MIM Granite Real Estate, Inc.

AURORA, ON, Nov. 7 /PRNewswire-FirstCall/ -- MI Developments Inc. (TSX: MIM.A, MIM.B; NYSE: MIM) ("MID" or the "Company") today announced its results for the three and nine months ended September 30, 2008. All figures are in U.S. dollars. ------------------------------------------------------------------------- (in thousands, except per share figures) REAL ESTATE BUSINESS(1) Three months ended Nine months ended September 30, September 30, ------------------------- ------------------------- 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Revenues $ 55,312 $ 47,316 $ 164,646 $ 138,156 Net income $ 42,821 $ 27,413 $ 100,073 $ 72,576 Funds from operations ("FFO")(2) $ 52,912 $ 37,292 $ 135,769 $ 102,777 Diluted FFO per share(2) $ 1.13 $ 0.77 $ 2.91 $ 2.12 ------------------------------------------------------------------------- (in thousands, except per share figures) MID CONSOLIDATED(1) Three months ended Nine months ended September 30, September 30, ------------------------- ------------------------- 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Revenues Real Estate Business $ 55,312 $ 47,316 $ 164,646 $ 138,156 Magna Entertainment Corp. ("MEC")(3) 82,323 82,151 480,541 504,399 Eliminations (10,163) (5,392) (26,914) (15,336) ------------ ------------ ------------ ------------ $ 127,472 $ 124,075 $ 618,273 $ 627,219 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) Real Estate Business $ 42,821 $ 27,413 $ 100,073 $ 72,576 MEC - continuing operations (27,273) (26,149) (34,607) 14,823 Eliminations (763) (1,816) (443) (55,091) ------------ ------------ ------------ ------------ Income (loss) from continuing operations 14,785 (552) 65,023 32,308 MEC - discontinued operations(4) 1,920 (2,266) (13,680) (4,288) ------------ ------------ ------------ ------------ $ 16,705 $ (2,818) $ 51,343 $ 28,020 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings (loss) per share from continuing operations $ 0.32 $ (0.01) $ 1.39 $ 0.67 Diluted earnings (loss) per share $ 0.36 $ (0.06) $ 1.10 $ 0.58 ------------------------------------------------------------------------- (1) Transactions between the Real Estate Business and MEC have not been eliminated in the presentation of each segment's results of operations. However, the effects of transactions between these two segments are eliminated in the consolidated results of operations of the Company. (2) FFO and diluted FFO per share are measures widely used by analysts and inves tors in evaluating the operating performance of real estate companies. However, FFO does not have a standardized meaning under Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other companies. Please refer to "Reconciliation of Non-GAAP to GAAP Financial Measures" below. (3) Excludes revenues from MEC's discontinued operations. (4) Discontinued operations represent MEC's discontinued operations, net of certain related consolidation adjustments. MEC's discontinued operations for the three-month and nine-month periods ended September 30, 2008 and 2007 include the operations of Remington Park, Thistledown, Portland Meadows, Great Lakes Downs and Magna Racino (TM). DISCUSSIONS WITH MID SHAREHOLDERS AND POTENTIAL REORGANIZATION -------------------------------------------------------------- TRANSACTION ----------- Since shortly after the time of the Company's spin-off from Magna International Inc. ("Magna") in August 2003, certain of the Company's shareholders have expressed different views as to how the Company should be structured, managed and operated. These views have been expressed in a variety of forms, including confidential discussions among the Company and shareholders, formal shareholder proposals, special meeting requisitions and litigation (the "Greenlight Litigation" - see note 20(b) to the financial statements attached below). The Company has had a controlling equity interest in MEC since the time of the Company's spin-off. As a result of MEC's ability to continue as a going concern being in substantial doubt (see "MEC LIQUIDITY AND GOING CONCERN"), the Company's relationship with MEC has been the subject of particular focus in the Company's interactions with its shareholders. On March 31, 2008, MID received a reorganization proposal on behalf of various shareholders of MID, including entities affiliated with the Stronach Trust, MID's controlling shareholder. The principal components of the reorganization proposal are set out in MID's press release dated March 31, 2008, which can be found on the Company's website at http://www.midevelopments.com/ and on SEDAR at http://www.sedar.com/. The stated objective of the reorganization was to (a) effect a substantial cash distribution to MID shareholders and (b) create a focused real estate investment vehicle, which would distribute 80% of its available cash flow, in which the interests of all shareholders would be fully aligned. The reorganization proposal included the separation of MID and MEC. Following the announcement of the reorganization proposal, certain of the Company's shareholders expressed their opposition to the proposal. Accordingly, in early June 2008, at the direction of a special committee of independent directors (the "MID Special Committee"), MID management commenced discussions with a number of MID Class A shareholders, including those shareholders that had supported the original reorganization proposal, in order to develop a consensus on how best to amend and structure the proposed reorganization to achieve the requisite level of shareholder support. On August 22, 2008, MID announced that it had retained GMP Securities L.P. ("GMP") as a financial advisor to liaise with shareholders in an attempt to develop a consensus on how best to reorganize MID. No consensus was reached with respect to amendments that would have resulted in a revised reorganization proposal that MID would have been asked to put before its shareholders for their consideration, and although GMP continues to liaise with the Company's shareholders, discussions with respect to the reorganization proposal have effectively terminated. Dennis Mills, Vice-Chairman & Chief Executive Officer, stated, "I remain optimistic that, working with GMP, we will be able to develop a transaction that will attract the necessary shareholder support to proceed." MID is continuing to explore strategic transactions and alternatives available in respect of its investment in MEC, including a recapitalization, restructuring or sales of some or all of MEC's assets, and evaluating whether, or to what extent, MID might participate in any such transactions or alternatives. In October 2008, several MID shareholders sent letters to the MID Special Committee and/or MID's Board of Directors (the "Board") expressing their views as to the process and as to how best to reorganize MID, including dealing with MID's investment in MEC, and one other person that is involved in the U.S. horseracing industry has proposed that MID sell to such person MID's loans to MEC. Many of these letters have been publicly filed with the United States Securities and Exchange Commission. Any potential transactions with MEC would be subject to review by the MID Special Committee and the approval of the Board. There can be no assurance that any transaction will be completed. MEC LIQUIDITY AND GOING CONCERN ------------------------------- In September 2007, following a strategic review, MEC announced a debt elimination plan (the "MEC Debt Elimination Plan") designed to eliminate MEC's net debt by December 31, 2008 and provide funding for MEC's operations. To address MEC's short-term liquidity concerns and provide it with sufficient time to implement the MEC Debt Elimination Plan, MID made available, through one of its subsidiaries (the "MID Lender"), a bridge loan to MEC (the "MEC Bridge Loan") with an initial maximum commitment of $80.0 million and a maturity date of May 31, 2008 (subsequently increased to $125.0 million and extended to December 1, 2008 as discussed below). The MEC Debt Elimination Plan also included a $20.0 million private placement to Fair Enterprise Limited, a company that forms part of an estate planning vehicle for the family of Mr. Frank Stronach (the Company's Chairman and the Chairman and Chief Executive Officer of MEC), of MEC Class A Stock, which closed in October 2007. To date, MEC has generated aggregate asset sale proceeds under the MEC Debt Elimination Plan of $37.7 million, of which $26.0 million has been used to make repayments under the MEC Bridge Loan. Although MEC continues to take steps to implement its plan, MEC does not expect to be able to complete asset sales as quickly as originally planned nor does MEC expect to achieve proceeds of disposition as high as originally contemplated. On November 5, 2008, MEC announced that it had engaged Miller Buckfire & Co., LLC ("Miller Buckfire") as its financial advisor and investment banker to review and evaluate various strategic alternatives, including additional asset sales, financing and balance sheet restructuring opportunities. MEC also announced that, as a result of the negative impact the weak real estate and credit markets have had on its ability to sell non-core assets, MEC intends to work with Miller Buckfire to develop and execute a plan to sell, or enter into joint ventures with respect to, one or more of its core racetracks in order to strengthen its balance sheet and liquidity position. MID management expects that MEC will be unable at December 1, 2008 to repay the MEC Bridge Loan or make the required $100.0 million repayment under the Gulfstream Park project financing facility (see "CHANGES TO MEC LOANS"). Furthermore, MID management expects that MEC will again need to seek extensions from existing lenders, including MID, and additional funds in the short-term from one or more possible sources, which may include MID. 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 loan agreements, unless MEC is able to obtain waivers, modifications or extensions. The availability of any required waivers, modifications, extensions or additional funds is not assured and, if available, the terms thereof are not yet determinable. If MEC is unsuccessful in its efforts, it could be required to liquidate assets in the fastest manner possible to raise funds, seek protection from its creditors in one or more ways, or be unable to continue as a going concern. Accordingly, MEC's ability to continue as a going concern is in substantial doubt. Mr. Mills added, "I believe that MEC has tremendous assets and potential upside. I am also encouraged by MEC's announcement earlier this week that it has engaged a financial advisor to help develop and execute a plan to sell, or enter into joint ventures with respect to, certain core assets and enhance MEC's capital structure. Although I have no doubt that it will be a challenge, I still believe there is an opportunity to turn things around at MEC." CHANGES TO MEC LOANS -------------------- Given that the sale of MEC assets under the MEC Debt Elimination Plan continues to take longer than originally contemplated, in May 2008, the maximum commitment available to MEC under the MEC Bridge Loan was increased to $110.0 million and the maturity date was extended to August 31, 2008. MEC was also permitted to redraw certain amounts that it had previously repaid under the MEC Bridge Loan. On August 13, 2008, the maturity date of the MEC Bridge Loan was extended to September 30, 2008. On September 15, 2008, the maturity date of the MEC Bridge Loan was extended to October 31, 2008. On October 15, 2008, the maximum commitment available to MEC under the MEC Bridge Loan was increased to $125.0 million, MEC was permitted to redraw certain amounts that it had previously repaid under the MEC Bridge Loan and the maturity date was extended to December 1, 2008. MEC is also obligated to repay $100 million of indebtedness under the Gulfstream Park project financing facility (see note 19(a)(ii) of the financial statements attached below) with the MID Lender by December 1, 2008. The maturity date for this repayment has been extended concurrently with the extensions to the maturity date of the MEC Bridge Loan described above. At the same time that the MID Lender made the changes to the MEC Bridge Loan and Gulfstream Park project financing facility discussed above, changes were made to MEC's $40.0 million senior secured revolving credit facility with a Canadian financial institution (the "MEC Credit Facility" - see note 9(a) to the financial statements attached below), which currently matures on November 17, 2008. MEC is in discussions with the Canadian financial institution about possible further extensions to the MEC Credit Facility. OUR RELATIONSHIP WITH MAGNA AND PRESSURES IN THE AUTOMOTIVE INDUSTRY -------------------------------------------------------------------- The Magna group contributes approximately 98% of the rental revenues of our Real Estate Business and Magna continues to be our principal tenant. However, the level of business MID has received from Magna has declined significantly over the past three years. This decline is primarily due to: pressures in the automotive industry (primarily in North America, although now spreading globally) and Magna's plant rationalization strategy, which have resulted in the closing of a number of manufacturing facilities in high cost countries; and uncertainty over MID's ownership structure and strategic direction due largely to the Greenlight Litigation. Although MID continues to explore alternatives to re-establish a strong and active relationship with Magna, and although Greenlight's appeal has now been dismissed, these factors may translate into a more permanent reduction in the quantum of business that MID receives from Magna. Our income-producing property portfolio decreased from 109 properties, representing 27.5 million square feet of leaseable area, at the end of 2006 to 105 properties at September 30, 2008, representing 27.3 million square feet of leaseable area. Given the concentration of our rental portfolio with the Magna group, a number of trends that have had a significant impact on the global automotive industry in recent years have also had an impact on the Real Estate Business. These trends, certain of which have significantly intensified in recent months as a result of negative economic developments, the global financial