
October 2005, the Real Estate Business purchased 791 acres of land
in Simmesport, Louisiana for $2.4 million. In the fourth quarter of
2005, the Real Estate Business committed to donating approximately
50 acres of this land to a not-for-profit organization established
to assist Hurricane Katrina redevelopment efforts with charitable
funding from Magna and other Canadian sources. In the second
quarter of 2007, the Real Estate Business committed to donating the
remaining 741 acres of land to the same not-for-profit
organization. As a result, $2.0 million of costs associated with
this further donation is included in the Real Estate Business'
"general and administrative" expenses in the three and six months
ended June 30, 2007. The founding members and officers of the
not-for-profit organization are officers and employees of MID and
Magna. 19. 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) On July 10, 2008, the Ontario Divisional Court dismissed the
appeal by Greenlight Capital, Inc. and certain of its affiliates of
the October 2006 decision of the Ontario Superior Court of Justice
dismissing Greenlight's oppression application against the Company
and certain of its current and former directors and officers. The
appeal hearing took place in April 2008. (c) MEC generates a
substantial amount of its revenues from wagering activities and is
subject to the risks inherent in the ownership and operation of its
racetracks. These include, among others, the risks normally
associated with changes in the general economic climate, trends in
the gaming industry, including competition from other gaming
institutions and state lottery commissions, and changes in tax laws
and gaming laws. (d) On May 18, 2007, ODS Technologies, L.P.,
operating as TVG Network, filed a summons against MEC, HRTV, LLC
and XpressBet, Inc. seeking an order that the defendants be
enjoined from infringing certain patents relating to interactive
wagering systems and an award of damages to compensate for the
infringement. An Answer to Complaint, Affirmative Defences and
Counterclaims have been filed on behalf of the defendants. The
discovery and disposition process is ongoing and the final outcome
related to this summons is uncertain. (e) In addition to the
letters of credit issued under the Company's credit facilities
(notes 9 and 14), the Company had $4.5 million (Real Estate
Business - $3.4 million; MEC - $1.1 million) of letters of credit
issued with various financial institutions at June 30, 2008 to
guarantee various construction projects. These letters of credit
are secured by cash deposits of the Company. (f) MEC has provided
indemnities related to surety bonds and letters of credit issued in
the process of obtaining licences and permits at certain racetracks
and to guarantee various construction projects related to
activities of its subsidiaries. At June 30, 2008, these indemnities
amounted to $6.8 million, with expiration dates through 2009. (g)
At June 30, 2008, the Company's contractual commitments related to
construction and development projects outstanding amounted to
approximately $2.9 million (Real Estate Business - $1.7 million;
MEC - $1.2 million). DATASOURCE: MI Developments Inc. CONTACT:
PRNewswire - - 08/08/2008
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