crisis, falling consumer confidence and other related factors, include: lower than anticipated global consumer demand for automobiles, declining North American vehicle production volumes, the deteriorating financial condition of certain of Magna's largest customers and their potential consolidation, pricing pressures and the growth of the automotive industry in low cost countries. These trends and the competitive and difficult environment existing in the automotive industry have resulted in Magna seeking to take advantage of lower operating cost countries and consolidating, moving, closing and/or selling operating facilities to align its capacity utilization and manufacturing footprint with vehicle production and consumer demand. Magna has disclosed that it anticipates North American and Western European vehicle production to continue to decline in the fourth quarter of 2008 and that it expects to close additional facilities in North America and Western Europe in 2008 and beyond, while growing its manufacturing presence in new markets, including Asia and Eastern Europe (where MID to date has not had a significant presence). Magna's rationalization strategy currently includes six facilities under lease from the Company in North America with an aggregate net book value of $24.1 million. These six facilities represent 908 thousand square feet of leaseable area with annualized lease payments of approximately $3.4 million, or 1.9%, of MID's annualized lease payments at September 30, 2008. MID management expects that the global automotive industry downturn and challenging economic conditions may result in a broadening of Magna's plant rationalization strategy to include additional MID facilities. REAL ESTATE BUSINESS FINANCIAL RESULTS -------------------------------------- Operating Highlights In respect of our core rental portfolio, during the third quarter of 2008 we brought on-stream two expansion projects (one in each of Mexico and Germany) for Magna, representing approximately 59 thousand square feet of leaseable area, at a cost of $6.5 million. At September 30, 2008, the Real Estate Business had four minor projects under development: three in Canada and one in Austria. These projects commenced in the first nine months of 2008 and will add an aggregate of 20 thousand square feet of leaseable area to the Real Estate Business' income- producing portfolio. The total anticipated cost of these projects is approximately $7.3 million, of which $0.5 million had been incurred at September 30, 2008. At September 30, 2008, the Real Estate Business had 27.3 million square feet of leaseable area, with annualized lease payments of $179.9 million, representing a return of 10.9% on the gross carrying value of our income- producing portfolio. Three Months Ended September 30, 2008 Revenues were $55.3 million in the third quarter of 2008, a 17% increase from revenues of $47.3 million in the third quarter of 2007. The higher revenues are due to a $3.2 million increase in rental revenues and a $4.8 million increase in interest and other income earned from MEC due to increased interest and fees earned under the MEC Bridge Loan. The higher rental revenues are partially due to foreign exchange, which had a $1.6 million positive impact as the U.S. dollar weakened, compared to the prior year period, against most foreign currencies (primarily the euro) in which the Real Estate Business operates. Contractual rent adjustments and Magna projects coming on-stream also had a higher than normal impact, increasing revenues by $1.8 million and $0.6 million, respectively. These positive contributions to rental revenues were partially offset by a $0.8 million reduction from property vacancies and renewals of leases, resulting partially from activities related to Magna's plant rationalization strategy. FFO for the third quarter of 2008 was $52.9 million ($1.13 per share) compared to $37.3 million ($0.77 per share) in the prior year period, representing an increase of 42% (47% on a per share basis). FFO for the third quarter of 2008 includes (i) an $8.7 million current tax recovery from revisions to estimates of certain tax exposures and the ability to benefit from certain income tax loss carryforwards previously not recognized, both driven by the results of tax audits in certain tax jurisdictions (see note 13 to the financial statements attached below), and (ii) a $0.8 million current tax recovery (offset by an equal future tax expense) resulting from the internal restructuring of one of the Real Estate Business' U.S. operating entities. FFO for the third quarter of 2007 includes a net $1.1 million current tax recovery, primarily due to a favourable tax reassessment received in the third quarter of 2007 in relation to land sold in a prior year. Excluding these items, FFO for the third quarter of 2008 was $43.4 million ($0.93 per share), representing a 20% increase from FFO for the third quarter of 2007 of $36.2 million ($0.75 per share). This $7.2 million increase is due to an $8.0 million increase in revenues and a $1.7 million reduction in current income tax expense (excluding current income taxes associated with disposal gains in the third quarter of 2007), partially offset by increases of $1.9 million in general and administrative expenses and $0.6 million in net interest expense. General and administrative expenses in the third quarter of 2008 increased by $1.9 million to $6.3 million from $4.4 million in the third quarter of 2007. General and administrative expenses for the third quarter of 2008 include (i) $1.2 million of advisory and other costs incurred in connection with the reorganization proposal and the exploration of alternatives in respect of MID's investment in MEC (see "DISCUSSIONS WITH MID SHAREHOLDERS AND POTENTIAL REORGANIZATION TRANSACTION") and (ii) a $1.0 million bonus payment paid to MID's former Chief Executive Officer following the Company's announcement of his departure in August 2008 (the "CEO Bonus Payment"). Excluding these items, general and administrative expenses of $4.1 million for the third quarter of 2008 decreased slightly compared to $4.4 million in the third quarter of 2007. Net interest expense was $2.4 million in the third quarter of 2008 ($3.7 million of interest expense less $1.3 million of interest income) compared to $1.9 million in the third quarter of 2007 ($3.9 million of interest expense less $2.0 million of interest income). The $0.7 million reduction in interest income is due primarily to a decline in interest rates the Real Estate Business earns on its excess cash balances. Interest expense decreased by $0.2 million, primarily due to an increase in the amount of capitalized interest in the third quarter of 2008 compared to the prior year period. The Real Estate Business had an income tax recovery for the third quarter of 2008 of $7.2 million, compared to an income tax expense for the third quarter of 2007 of $3.3 million. Excluding net unusual tax recoveries in the three months ended September 30, 2008 and 2007 of $12.5 million and $2.6 million, respectively (see note 13 to the financial statements attached below), the income tax expense for the third quarter of 2008 was $5.3 million, representing an effective tax rate of 14.8%, compared to $6.0 million for the third quarter of 2007, representing an effective tax rate of 19.5%. This 4.7% decrease in the adjusted effective tax rate is primarily due to (i) reductions in the statutory tax rates from 2007 to 2008 in Canada and Germany and (ii) changes in the proportion of income earned in the various tax jurisdictions in which the Real Estate Business operates. The Real Estate Business reported net income of $42.8 million for the third quarter of 2008 compared to $27.4 million in the prior year period. The $15.4 million increase is due to an $8.0 million increase in revenues and a $10.5 million reduction in income tax expense, partially offset by increases of $1.9 million in general and administrative expenses, $0.5 million in depreciation and amortization (due primarily to the impact of foreign exchange) and $0.6 million in net interest expense, and the $0.1 million gain on disposal of real estate in the third quarter of 2007. Nine Months Ended September 30, 2008 Revenues were $164.6 million in the first nine months of 2008, a 19% increase from revenues of $138.2 million in the first nine months of 2007. The higher revenues are due to a $14.9 million increase in rental revenues and an $11.6 million increase in interest and other income earned from increased borrowings under the financing arrangements with MEC. The higher rental revenues are primarily due to foreign exchange, which had a $9.8 million positive impact as the U.S. dollar weakened, compared to the prior year period, against most foreign currencies (primarily the euro and Canadian dollar) in which the Real Estate Business operates. Contractual rent adjustments and Magna projects coming on-stream also had a higher than normal impact, increasing revenues by $5.0 million and $1.9 million, respectively. These positive contributions to rental revenues were partially offset by a $2.0 million reduction from property disposals and vacancies and renewals of leases, resulting partially from activities related to Magna's plant rationalization strategy. FFO for the first nine months of 2008 was $135.8 million ($2.91 per share) compared to $102.8 million ($2.12 per share) in the prior year period. FFO for the first nine months of 2008 includes (i) a $7.0 million current tax recovery from revisions to estimates of certain tax exposures and (ii) a $0.8 million current tax recovery (offset by an equal future tax expense) resulting from the internal restructuring of one of the Real Estate Business' U.S. operating entities. FFO for the first nine months of 2007 includes a net $1.1 million current tax recovery, primarily due to a favourable tax reassessment received in the third quarter of 2007 in relation to land sold in a prior year. Excluding these items and a $3.9 million lease termination fee paid by Magna in conjunction with a lease termination at the end of the first quarter of 2008 and its related income tax effect, FFO for the first nine months of 2008 was $125.4 million ($2.69 per share), representing a 23% increase from FFO for the first nine months of 2007 of $101.7 million ($2.10 per share). This $23.7 million increase is due to a $26.5 million increase in revenue and a $2.3 million reduction in current income tax expense (excluding current income taxes associated with disposal gains in 2007), partially offset by increases of $2.7 million in general and administrative expenses and $2.4 million in net interest expense. General and administrative expenses increased to $20.7 million for the nine months ended September 30, 2008 from $18.0 million in the prior year period. General and administrative expenses for the first nine months of 2008 include (i) $5.8 million of advisory and other costs incurred in connection with the reorganization proposal and the exploration of alternatives in respect of MID's investment in MEC, (ii) the $1.0 million CEO Bonus Payment and (iii) a net $0.3 million recovery (primarily under the Company's insurance policy) of costs incurred in connection with the Greenlight Litigation. General and administrative expenses for the first nine months of 2007 include (i) $2.1 million of advisory and other costs in connection with the exploration of alternatives in respect of MID's investment in MEC, (ii) $2.0 million of costs associated with the Company's contribution of land to a not- for-profit organization to assist Hurricane Katrina redevelopment efforts and (iii) $0.3 million of costs associated with the Company's defence against the Greenlight Litigation. Excluding these items, general and administrative expenses for the first nine months of 2008 were $14.2 million compared to $13.6 million for the first nine months of 2007. The increase from the prior period was primarily due to the impact of foreign exchange. Net interest expense was $7.8 million in the nine months ended September 30, 2008 ($11.8 million of interest expense less $4.0 million of interest income) compared to $5.4 million for the nine months ended September 30, 2007 ($11.1 million of interest expense less $5.7 million of interest income). The $1.7 million reduction in interest income is due primarily to a decline in interest rates the Real Estate Business earns on its excess cash balances and there being less cash available for short-term investment. Interest expense increased by $0.7 million, primarily due to foreign exchange as the Company's senior unsecured debentures are denominated in Canadian dollars, partially offset by a $0.3 million increase in the amount of capitalized interest in the nine months ended September 30, 2008 compared to the prior year period. In the nine months ended September 30, 2008, the Real Estate Business' income tax expense was $6.0 million compared to $13.7 million in the prior year period. Excluding net unusual tax recoveries in the nine months ended September 30, 2008 and 2007 of $12.1 million and $2.6 million, respectively (see note 13 to the financial statements attached below), and a $1.5 million gain on disposal of real estate and related tax expense in 2007, the income tax expense for the first nine months of 2008 was $18.1 million, representing an effective tax rate of 17.1%, compared to $15.9 million for the first nine months of 2007, representing an effective tax rate of 18.8%. This 1.7% decrease in the adjusted effective tax rate is primarily due to (i) reductions in the statutory tax rates from 2007 to 2008 in Canada and Germany and (ii) changes in the proportion of income earned in the various tax jurisdictions in which the Real Estate Business operates. Net income of $100.1 million for the first nine months of 2008 increased by 38% compared to net income of $72.6 million for the first nine months of 2007. The $27.5 million increase is due to increases of $26.5 million in revenues and $3.1 million in other net gains (due primarily to the $3.9 million lease termination fee discussed above) and a $7.7 million reduction in income tax expense, partially offset by increases of $2.7 million in general and administrative expenses, $2.8 million in depreciation and amortization (due primarily to the impact of foreign exchange) and $2.4 million in net interest expense. Net income was also negatively impacted by a write-down of long-lived assets of $0.5 million recognized in the second quarter of 2008 as well as the $1.5 million gain on disposal of real estate recognized in the first nine months of 2007 (nil in 2008). MAGNA ENTERTAINMENT CORP. FINANCIAL RESULTS ------------------------------------------- Most of MEC's racetracks operate for prescribed periods each year. As a result, MEC's racing revenues and operating results for any quarter will not be indicative of racing revenues and operating results for any other quarter or for the year as a whole. Because four of MEC's largest racetracks (Santa Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie and Pimlico Race Course) run live race meets principally during the first half of the year, MEC's racing operations have historically operated at a loss in the second half of the year, with MEC's third quarter typically generating the largest operating loss. This seasonality has resulted in large quarterly fluctuations in revenue and operating results. MEC's results have been restated to distinguish between results from continuing and discontinued operations. MEC's discontinued operations for the three-month and nine-month periods ended September 30, 2008 and 2007 include the operations of Remington Park, Thistledown, Portland Meadows, Great Lakes Downs and Magna Racino(TM). MEC's revenues from continuing operations for the third quarter of 2008 were relatively stable at $82.3 million compared to $82.1 million in the prior year period. MEC's revenues for the third quarter of 2008 compared to the third quarter of 2007 were impacted by positive factors including (i) 10 additional live race days at Golden Gate Fields with a change in the racing calendar and additional awarded live race days and (ii) increased revenues in MEC's Florida operations, primarily due increased slot revenues at Gulfstream Park and the offering of simulcasting after the live race meet ended, which was not available in the prior year period. However, these positive factors were offset primarily by lower average daily attendance and handle at both Laurel Park and Pimlico (collectively "MJC"), Lone Star Park and The Meadows. MEC's revenues from continuing operations for the nine months ended September 30, 2008 decreased 5% to $480.5 million from $504.4 million in the prior year period, primarily due to (i) the net loss of eight live race days at Santa Anita Park due to heavy rain and track drainage issues with the new synthetic racing surface that was installed in the fall of 2007, (ii) 13 fewer live race days at Laurel Park, (iii) lower handle and wagering on the 2008 Preakness(R) and (iv) the same factors impacting revenues for the third quarter of 2008. Earnings before interest, taxes, depreciation and amortization from MEC's continuing operations excluding write-downs of long-lived assets, real estate disposal gains, other net gains and the minority interest impact ("EBITDA") for the three months ended September 30, 2008 was a loss of $20.3 million compared to a loss of $22.0 million in the prior year period. This $1.7 million improvement is due to a $0.2 million increase in revenues and reductions of $0.3 million in operating costs and $4.0 million in general and administrative expenses, partially offset by a $2.8 million increase in purses, awards and other costs. The reduction in general and administrative expenses is primarily attributable to several of MEC's racetracks, as well as its corporate office, incurring lower general and administrative expenses as a result of cost reduction initiatives and reduced severance costs in the current year period compared to the prior year period. The increase in purses, awards and other expenses is primarily due to increased wagering at Gulfstream Park, Golden Gate Fields and XpressBet(R), partially offset by decreased wagering at MJC, Lone Star Park and The Meadows. EBITDA for the first nine months of 2008 decreased by $2.8 million to $3.7 million from $6.5 million for the first nine months of 2007, due to a $23.9 million reduction in revenues, partially offset by reductions of $10.9 million in purses, awards and other costs, $3.6 million in operating costs and $6.6 million in general and administrative expenses for reasons discussed above. The reduction in purses, awards and other costs is due primarily to lower revenues at Santa Anita Park, Lone Star Park, MJC, Golden Gate Fields and The Meadows for the reasons discussed previously. The reduction in operating costs is due primarily to (i) fewer live race days at Santa Anita Park, (ii) cost reduction initiatives in MEC's Florida operations and (iii) a decrease in the proportion of PariMax operating costs included in MEC's results of operations, primarily due to the formation of the HRTV LLC joint venture in April 2007, partially offset by an increase in predevelopment costs driven primarily by higher legal costs to protect MEC's distribution rights and higher costs incurred in the pursuit of alternative gaming opportunities, including the November 4, 2008 gaming referendum in Maryland. In that referendum, voters approved the proposed state constitutional amendment authorizing the State to issue up to five video lottery licenses, one of which MEC has announced MJC expects to pursue for Laurel Park as soon as practicable after the administrative aspects of the license application process are finalized by the applicable regulators. The reduction in general and administrative expenses is primarily attributable to several of MEC's racetracks, as well as its corporate office, incurring lower general and administrative expenses as a result of cost reduction initiatives and reduced severance costs in the current year period compared to the prior year period. MEC recorded a net loss of $26.1 million for the third quarter of 2008 compared to $29.2 million in the third quarter of 2007. MEC's results of operations for the third quarter of 2007 include a $1.4 million write-down of long-lived assets. Excluding this item, the $1.7 million reduction in net loss in the third quarter of 2008 is due primarily to the $1.7 million improvement in EBITDA discussed above, a $4.9 million increase in the minority interest recovery and a $4.3 million increase in income from MEC's discontinued operations (see note 4 to the financial statements attached below), partially offset by increases of $1.3 million in depreciation and amortization, $6.5 million in net interest expense and $1.4 million in income tax expense. The increase in depreciation and amortization is due primarily to increased depreciation (i) at Santa Anita Park and Golden Gate Fields with the installation of new synthetic racing surfaces in the fall of 2007 and (ii) on phase two of the slots facility at Gulfstream Park. The increase in net interest expense is primarily attributable to (i) increased amounts outstanding under the MEC Bridge Loan and (ii) increased fees related to changes to the MEC Bridge Loan and extensions of the MEC Credit Facility. For the nine months ended September 30, 2008, MEC recorded a net loss of $50.5 million compared to net income of $8.1 million in the prior year period. MEC's results of operations for the first nine months of 2008 include (i) $24.5 million of disposal gains, primarily related to the disposal of 225 acres of excess real estate located in Ebreichsdorf, Austria to a subsidiary of Magna for a purchase price of 20.0 million euros ($31.5 million), net of transaction costs and (ii) a $5.0 million write-down of long-lived assets in the first quarter of 2008 related to real estate held for sale in Dixon, California. MEC's results of operations in the first nine months of 2007 include (i) $48.8 million of gains on the disposal of real estate (which have no related minority interest impact and are eliminated from MID's consolidated results) related to the sale of MEC's interests and rights in three real estate properties to MID in return for cash consideration of approximately $79.0 million and (ii) a $1.4 million write-down of long-lived assets. Excluding these items, the $30.7 million increase in net loss is due primarily to the $2.8 million reduction in EBITDA discussed above, increases of $5.8 million in depreciation and amortization and $16.5 million in net interest expense for the reasons discussed previously and a $9.2 million increase in the loss from discontinued operations (see note 4 to the financial statements attached below), partially offset by a $4.4 million increase in the minority interest recovery. DIVIDENDS --------- MID's Board of Directors declared a dividend of $0.15 per share on MID's Class A Subordinate Voting Shares and Class B Shares for the third quarter ended September 30, 2008. The dividend is payable on or about December 15, 2008 to shareholders of record at the close of business on November 28, 2008. Unless indicated otherwise, MID has designated the entire amount of all past and future taxable dividends paid in 2006, 2007 and 2008 to be an "eligible dividend" for purposes of the Income Tax Act (Canada), as amended from time to time. Please contact your tax advisor if you have any questions with regard to the designation of eligible dividends. CONFERENCE CALL --------------- A conference call will be held for interested analysts and shareholders to discuss the third quarter's results on November 7, 2008 at 10:30 am EST. The number to use for this call is 1-800-731-5319. The number for overseas callers is 416-644-3421. Please call 10 minutes prior to the start of the conference call. MID will also webcast the conference call at http://www.midevelopments.com/. The conference call will be chaired by Dennis Mills, Vice-Chairman and Chief Executive Officer. For anyone unable to listen to the scheduled call, the rebroadcast numbers will be: North America - 1-877-289-8525 and Overseas - 416-640-1917 (reservation number is 21285767, followed by the number sign) and the rebroadcast will be available until November 14, 2008. ABOUT MID --------- MID is a real estate operating company focusing primarily on the ownership, leasing, management, acquisition and development of a predominantly industrial rental portfolio for Magna and its subsidiaries in North America and Europe. MID also acquires land that it intends to develop for mixed-use and residential projects. MID holds a controlling interest in MEC, North America's number one owner and operator of horse racetracks, based on revenue, and one of the world's leading suppliers, via simulcasting, of live horseracing content to the growing inter-track, off-track and account wagering markets. RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES REAL ESTATE BUSINESS RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS (U.S. dollars in thousands, except per share figures) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Net income $ 42,821 $ 27,413 $ 100,073 $ 72,576 Add back (deduct): Depreciation and amortization 10,956 10,434 33,359 30,581 Future income tax expense (recovery) (865) (494) 1,782 1,361 Write-down of long-lived assets - - 450 - Gain on disposal of real estate, net of income tax - (61) - (1,089) Currency translation loss (gain) - - 105 (652) ------------------------------------------------------------------------- Funds from operations $ 52,912 $ 37,292 $ 135,769 $ 102,777 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted funds from operations per share $ 1.13 $ 0.77 $ 2.91 $ 2.12 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average number of shares outstanding (thousands) Basic 46,708 48,324 46,708 48,348 Diluted 46,708 48,332 46,708 48,369 ------------------------------------------------------------------------- ------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS -------------------------- The contents of this press release contain statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of applicable securities legislation, including the United States Securities Act of 1933 and the United States Securities Exchange Act of 1934. Forward-looking statements may include, among others, statements regarding the Company's future plans, goals, strategies, intentions, beliefs, estimates, costs, objectives, economic performance or expectations, or the assumptions underlying any of the foregoing. Words such as "may", "would", "could", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "project", "estimate" and similar expressions are used to identify forward-looking statements. Forward-looking statements should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or the times at or by which such future performance will be achieved. Undue reliance should not be placed on such statements. Forward-looking statements are based on information available at the time and/or management's good faith assumptions and analyses made in light of our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances, and are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Company's control, that could cause actual events or results to differ materially from such forward-looking statements. Important factors that could cause such differences include, but are not limited to, the risks set forth in the "Risk Factors" section in MID's Annual Information Form for 2007, filed on SEDAR at http://www.sedar.com/ and attached as Exhibit 1 to MID's Annual Report on Form 40-F for the year ended December 31, 2007, which investors are strongly advised to review. The "Risk Factors" section also contains information about the material factors or assumptions underlying such forward- looking statements. Forward-looking statements speak only as of the date the statement was made and unless otherwise required by applicable securities laws, MID expressly disclaims any intention and undertakes no obligation to update or revise any forward-looking statements contained in this press release to reflect subsequent information, events or circumstances or otherwise. Consolidated Statements of Income (Loss) (U.S. dollars in thousands, except per share figures) (Unaudited) Consolidated (notes 1, 19) Real Estate Business -------------------------- ------------------------- (restated - note 4) Three Months Ended September 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenues Rental revenue $ 45,149 $ 41,924 $ 45,149 $ 41,924 Racing and other revenue 82,323 82,151 - - Interest and other income from MEC (note 19) - - 10,163 5,392 ------------------------------------------------------------------------- 127,472 124,075 55,312 47,316 ------------------------------------------------------------------------- Operating costs and expenses Purses, awards and other 33,582 30,769 - - Operating costs 55,351 55,595 - - General and administrative (notes 3, 19) 20,246 23,369 6,282 4,362 Depreciation and amortization 22,158 20,340 10,956 10,434 Interest expense, net 11,560 9,380 2,445 1,857 Write-down of long-lived assets (note 6) - 1,444 - - ------------------------------------------------------------------------- Operating income (loss) (15,425) (16,822) 35,629 30,663 Gain on disposal of real estate (note 19) - 96 - 96 Other gains (note 20) 19 - - - ------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (15,406) (16,726) 35,629 30,759 Income tax expense (recovery) (note 13) (6,531) 2,585 (7,192) 3,346 Minority interest (23,660) (18,759) - - ------------------------------------------------------------------------- Income (loss) from continuing operations 14,785 (552) 42,821 27,413 Income (loss) from discontinued operations (note 4) 1,920 (2,266) - - ------------------------------------------------------------------------- Net income (loss) $ 16,705 $ (2,818) $ 42,821 $ 27,413 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings (loss) per Class A Subordinate Voting or Class B Share (note 7) - Continuing operations $ 0.32 $ (0.01) - Discontinued operations (note 4) 0.04 (0.05) ----------------------------------------------- Total $ 0.36 $ (0.06) ----------------------------------------------- ----------------------------------------------- Basic and diluted average number of Class A Subordinate Voting and Class B Shares outstanding during the period (in thousands) (note 7) 46,708 48,324 ----------------------------------------------- ----------------------------------------------- Magna Entertainment Corp. ------------------------- (restated - note 4) Three Months Ended September 30, 2008 2007 ----------------------------------------------- Revenues Rental revenue $ - $ - Racing and other revenue 82,323 82,151 Interest and other income from MEC (note 19) - - ----------------------------------------------- 82,323 82,151 ----------------------------------------------- Operating costs and expenses Purses, awards and other 33,582 30,769 Operating costs 55,351 55,595 General and administrative (notes 3, 19) 13,714 17,755 Depreciation and amortization 11,244 9,974 Interest expense, net 18,845 12,383 Write-down of long-lived assets (note 6) - 1,444 ----------------------------------------------- Operating income (loss) (50,413) (45,769) Gain on disposal of real estate (note 19) 122 100 Other gains (note 20) 19 - ----------------------------------------------- Income (loss) before income taxes and minority interest (50,272) (45,669) Income tax expense (recovery) (note 13) 661 (761) Minority interest (23,660) (18,759) ----------------------------------------------- Income (loss) from continuing operations (27,273) (26,149) Income (loss) from discontinued operations (note 4) 1,193 (3,054) ----------------------------------------------- Net income (loss) $ (26,080) $ (29,203) ----------------------------------------------- ----------------------------------------------- See accompanying notes Consolidated Statements of Income (Loss) (U.S. dollars in thousands, except per share figures) (Unaudited) Consolidated (notes 1, 19) Real Estate Business -------------------------- ------------------------- (restated - note 4) Nine Months Ended September 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenues Rental revenue $ 137,732 $ 122,820 $ 137,732 $ 122,820 Racing and other revenue 480,541 504,399 - - Interest and other income from MEC (note 19) - - 26,914 15,336 ------------------------------------------------------------------------- 618,273 627,219 164,646 138,156 ------------------------------------------------------------------------- Operating costs and expenses Purses, awards and other 228,915 239,775 - - Operating costs 204,126 207,700 - - General and administrative (notes 3, 19) 64,754 71,743 20,696 18,017 Depreciation and amortization 66,513 57,890 33,359 30,581 Interest expense, net 33,849 28,070 7,852 5,405 Write-down of long-lived assets (notes 6, 8) 5,450 1,444 450 - ------------------------------------------------------------------------- Operating income (loss) 14,666 20,597 102,289 84,153 Gain on disposal of real estate (note 19) 24,340 1,478 - 1,478 Other gains, net (notes 12, 14, 19, 20) 5,376 656 3,787 652 ------------------------------------------------------------------------- Income (loss) before income taxes and minority interest 44,382 22,731 106,076 86,283 Income tax expense (note 13) 8,969 15,634 6,003 13,707 Minority interest (29,610) (25,211) - - ------------------------------------------------------------------------- Income (loss) from continuing operations 65,023 32,308 100,073 72,576 Loss from discontinued operations (note 4) (13,680) (4,288) - - ------------------------------------------------------------------------- Net income (loss) $ 51,343 $ 28,020 $ 100,073 $ 72,576 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings (loss) per Class A Subordinate Voting or Class B Share (note 7) - Continuing operations $ 1.39 $ 0.67 - Discontinued operations (note 4) (0.29) (0.09) ----------------------------------------------- Total $ 1.10 $ 0.58 ----------------------------------------------- ----------------------------------------------- Average number of Class A Subordinate Voting and Class B Shares outstanding during the period (in thousands) (note 7) - Basic 46,708 48,348 - Diluted 46,708 48,369 ----------------------------------------------- ----------------------------------------------- Magna Entertainment Corp. ------------------------- (restated - note 4) Nine Months Ended September 30, 2008 2007 ----------------------------------------------- Revenues Rental revenue $ - $ - Racing and other revenue 480,541 504,399 Interest and other income from MEC (note 19) - - ----------------------------------------------- 480,541 504,399 ----------------------------------------------- Operating costs and expenses Purses, awards and other 228,915 239,775 Operating costs 204,126 207,700 General and administrative (notes 3, 19) 43,774 50,389 Depreciation and amortization 33,283 27,438 Interest expense, net 52,745 36,203 Write-down of long-lived assets (notes 6, 8) 5,000 1,444 ----------------------------------------------- Operating income (loss) (87,302) (58,550) Gain on disposal of real estate (note 19) 24,462 48,754 Other gains, net (notes 12, 14, 19, 20) 1,589 4 ----------------------------------------------- Income (loss) before income taxes and minority interest (61,251) (9,792) Income tax expense (note 13) 2,966 596 Minority interest (29,610) (25,211) ----------------------------------------------- Income (loss) from continuing operations (34,607) 14,823 Loss from discontinued operations (note 4) (15,916) (6,759) ----------------------------------------------- Net income (loss) $ (50,523) $ 8,064 ----------------------------------------------- ----------------------------------------------- See accompanying notes Consolidated Statements of Comprehensive Income (Loss) (U.S. dollars in thousands) (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Net income (loss) $ 16,705 $ (2,818) $ 51,343 $ 28,020 Other comprehensive income (loss): Change in fair value of interest rate swaps, net of taxes and minority interest (note 12) (24) (191) 5 (247) Foreign currency translation adjustment, net of minority interest (note 12) (55,513) 45,869 (19,790) 80,717 Reversal of foreign currency translation gain related to shares purchased for cancellation (note 10) - (5,778) - (5,778) Recognition of foreign currency translation loss (gain) in net income (note 12) - - 105 (652) ------------------------------------------------------------------------- Comprehensive income (loss) $ (38,832) $ 37,082 $ 31,663 $ 102,060 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Consolidated Statements of Changes in Deficit (U.S. dollars in thousands) (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Deficit, beginning of period $ (37,810) $ (52,785) $ (58,436) $ (69,112) Net income (loss) 16,705 (2,818) 51,343 28,020 Dividends (7,007) (7,255) (21,019) (21,766) ------------------------------------------------------------------------- Deficit, end of period $ (28,112) $ (62,858) $ (28,112) $ (62,858) ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Consolidated Statements of Cash Flows (U.S. dollars in thousands) (Unaudited) Consolidated (notes 1, 19) Real Estate Business -------------------------- ------------------------- (restated - note 4) Three Months Ended September 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- OPERATING ACTIVITIES Income (loss) from continuing operations $ 14,785 $ (552) $ 42,821 $ 27,413 Items not involving current cash flows (note 16) (1,362) 1,556 8,233 10,149 Changes in non-cash balances (note 16) 7,118 6,288 (7,562) 2,476 ------------------------------------------------------------------------- Cash provided by (used in) operating activities 20,541 7,292 43,492 40,038 ------------------------------------------------------------------------- INVESTING ACTIVITIES Real estate and fixed asset additions (20,611) (26,435) (2,939) (7,082) Proceeds on disposal of real estate and fixed assets, net 1,171 3,529 - 927 Increase in other assets (311) (696) (95) (4) Loan advances to MEC, net - - (21,889) (10,780) Loan repayments from MEC - - 5,023 2,065 ------------------------------------------------------------------------- Cash used in investment activities (19,751) (23,602) (19,900) (14,874) ------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from bank indebtedness 10,237 25,199 - - Repayment of bank indebtedness (4,201) - - - Issuance of long-term debt, net 7,343 205 - - Repayment of long-term debt (1,941) (2,316) (116) (109) Loan advances from MID, net - - - - Loan repayments to MID - - - - Shares purchased for cancellation (10) (11,836) - (11,836) Dividends paid (7,007) (7,255) (7,007) (7,255) ------------------------------------------------------------------------- Cash provided by (used in) financing activities 4,421 3,997 (7,123) (19,200) ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (7,598) 4,495 (7,381) 4,300 ------------------------------------------------------------------------- Net cash flows provided by (used in) continuing operations (2,387) (7,818) 9,088 10,264 ------------------------------------------------------------------------- DISCONTINUED OPERATIONS Cash provided by (used in) operating activities 1,612 (2,504) - - Cash provided by (used in) investing activities 2,699 (714) - - Cash provided by (used in) financing activities 66 - - - ------------------------------------------------------------------------- Net cash flows provided by (used in) discontinued operations 4,377 (3,218) - - ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period 1,990 (11,036) 9,088 10,264 Cash and cash equivalents, beginning of period 185,752 203,407 147,244 147,983 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 187,742 192,371 156,332 158,247 Less: cash and cash equivalents of discontinued operations, end of period (9,346) (10,463) - - ------------------------------------------------------------------------- Cash and cash equivalents, of continuing operations end of period $ 178,396 $ 181,908 $ 156,332 $ 158,247 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Magna Entertainment Corp. ------------------------- (restated - note 4) Three Months Ended September 30, 2008 2007 ----------------------------------------------- OPERATING ACTIVITIES Income (loss) from continuing operations $ (27,273) $ (26,149) Items not involving current cash flows (note 16) (9,346) (8,338) Changes in non-cash balances (note 16) 14,581 3,097 ----------------------------------------------- Cash provided by (used in) operating activities (22,038) (31,390) ----------------------------------------------- INVESTING ACTIVITIES Real estate and fixed asset additions (17,794) (19,433) Proceeds on disposal of real estate and fixed assets, net 1,293 2,702 Increase in other assets (216) (692) Loan advances to MEC, net - - Loan repayments from MEC - - ----------------------------------------------- Cash used in investment activities (16,717) (17,423) ----------------------------------------------- FINANCING ACTIVITIES Proceeds from bank indebtedness 10,237 25,199 Repayment of bank indebtedness (4,201) - Issuance of long-term debt, net 7,343 205 Repayment of long-term debt (1,825) (2,207) Loan advances from MID, net 21,659 10,148 Loan repayments to MID (4,979) (414) Shares purchased for cancellation (10) - Dividends paid - - ----------------------------------------------- Cash provided by (used in) financing activities 28,224 32,931 ----------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (217) 195 ----------------------------------------------- Net cash flows provided by (used in) continuing operations (10,748) (15,687) ----------------------------------------------- DISCONTINUED OPERATIONS Cash provided by (used in) operating activities 929 (3,248) Cash provided by (used in) investing activities 2,699 (714) Cash provided by (used in) financing activities 22 (1,651) ----------------------------------------------- Net cash flows provided by (used in) discontinued operations 3,650 (5,613) ----------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period (7,098) (21,300) Cash and cash equivalents, beginning of period 38,508 55,424 ----------------------------------------------- Cash and cash equivalents, end of period 31,410 34,124 Less: cash and cash equivalents of discontinued operations, end of period (9,346) (10,463) ----------------------------------------------- Cash and cash equivalents, of continuing operations end of period $ 22,064 $ 23,661 ----------------------------------------------- ----------------------------------------------- See accompanying notes Consolidated Statements of Cash Flows (U.S. dollars in thousands) (Unaudited) Consolidated (notes 1, 19) Real Estate Business -------------------------- ------------------------- (restated - note 4) Nine Months Ended September 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- OPERATING ACTIVITIES Income (loss) from continuing operations $ 65,023 $ 32,308 $ 100,073 $ 72,576 Items not involving current cash flows (note 16) 24,458 33,016 31,737 30,904 Changes in non-cash balances (note 16) (4,606) (2,242) 748 10,563 ------------------------------------------------------------------------- Cash provided by (used in) operating activities 84,875 63,082 132,558 114,043 ------------------------------------------------------------------------- INVESTING ACTIVITIES Property and fixed asset additions (57,763) (72,114) (15,997) (105,956) Proceeds on disposal of real estate properties and fixed assets, net 34,123 11,859 - 6,321 Decrease (increase) in other assets (1,591) (1,731) (244) 54 Loan advances to MEC, net - - (73,889) (27,463) Loan repayments from MEC - - 29,286 4,425 ------------------------------------------------------------------------- Cash provided by (used in) investment activities (25,231) (61,986) (60,844) (122,619) ------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from bank indebtedness 48,705 40,940 - - Repayment of bank indebtedness (44,670) (21,515) - - Issuance of long-term debt 15,759 4,345 - - Repayment of long-term debt (11,051) (31,965) (348) (298) Loan advances from MID, net - - - - Loan repayments to MID - - - - Issuance of shares - 1,058 - 1,058 Shares purchased for cancellation (10) (11,836) - (11,836) Dividends paid (21,019) (21,766) (21,019) (21,766) ------------------------------------------------------------------------- Cash provided by (used in) financing activities (12,286) (40,739) (21,367) (32,842) ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (5,099) 7,901 (4,960) 7,799 ------------------------------------------------------------------------- Net cash flows provided by (used in) continuing operations 42,259 (31,742) 45,387 (33,619) ------------------------------------------------------------------------- DISCONTINUED OPERATIONS Cash provided by (used in) operating activities 4,635 (2,519) - - Cash used in investing activities (2,284) (3,941) - - Cash used in financing activities (11,728) (19,682) - - ------------------------------------------------------------------------- Net cash flows used in discontinued operations (9,377) (26,142) - - ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period 32,882 (57,884) 45,387 (33,619) Cash and cash equivalents, beginning of period 154,860 250,255 110,945 191,866 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 187,742 192,371 156,332 158,247 Less: cash and cash equivalents of discontinued operations, end of period (9,346) (10,463) - - ------------------------------------------------------------------------- Cash and cash equivalents, of continuing operations end of period $ 1 78,396 $ 181,908 $ 156,332 $ 158,247 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Magna Entertainment Corp. ------------------------- (restated - note 4) Nine Months Ended September 30, 2008 2007 ----------------------------------------------- OPERATING ACTIVITIES Income (loss) from continuing operations $ (34,607) $ 14,823 Items not involving current cash flows (note 16) (4,866) (47,341) Changes in non-cash balances (note 16) (5,735) (13,349) ----------------------------------------------- Cash provided by (used in) operating activities (45,208) (45,867) ----------------------------------------------- INVESTING ACTIVITIES Property and fixed asset additions (41,888) (55,639) Proceeds on disposal of real estate properties and fixed assets, net 34,245 93,252 Decrease (increase) in other assets (1,347) (1,785) Loan advances to MEC, net - - Loan repayments from MEC - - ----------------------------------------------- Cash provided by (used in) investment activities (8,990) 35,828 ----------------------------------------------- FINANCING ACTIVITIES Proceeds from bank indebtedness 48,705 40,940 Repayment of bank indebtedness (44,670) (21,515) Issuance of long-term debt 15,759 4,345 Repayment of long-term debt (10,703) (31,667) Loan advances from MID, net 72,560 26,477 Loan repayments to MID (27,413) (1,130) Issuance of shares - - Shares purchased for cancellation (10) - Dividends paid - - ----------------------------------------------- Cash provided by (used in) financing activities 54,228 17,450 ----------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (139) 102 ----------------------------------------------- Net cash flows provided by (used in) continuing operations (109) 7,513 ----------------------------------------------- DISCONTINUED OPERATIONS Cash provided by (used in) operating activities 2,529 (4,860) Cash used in investing activities (2,284) (3,941) Cash used in financing activities (12,641) (22,977) ----------------------------------------------- Net cash flows used in discontinued operations (12,396) (31,778) ----------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period (12,505) (24,265) Cash and cash equivalents, beginning of period 43,915 58,389 ----------------------------------------------- Cash and cash equivalents, end of period 31,410 34,124 Less: cash and cash equivalents of discontinued operations, end of period (9,346) (10,463) ----------------------------------------------- Cash and cash equivalents, of continuing operations end of period $ 22,064 $ 23,661 ----------------------------------------------- ----------------------------------------------- See accompanying notes Consolidated Balance Sheets (Refer to note 1 - Basis of Presentation) (U.S. dollars in thousands) (Unaudited) Consolidated (notes 1, 19) Real Estate Business -------------------------- ------------------------- (restated - notes 4, 5) September December September December As at 30, 2008 31, 2007 30, 2008 31, 2007 ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 178,396 $ 145,619 $ 156,332 $ 110,945 Restricted cash (note 19) 14,303 32,722 945 4,458 Accounts receivable 30,428 39,958 3,350 7,425 Loans receivable from MEC, net (note 19) - - 190,566 139,168 Due from MID (note 19) - - - - Income taxes receivable 2,038 1,631 2,038 402 Prepaid expenses and other 22,424 17,173 1,039 1,206 Assets held for sale (note 5) - 1,493 - - Discontinued operations (note 4) 31,459 24,724 - - ------------------------------------------------------------------------- 279,048 263,320 354,270 263,604 Real estate properties, net (note 8) 2,183,926 2,225,154 1,508,062 1,561,921 Fixed assets, net 74,097 86,196 302 445 Racing licences 109,868 109,868 - - Other assets 7,205 6,213 1,070 879 Loans receivable from MEC (note 19) - - 96,271 97,589 Deferred rent receivable 14,426 14,898 14,426 14,898 Future tax assets 48,680 45,118 9,055 5,497 Assets held for sale (note 5) 26,984 38,647 - - Discontinued operations (note 4) 82,550 110,927 - - ------------------------------------------------------------------------- $ 2,826,784 $ 2,900,341 $ 1,983,456 $ 1,944,833 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank indebtedness (note 9) $ 43,249 $ 39,214 $ - $ - Accounts payable and accrued liabilities 111,605 140,473 19,091 16,678 Income taxes payable 6,602 13,040 5,442 13,040 Loan payable to MID, net (note 19) - - - - Due to MEC (note 19) - - 945 4,464 Long-term debt due within one year (note 9) 14,538 11,142 3,867 488 Deferred revenue 4,371 6,189 1,488 2,078 Liabilities related to assets held for sale (note 5) - 171 - - Discontinued operations (note 4) 42,469 47,981 - - ------------------------------------------------------------------------- 222,834 258,210 30,833 36,748 Long-term debt (note 9) 86,033 96,326 2,536 6,646 Senior unsecured debentures, net 253,251 267,578 253,251 267,578 Note obligations, net 218,279 216,050 - - Loan payable to MID, net (note 19) - - - - Other long-term liabilities 32,286 24,105 - - Future tax liabilities 137,571 130,885 52,017 48,257 Minority interest 114,436 156,359 - - Liabilities related to assets held for sale (note 5) 876 876 - - Discontinued operations (note 4) 14,540 14,492 - - ------------------------------------------------------------------------- 1,080,106 1,164,881 338,637 359,229 ------------------------------------------------------------------------- Shareholders' equity: Share capital (note 10) 1,524,440 1,524,440 Contributed surplus (note 11) 28,091 27,517 Deficit (28,112) (58,436) Accumulated other comprehensive income (note 12) 222,259 241,939 ------------------------------------------------------------------------- 1,746,678 1,735,460 1,644,819 1,585,604 ------------------------------------------------------------------------- $ 2,826,784 $ 2,900,341 $ 1,983,456 $ 1,944,833 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Magna Entertainment Corp. ------------------------- (restated - notes 4, 5) September December As at 30, 2008 31, 2007 ----------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 22,064 $ 34,674 Restricted cash (note 19) 13,358 28,264 Accounts receivable 27,078 32,533 Loans receivable from MEC, net (note 19) - - Due from MID (note 19) 945 4,464 Income taxes receivable - 1,229 Prepaid expenses and other 21,560 16,335 Assets held for sale (note 5) - 1,493 Discontinued operations (note 4) 31,459 24,724 ----------------------------------------------- 116,464 143,716 Real estate properties, net (note 8) 731,244 718,620 Fixed assets, net 73,795 85,751 Racing licences 109,868 109,868 Other assets 6,135 5,334 Loans receivable from MEC (note 19) - - Deferred rent receivable - - Future tax assets 39,625 39,621 Assets held for sale (note 5) 26,984 38,647 Discontinued operations (note 4) 82,604 110,999 ----------------------------------------------- $ 1,186,719 $ 1,252,556 ----------------------------------------------- ----------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank indebtedness (note 9) $ 43,249 $ 39,214 Accounts payable and accrued liabilities 92,514 124,140 Income taxes payable 1,160 - Loan payable to MID, net (note 19) 190,158 137,002 Due to MEC (note 19) - - Long-term debt due within one year (note 9) 10,671 10,654 Deferred revenue 2,883 4,339 Liabilities related to assets held for sale (note 5) - 171 Discontinued operations (note 4) 42,882 48,378 ----------------------------------------------- 383,517 363,898 Long-term debt (note 9) 83,497 89,680 Senior unsecured debentures, net - - Note obligations, net 218,279 216,050 Loan payable to MID, net (note 19) 66,981 67,107 Other long-term liabilities 32,286 24,105 Future tax liabilities 84,223 81,297 Minority interest 114,436 156,359 Liabilities related to assets held for sale (note 5) 876 876 Discontinued operations (note 4) 39,865 40,635 ----------------------------------------------- 1,023,960 1,040,007 ----------------------------------------------- Shareholders' equity: Share capital (note 10) Contributed surplus (note 11) Deficit Accumulated other comprehensive income (note 12) ----------------------------------------------- 162,759 212,549 ----------------------------------------------- $ 1,186,719 $ 1,252,556 ----------------------------------------------- ----------------------------------------------- Commitments and contingencies (note 20) See accompanying notes Notes to Interim Consolidated Financial Statements (All amounts in U.S. dollars and all tabular amounts in thousands unless otherwise noted) (All amounts as at September 30, 2008 and December 31, 2007 and for the three-month and nine-month periods ended September 30, 2008 and 2007 are unaudited) 1. BASIS OF PRESENTATION The unaudited interim consolidated financial statements include the accounts of MI Developments Inc. and its subsidiaries (collectively, "MID" or the "Company"). MID is a real estate operating company that currently owns, leases, manages and develops a predominantly industrial rental portfolio leased primarily to Magna International Inc. and its automotive operating units ("Magna"). MID also acquires land that it intends to develop for mixed-use and residential projects. The Company also holds a controlling interest in Magna Entertainment Corp. ("MEC"), an owner and operator of horse racetracks and a supplier of live racing content to the inter-track, off-track and account wagering markets. At September 30, 2008, the Company owned approximately 54% of MEC's total equity, representing approximately 96% of the total voting power of its outstanding stock. MEC's results are consolidated with the Company's results, with outside ownership accounted for as a minority interest. (a) Magna Entertainment Corp. The results of operations and the financial position of MEC have been included in the unaudited interim consolidated financial statements on a going concern basis, which contemplates the realization of MEC's assets and the discharge of MEC's liabilities in the normal course of business for the foreseeable future. MEC has incurred a net loss (before the amount attributed to the minority interest) of $93.8 million for the nine months ended September 30, 2008, and net losses before minority interest recovery of $68.8 million, $65.4 million and $107.4 million for the years ended December 31, 2007, 2006 and 2005, respectively. At September 30, 2008, MEC had a working capital deficiency of $267.1 million and $255.4 million of debt scheduled to mature in the 12-month period ending September 30, 2009, including (i) $36.5 million under MEC's $40.0 million senior secured revolving credit facility with a Canadian financial institution (the "MEC Credit Facility"), which is scheduled to mature on November 17, 2008 (note 9), (ii) $88.6 million under a bridge loan (the "MEC Bridge Loan") of up to $125.0 million (initially up to $80.0 million) from a wholly-owned subsidiary of MID (the "MID Lender"), which is scheduled to mature on December 1, 2008 (note 19) and (iii) MEC's obligation to repay $100.0 million of indebtedness under the Gulfstream Park project financing facility with the MID Lender by December 1, 2008 (note 19). Accordingly, 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 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. On September 12, 2007, MEC's Board of Directors approved a debt elimination plan (the "MEC Debt Elimination Plan") designed to eliminate MEC's net debt by December 31, 2008 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. The success of the MEC Debt Elimination Plan is not assured. To address short-term liquidity concerns and provide sufficient time to implement the MEC Debt Elimination Plan, MEC arranged $100.0 million of funding in September 2007, comprised of (i) a $20.0 million private placement of MEC's Class A Subordinate Voting Stock ("MEC Class A Stock") to Fair Enterprise Limited ("FEL"), a company that forms part of an estate planning vehicle for the family of Mr. Frank Stronach, the Company's Chairman and the Chairman and Chief Executive Officer of MEC, completed in October 2007; and (ii) the MEC Bridge Loan. Although MEC continues to take steps to implement the MEC Debt Elimination Plan, MEC does not expect to execute its plan on the originally contemplated time schedule, if at all. As a result, MEC has needed and will again need to seek extensions from existing lenders and additional funds in the short-term from one or more possible sources, which may include the Company. The availability of such extensions and additional funds is not assured and, if available, the terms thereof are not yet determinable. These unaudited interim consolidated financial statements do not give effect to any adjustments to recorded amounts and their classification which would be necessary should MEC be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the unaudited interim consolidated financial statements. The uncertainty regarding MEC's ability to continue as a going concern does not impact the realization of the Company's assets and discharge of its liabilities in the normal course of its real estate business. MID's real estate business has not guaranteed any of MEC's indebtedness. MEC's racing business is seasonal in nature and racing revenues and operating results for any quarter will not be indicative of the racing revenues and operating results for the year. MEC's racing operations have historically operated at a loss in the second half of the year, with the third quarter typically generating the largest operating loss. This seasonality has resulted in large quarterly fluctuations in MEC's revenues and operating results. (b) Consolidated Financial Statements The unaudited interim consolidated financial statements have been prepared in U.S. dollars following Canadian generally accepted accounting principles ("GAAP") and the accounting policies as set out in the annual consolidated financial statements for the year ended December 31, 2007, except as disclosed in note 2. The unaudited interim consolidated financial statements do not conform in all respects to the requirements of generally accepted accounting principles for annual financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2007. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments necessary to present fairly the financial position at September 30, 2008 and 2007, and the results of operations and cash flows for the three-month and nine- month periods ended September 30, 2008 and 2007. Financial data and related measurements are presented on the consolidated statements of income (loss), consolidated statements of cash flows, and consolidated balance sheets in two categories, "Real Estate Business" and "Magna Entertainment Corp.", which correspond to the Company's reporting segments as described in note 18 to the unaudited interim consolidated financial statements. Transactions and balances between the "Real Estate Business" and "Magna Entertainment Corp." segments 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, which are further described in note 19, are eliminated in the consolidated results of operations and financial position of the Company. The Company has reclassified certain prior period amounts to reflect the restatement for MEC's discontinued operations (note 4), assets held for sale (note 5) and reverse stock split (notes 14 and 20). 2. ACCOUNTING CHANGES (a) Financial Instruments - Disclosure and Presentation In December 2006, the Canadian Institute of Chartered Accountants (the "CICA") issued additional disclosure and presentation standards for financial instruments in Handbook Sections 3862, "Financial Instruments - Disclosures", and 3863, "Financial Instruments - Presentation", which replace Handbook Section 3861, "Financial Instruments - Disclosure and Presentation". The Company has adopted these new standards effective January 1, 2008. Handbook Section 3862 requires increased disclosure relating to the risks associated with financial instruments and the Company's approach to managing those risks. Handbook Section 3863 maintains the presentation requirements of Handbook Section 3861. Certain disclosures regarding the Company's consolidated financial instruments were previously made in notes 1, 2, 9, 10, 11, 18 and 23 to the annual consolidated financial statements for the year ended December 31, 2007 and do not differ materially at September 30, 2008, except as disclosed in notes 9, 15, 17 and 20 to the unaudited interim consolidated financial statements. The additional disclosures required by Handbook Section 3862 have been made in notes 15 and 17 to the unaudited interim consolidated financial statements. The adoption of Handbook Section 3863 did not have any impact on the Company's unaudited interim consolidated financial statements. (b) Capital Disclosures The CICA issued Handbook Section 1535, "Capital Disclosures", in December 2006, which requires that the Company disclose its objectives, policies and processes for managing capital (which it must define), as well as certain quantitative data. Handbook Section 1535 also requires the disclosure of any externally-imposed capital requirements, whether the entity has complied with them and, if not, the consequences of such non-compliance. The Company adopted the requirements of Handbook Section 1535 on January 1, 2008 and the required disclosures are contained in note 15 to the unaudited interim consolidated financial statements. (c) Going Concern In June 2007, the CICA amended Handbook Section 1400, "General Standards of Financial Statement Presentation", to include going concern requirements. The amendments require management to make an assessment of an entity's ability to continue as a going concern and to disclose material uncertainties related to events or conditions that may cast doubt upon the entity's ability to continue as a going concern. In doing so, management must take into account information about the future, which is at least, but not limited to, 12 months from the balance sheet date. The Company's adoption on January 1, 2008 of the amendments to Handbook Section 1400 did not have any impact on the Company's unaudited interim consolidated financial statements or the disclosure contained in note 1 to the unaudited interim consolidated financial statements. 3. DISCUSSIONS WITH MID SHAREHOLDERS AND POTENTIAL REORGANIZATION TRANSACTION On March 31, 2008, MID received a reorganization proposal on behalf of various shareholders of MID, including entities affiliated with the Stronach Trust (the "Stronach Group"), MID's controlling shareholder. The reorganization proposal was supported by MID shareholders owning more than 50% of the outstanding Class A Subordinate Voting Shares and approximately 95% of the outstanding Class B Shares. The principal components of the reorganization proposal are set out in MID's press release dated March 31, 2008, which can be found on the Company's website at http://www.midevelopments.com/ and on SEDAR at http://www.sedar.com/. The stated objective of the reorganization was to (a) effect a substantial cash distribution to MID shareholders and (b) create a focused real estate investment vehicle, which would distribute 80% of its available cash flow, in which the interests of all shareholders would be fully aligned. The reorganization proposal included the separation of MID and MEC. Following the announcement of the reorganization proposal, certain of the Company's shareholders expressed their opposition to the proposal. Accordingly, in early June 2008, at the direction of a special committee of independent directors (the "MID Special Committee"), MID management commenced discussions with a number of MID Class A shareholders, including those shareholders that had supported the original reorganization proposal, in order to develop a consensus on how to best amend and structure the proposed reorganization to achieve the requisite level of shareholder support. On August 22, 2008, MID announced that it had retained GMP Securities L.P. ("GMP") as a financial advisor to liaise with shareholders in an attempt to develop a consensus on how best to reorganize MID. No consensus was reached with respect to amendments that would have resulted in a revised reorganization proposal that MID would have been asked to put before its shareholders for their consideration, and although GMP continues to liaise with the Company's shareholders, discussions with respect to the reorganization proposal have effectively terminated. MID is continuing to explore strategic transactions and alternatives available in respect of its investment in MEC, including a recapitalization, restructuring or sales of some or all of MEC's assets, and evaluating whether, or to what extent, MID might participate in any such transactions or alternatives. In October 2008, several MID shareholders sent letters to the MID Special Committee and/or MID's Board of Directors (the "Board") expressing their views as to the process and as to how best to reorganize MID, including dealing with MID's investment in MEC, and one other person that is involved in the U.S. horseracing industry has proposed that MID sell to such person MID's loans to MEC. Many of these letters have been publicly filed with the United States Securities and Exchange Commission. Any potential transactions with MEC would be subject to review by the MID Special Committee and the approval of the Board. There can be no assurance that any transaction will be completed. The unaudited interim consolidated financial statements do not reflect any adjustments that may be required should any transaction be completed. During the three-month and nine-month periods ended September 30, 2008, $1.2 million and $5.5 million, respectively, of advisory and other costs have been incurred in connection with the reorganization proposal and the exploration of alternatives in respect of MID's investment in MEC, which costs are included in the Real Estate Business' "general and administrative expenses" on the Company's unaudited interim consolidated statements of income (loss). 4. DISCONTINUED OPERATIONS In connection with the MEC Debt Elimination Plan, MEC announced its intention to sell Great Lakes Downs in Michigan, Thistledown in Ohio and its interest in Portland Meadows in Oregon. MEC also announced its intention to explore the sale of Remington Park, a horseracing and gaming facility in Oklahoma City. In September 2007, MEC engaged a U.S. investment bank to assist in soliciting potential purchasers and managing the sale process for certain assets covered by the MEC Debt Elimination Plan. In October 2007, the U.S. investment bank began marketing Thistledown and Remington Park for sale and initiated a program to locate potential buyers. However, MEC has since taken over the sales process from the U.S. investment bank and is currently in discussions with potential buyers of these assets. In November 2007, MEC began marketing its interest in Portland Meadows for sale and is currently in discussions with potential buyers for this asset. In March 2008, MEC committed to a plan to sell Magna Racino(TM). MEC has initiated a program to locate potential buyers and has begun marketing the assets for sale through a real estate agent. On July 16, 2008, MEC completed the sale of Great Lakes Downs in Michigan for cash consideration of $5.0 million. The proceeds of approximately $4.5 million, net of transaction costs, were used to repay a portion of the MEC Bridge Loan (note 19). MEC recognized a $0.5 million gain on disposition of Great Lakes Downs in the results of discontinued operations for the three- month and nine-month periods ended September 30, 2008. MEC's results of operations related to discontinued operations for the three-month and nine-month periods ended September 30, 2008 and 2007, and MEC's assets and liabilities related to discontinued operations as at September 30, 2008 and December 31, 2007, are shown in the following tables: Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Revenues $ 33,438 $ 33,050 $ 99,028 $ 98,679 Costs and expenses 33,845 35,701 97,128 102,178 --------------------------------------------------------------------- (407) (2,651) 1,900 (3,499) Depreciation and amortization - 1,750 605 5,252 Interest expense, net 1,080 968 2,630 3,129 Write-down of long-lived assets (note 6) - - 32,294 - --------------------------------------------------------------------- Loss before undernoted (1,487) (5,369) (33,629) (11,880) Gain on disposition 536 - 536 - --------------------------------------------------------------------- Loss before income taxes and minority interest (951) (5,369) (33,093) (11,880) Income tax recovery (note 13) (3,174) (133) (3,559) (295) Minority interest 1,030 (2,182) (13,618) (4,826) --------------------------------------------------------------------- MEC's income (loss) from discontinued operations 1,193 (3,054) (15,916) (6,759) --------------------------------------------------------------------- Eliminations (note 19) 727 788 2,236 2,471 --------------------------------------------------------------------- Consolidated income (loss) from discontinued operations $ 1,920 $ (2,266) $ (13,680) $ (4,288) --------------------------------------------------------------------- --------------------------------------------------------------------- September December As at 30, 2008 31, 2007 --------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 9,346 $ 9,241 Restricted cash 14,265 7,069 Accounts receivable 4,600 6,602 Prepaid expenses and other 3,248 1,812 --------------------------------------------------------------------- 31,459 24,724 --------------------------------------------------------------------- Real estate properties, net 55,949 81,035 Fixed assets, net 13,003 16,295 Other assets 105 122 Future tax assets 13,547 13,547 --------------------------------------------------------------------- 82,604 110,999 --------------------------------------------------------------------- MEC's assets related to discontinued operations 114,063 135,723 --------------------------------------------------------------------- Eliminations (note 19) (54) (72) --------------------------------------------------------------------- Consolidated assets related to discontinued operations $ 114,009 $ 135,651 --------------------------------------------------------------------- --------------------------------------------------------------------- LIABILITIES Current liabilities: Accounts payable and accrued liabilities $ 30,481 $ 21,446 Income taxes payable 95 3,182 Long-term debt due within one year 10,946 22,096 Loan payable to MID 413 397 Deferred revenue 947 1,257 --------------------------------------------------------------------- 42,882 48,378 --------------------------------------------------------------------- Long-term debt - 115 Loan payable to MID, net 25,325 26,143 Other long-term liabilities 993 830 Future tax liabilities 13,547 13,547 --------------------------------------------------------------------- 39,865 40,635 --------------------------------------------------------------------- MEC's liabilities related to discontinued operations 82,747 89,013 --------------------------------------------------------------------- Eliminations (note 19) (25,738) (26,540) --------------------------------------------------------------------- Consolidated liabilities related to discontinued operations $ 57,009 $ 62,473 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 located 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 19). (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 19). (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. Under the terms of the MEC Bridge Loan (note 19), 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) On August 12, 2008, MEC announced that it had entered into an agreement to sell approximately 489 acres of excess real estate located in Ocala, Florida to Lincoln Property Company and Orion Investment Properties, Inc. for a purchase price of $16.5 million cash, subject to a 90-day due diligence period in favour of the purchasers. On November 3, 2008, MEC announced that the prospective purchasers had terminated the agreement. MEC has announced that it still intends to sell the Ocala property and will re- initiate its marketing efforts. (e) 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 September 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), (c) and (d) above, at September 30, 2008 and December 31, 2007, are shown in the table below. (restated - note 5(c)) September December As at 30, 2008 31, 2007 ------------------------------------------------------------------------- ASSETS Current assets: Real estate properties, net Porter, New York (note 6) $ - $ 1,493 ------------------------------------------------------------------------- Real estate properties, net Dixon, California (note 6) 14,139 19,139 Ocala, Florida 8,399 8,407 Oberwaltersdorf, Austria 4,446 4,482 Ebreichsdorf, Austria - 6,619 ------------------------------------------------------------------------- 26,984 38,647 ------------------------------------------------------------------------- $ 26,984 $ 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 Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Assets Held For Sale (note 5) Dixon, California(i) $ - $ - $ 5,000 $ - Porter, New York(ii) - 1,444 - 1,444 ------------------------------------------------------------------------- $ - $ 1,444 $ 5,000 $ 1,444 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Discontinued Operations (note 4) Magna Racino(TM)(iii) $ - $ - $ 29,195 $ - Portland Meadows(iv) - - 3,099 - ------------------------------------------------------------------------- $ - $ - $ 32,294 $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) As a result of significant weakness in the Northern California real estate market and the U.S. financial market, MEC recorded an impairment charge of $5.0 million related to the Dixon, California real estate property (note 5(c)) in the nine months ended September 30, 2008, which represents the excess of the carrying value of the asset over the estimated net realizable value. (ii) In connection with the sales plan relating to the real estate in Porter, New York (note 5(a)), MEC recognized an impairment loss of $1.4 million in the three-month and nine-month periods ended September 30, 2007, which represented the excess of the carrying value over the estimated fair value of these properties, less selling costs. In the three months ended December 31, 2007, $0.1 million of this impairment charge was reversed based on the actual net proceeds realized in the disposition of these properties. (iii) 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 nine months ended September 30, 2008, which represents the excess of the carrying value of the assets over the estimated net realizable value. (iv) In June 2003, the Oregon Racing Commission ("ORC") adopted regulations that permitted wagering through instant racing terminals as a form of pari-mutuel wagering at Portland Meadows (the "Instant Racing Rules"). In September 2006, the ORC granted a request by Portland Meadows to offer instant racing under its 2006-2007 race meet 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. In May 2008, MEC filed a petition with the Oregon Court of Appeal for judicial review of the order of the ORC. A decision from the Oregon Court of Appeal on Instant Racing is expected in the first or second quarter of 2009. 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 nine months ended September 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 nine-month periods ended September 30, 2008 and 2007 are computed as follows: Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- (restated (restated - note 4) - note 4) 2008 2007 2008 2007 ------------------------------------------------------------------------- Income (loss) from continuing operations $ 14,785 $ (552) $ 65,023 $ 32,308 Income (loss) from discontinued operations 1,920 (2,266) (13,680) (4,288) ------------------------------------------------------------------------- Net income (loss) $ 16,705 $ (2,818) $ 51,343 $ 28,020 ------------------------------------------------------------------------- Weighted average number of Class A Subordinate Voting and Class B Shares outstanding during the period (thousands) 46,708 48,324 46,708 48,348 Dilutive impact of stock options (thousands) - - - 21 ------------------------------------------------------------------------- 46,708 48,324 46,708 48,369 ------------------------------------------------------------------------- Diluted earnings (loss) per Class A Subordinate Voting or Class B Share - from continuing operations $ 0.32 $ (0.01) $ 1.39 $ 0.67 - from discontinued operations 0.04 (0.05) (0.29) (0.09) ------------------------------------------------------------------------- $ 0.36 $ (0.06) $ 1.10 $ 0.58 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The computation of diluted earnings (loss) per share for the three-month and nine-month periods ended September 30, 2008 excludes the effect of the potential exercise of 506,544 (2007 - 551,444) and 516,444 (2007 - 140,000) options, respectively, 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) September December As at 30, 2008 31, 2007 ------------------------------------------------------------------------- Real Estate Business Revenue-producing properties Land $ 222,533 $ 226,269 Buildings, parking lots and roadways - cost 1,431,160 1,444,241 Buildings, parking lots and roadways - accumulated depreciation (370,665) (345,825) ------------------------------------------------------------------------- 1,283,028 1,324,685 ------------------------------------------------------------------------- Development properties Land and improvements 224,009 226,248 Properties under development 539 9,541 ------------------------------------------------------------------------- 224,548 235,789 ------------------------------------------------------------------------- Properties held for sale 486 1,447 ------------------------------------------------------------------------- 1,508,062 1,561,921 ------------------------------------------------------------------------- MEC Revenue-producing racetrack properties Land and improvements 164,858 164,856 Buildings - cost 550,920 544,543 Buildings - accumulated depreciation (130,812) (113,620) Construction in progress 67,879 42,666 ------------------------------------------------------------------------- 652,845 638,445 ------------------------------------------------------------------------- Under-utilized racetrack real estate 76,130 76,130 ------------------------------------------------------------------------- Revenue-producing non-racetrack properties Land and improvements 159 2,015 Buildings - cost 2,117 2,123 Buildings - accumulated depreciation (7) (93) ------------------------------------------------------------------------- 2,269 4,045 ------------------------------------------------------------------------- 731,244 718,620 ------------------------------------------------------------------------- Eliminations (note 19) (55,380) (55,387) ------------------------------------------------------------------------- Consolidated $ 2,183,926 $ 2,225,154 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (b) During the second quarter of 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 included in "revenue-producing properties" as at September 30, 2008. (c) During the second quarter of 2008, the Real Estate Business determined that one property included in "revenue-producing properties" at December 31, 2007 is expected to be sold after its lease expiry date 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 second quarter of 2008), has been included in "properties held for sale" as at September 30, 2008. 9. BANK INDEBTEDNESS AND LONG-TERM DEBT (a) During the nine months ended September 30, 2008, the maturity date of the MEC Credit Facility was extended from March 31, 2008 to October 15, 2008. In October 2008, the maturity date was extended to November 17, 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 September 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 September 30, 2008 was 8.8% (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 September 30, 2008, $2.6 million and $2.4 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 September 30, 2008. (c) One of MEC's subsidiaries, Pimlico Racing Association, Inc., has a revolving term loan facility with a U.S. financial institution that permits the prepayment of outstanding principal without penalty. This facility matures on December 1, 2013, bears interest at 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"). On August 5, 2008, the revolving term loan facility was amended to reduce the maximum undrawn availability from $7.7 million to $4.5 million. At September 30, 2008, MEC had borrowings of $1.6 million (December 31, 2007 - nil) under this facility. (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. This bank term loan facility 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, June 30, 2008 and September 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, June 30, 2008 and September 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 was authorized, from October 8, 2007 to 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 for cash consideration of $52.1 million (Cdn. $31.13 per share on a weighted average basis). These amounts include the purchase of 485,700 shares for cancellation in the three-month and nine-month periods ended September 30, 2007 for cash consideration of $15.4 million (Cdn. $32.58 per share on a weighted average basis), of which $3.6 million was paid after September 30, 2007. The Company's historical Canadian carrying value of these shares purchased for cancellation in excess of the purchase price was $6.2 million, which has been credited to "contributed surplus" (note 11). The aggregate amount of the purchase price and the amount credited to "contributed surplus", in excess of the Company's U.S. historical reported carrying value of these shares purchased for cancellation, was $5.8 million and has been charged to "accumulated other comprehensive income" (note 12). The price that MID paid for shares purchased pursuant to the bids was the market price at the time of acquisition. No shares were purchased for cancellation in 2008. 11. CONTRIBUTED SURPLUS Changes in the Company's contributed surplus are shown in the following table: Three Months Nine Months Ended September 30, Ended September 30, ------------------------ -------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Contributed surplus, beginning of period $ 27,779 $ 2,674 $ 27,517 $ 2,667 Carrying value of shares purchased for cancellation in excess of purchase price (note 10) - 6,222 - 6,222 Stock-based compensation 312 223 574 475 Transfer to share capital on exercise of stock options - - - (245) ------------------------------------------------------------------------- Contributed surplus, end of period $ 28,091 $ 9,119 $ 28,091 $ 9,119 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 12. ACCUMULATED OTHER COMPREHENSIVE INCOME Changes in the Company's accumulated other comprehensive income are shown in the following table: Three Months Nine Months Ended September 30, Ended September 30, ------------------------ -------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Accumulated other comprehensive income, beginning of period $ 277,796 $ 200,693 $ 241,939 $ 166,553 Change in fair value of interest rate swaps, net of taxes and minority interest (24) (191) 5 (247) Foreign currency translation adjustment, net of minority interest (i) (55,513) 45,869 (19,790) 80,717 Reversal of foreign currency translation gain related to shares purchased for cancellation (note 10) - (5,778) - (5,778) Recognition of foreign currency translation translation loss (gain) in net income (loss) (ii) - - 105 (652) ------------------------------------------------------------------------- Accumulated other comprehensive income, end of period (iii) $ 222,259 $ 240,593 $ 222,259 $ 240,593 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (i) During the three-month and nine-month periods ended September 30, 2008 and 2007, the Company reported unrealized foreign currency translation gains and losses related to its self-sustaining operations having functional currencies other than the U.S. dollar. The losses in the three-month and nine-month periods ended September 30, 2008 are primarily due to the weakening of the euro and the Canadian dollar against the U.S. dollar. The gains in the three-month and nine-month periods ended September 30, 2007 are primarily due to the strengthening of the euro and the Canadian dollar against the U.S. dollar. (ii) Included in the Real Estate Business' "other gains, net" for the nine months ended September 30, 2008, is a $0.1 million currency translation loss (nine months ended September 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: September December As at 30, 2008 31, 2007 ------------------------------------------------------------------------- Foreign currency translation adjustment, net of minority interest $ 222,676 $ 242,369 Fair value of interest rate swaps, net of taxes and minority interest (417) (430) ------------------------------------------------------------------------- $ 222,259 $ 241,939 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 13. INCOME TAXES The Company conducts operations in a number of countries with varying statutory rates of taxation. Judgement is required in the estimation of income taxes, and future income tax assets and liabilities, in each of the Company's operating jurisdictions. This process involves estimating actual current tax exposure, assessing temporary differences that result from the different treatments of items for tax and accounting purposes, assessing whether it is more likely than not that future income tax assets will be realized and, based on all the available evidence, determining if a valuation allowance is required on all or a portion of such future income tax assets. The Company's effective tax rate can vary significantly quarter to quarter due to changes in (i) the proportion of income earned in each tax jurisdiction, (ii) current and future statutory rates of taxation, (iii) estimates of tax exposures, (iv) the assessment of whether it is more likely than not that future income tax assets will be realized and (v) the valuation allowances recorded on future tax assets. The Real Estate Business' income tax expense (recovery) for the three- month and nine-month periods ended September 30, 2008 is inclusive of an aggregate income tax recovery of $12.5 million and $12.1 million, respectively, due to revisions to estimates of certain tax exposures and the ability to benefit from certain income tax loss carryforwards previously not recognized, both driven by the results of tax audits in certain tax jurisdictions. Similarly, MEC's income tax recovery for discontinued operations (note 4) is inclusive of a $3.1 million income tax recovery due to revisions to estimates of certain tax exposures driven by the results of tax audits in certain tax jurisdictions. The Real Estate Business' income tax expense for the three-month and nine-month periods ended September 30, 2007 includes (i) a recovery of $1.6 million realized from the reduction in future tax rates in Canada, Germany and the United Kingdom enacted in the third quarter of 2007 and (ii) a net $1.1 million recovery primarily due to a favourable tax reassessment received in the third quarter of 2007 in relation to land sold in a prior year. 14. 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 Granted - - 125,000 32.21 Forfeited (6,000) 41.17 (35,000) 41.17 ------------------------------------------------------------------------- Stock options outstanding, September 30 500,544 34.89 516,544 35.09 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Stock options exercisable, September 30 381,544 34.16 280,544 31.15 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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. The assumptions used in determining the fair value of the MID stock options granted are shown in the table below: Three Months Nine Months Ended September 30, Ended September 30, ------------------------ -------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Risk-free interest rate - 4.3% - 4.3% Expected dividend yield - 1.92% - 1.92% Expected volatility of MID's Class A Subordinate Voting Shares - 18.9% - 18.9% Weighted average expected life (years) - 4.0 - 4.0 Weighted average fair value per option granted - $5.51 - $5.51 ------------------------------------------------------------------------- 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 Granted 8,194 3,568 ------------------------------------------------------------------------- DSUs outstanding, September 30 61,237 38,153 ------------------------------------------------------------------------- During the three and nine months ended September 30, 2008, the Real Estate Business recognized stock-based compensation expense of $0.3 million (2007 - $0.2 million) and $0.6 million (2007 - $0.8 million), respectively, which includes $3 thousand (2007 - $3 thousand) and $27 thousand (2007 - $0.3 million), respectively, pertaining to DSUs. (b) During the third quarter of 2008, 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 20(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 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 nine months ended September 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 nine months ended September 30, 2008, MEC issued 21,687 (2007 - 1,547) shares of MEC Class A Stock with a stated value of $0.2 million (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 (included in MEC's "other gains, net") in the nine months ended September 30, 2008 (2007 - $4 thousand dilution gain). 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 --------------------------------------------------------------------- MEC Stock Options outstanding, June 30 236,950 116.55 235,700 121.40 Granted - - 19,500 64.00 Forfeited or expired - - (700) 104.00 --------------------------------------------------------------------- MEC Stock Options outstanding, September 30 236,950 116.55 254,500 117.00 --------------------------------------------------------------------- --------------------------------------------------------------------- MEC Stock Options exercisable, September 30 220,802 118.92 221,783 120.40 --------------------------------------------------------------------- --------------------------------------------------------------------- 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 14(a)). The weighted average assumptions used in determining the fair value of the MEC stock options granted are shown in the table below: Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 2008 2007 2008 2007 --------------------------------------------------------------------- Risk-free interest rate - 4.2% - 4.2% Expected dividend yield - - - - Expected volatility of MEC Class A Stock - 55.9% - 55.9% Weighted average expected life (years) - 5.0 - 5.0 Weighted average fair value per option granted - $ 27.20 - $ 27.20 --------------------------------------------------------------------- --------------------------------------------------------------------- During the three-month and nine-month periods ended September 30, 2008, MEC recognized total stock-based compensation expense of $36 thousand (2007 - $0.5 million) and $0.3 million (2007 - $0.7 million), respectively, relating to performance share awards, director compensation and stock options under the MEC Plan. 15. 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 18) 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 September 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. At September 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 September 30, 2008 was $259.7 million (December 31, 2007 - $274.7 million), which is comprised of $253.3 million (December 31, 2007 - $267.6 million) of the Debentures and $6.4 million (December 31, 2007 - $7.1 million) of mortgages payable on two properties. The Real Estate Business' total capitalization at September 30, 2008 was $1.90 billion (December 31, 2007 - $1.86 billion). The Real Estate Business generated cash flows from operating activities of $132.6 million in the nine months ended September 30, 2008 and had cash and cash equivalents of $156.3 million at September 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 continues 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 September 30, 2008, MEC's net debt was $618.1 million (December 31, 2007 - $564.5 million) and MEC was in compliance with all of its covenants. 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 19). Although MEC continues to take steps to implement its plan, MEC does not expect to be able to complete asset sales as quickly as originally planned nor does MEC expect to achieve proceeds of disposition as high as originally contemplated. 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. 16. DETAILS OF CASH FROM OPERATING ACTIVITIES (a) Items not involving current cash flows: Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- (restated (restated - note 4) - note 4) 2008 2007 2008 2007 --------------------------------------------------------------------- Real Estate Business Straight-line rent adjustment $ (4) $ 150 $ (38) $ 387 Interest and other income from MEC (2,295) (156) (4,823) (299) Stock-based compensation expense 315 226 601 763 Depreciation and amortization 10,956 10,434 33,359 30,581 Write-down of long-lived assets - - 450 - Gain on disposal of real estate - (96) - (1,478) Future income taxes (865) (494) 1,782 1,361 Other losses (gains) - - 105 (652) Other 126 85 301 241 --------------------------------------------------------------------- 8,233 10,149 31,737 30,904 --------------------------------------------------------------------- MEC Stock-based compensation expense 36 463 267 735 Interest expense with MID - - - 75 Depreciation and amortization 11,244 9,974 33,283 27,438 Amortization of debt issuance costs 2,896 715 8,046 1,567 Write-down of long-lived assets - 1,444 5,000 1,444 Gain on disposal of real estate (122) (100) (24,462) (48,754) Other gains, net (19) - (1,589) (4) Future income taxes (86) (124) 1,476 (1,692) Minority interest (23,660) (18,759) (29,610) (25,211) Other 365 (1,951) 2,723 (2,939) --------------------------------------------------------------------- (9,346) (8,338) (4,866) (47,341) --------------------------------------------------------------------- Eliminations (note 19) (249) (255) (2,413) 49,453 --------------------------------------------------------------------- Consolidated $ (1,362) $ 1,556 $ 24,458 $ 33,016 --------------------------------------------------------------------- --------------------------------------------------------------------- (b) Changes in non-cash balances: Three Months Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- (restated (restated - note 4) - note 4) 2008 2007 2008 2007 --------------------------------------------------------------------- Real Estate Business Accounts receivable $ 3,428 $ 1,525 $ 4,169 $ 2,219 Loans receivable from MEC, net (321) (128) (654) (128) Prepaid expenses and other - (789) 129 (744) Accounts payable and accrued liabilities 1,297 3,326 6,277 5,386 Income taxes (10,277) (439) (8,658) 4,576 Deferred revenue (1,689) (1,019) (515) (746) --------------------------------------------------------------------- (7,562) 2,476 748 10,563 --------------------------------------------------------------------- MEC Restricted cash (1,625) (3,685) 14,906 14,945 Accounts receivable 10,223 9,310 8,981 3,136 Prepaid expenses and other 2,187 1,649 (5,030) (2,335) Accounts payable and accrued liabilities 2,504 (840) (26,191) (27,586) Income taxes 860 (932) 2,401 584 Loans Payable to MID, net 321 128 654 128 Deferred revenue 111 (2,533) (1,456) (2,221) --------------------------------------------------------------------- 14,581 3,097 (5,735) (13,349) --------------------------------------------------------------------- Eliminations (note 19) 99 715 381 544 --------------------------------------------------------------------- Consolidated $ 7,118 $ 6,288 $ (4,606) $ (2,242) --------------------------------------------------------------------- --------------------------------------------------------------------- 17. 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 September 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 nine months ended September 30, 2008 by approximately $0.4 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 September 30, 2008 were outstanding throughout the entire nine 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 $0.5 million for the nine months ended September 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 September 30, 2008, a 50 basis point change in interest rates would have impacted other comprehensive income (loss) (excluding related minority interest and tax effects) by approximately $0.5 million for the nine months ended September 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 assets and liabilities. Based on the balance of these financial instruments at September 30, 2008, a 10% change in exchange rates between the Canadian dollar and the relevant currencies at September 30, 2008 would not have had a material impact on the Company's consolidated net income for the nine months ended September 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 September 30, 2008, MEC's "accounts receivable" included on the Company's consolidated balance sheet are net of an allowance for doubtful accounts of $1.6 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 nine months ended September 30, 2008, MEC incurred a bad debt recovery of $0.2 million (2007 - $30 thousand expense) and bad debt expense of $0.1 million (2007 - $3 million expense), respectively. 18. 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 September 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 20). 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. 19. 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 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 65% of the total voting power attaching to all Magna's shares. The Stronach Trust indirectly owns the shares carrying the substantial majority of the votes of M Unicar. 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 $125.0 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, was intended to provide short-term funding to MEC as it sought to implement 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 December 1, 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 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 20). 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 15.7% at September 30, 2008). During the nine months ended September 30, 2008, the maturity date of the MEC Bridge Loan was extended from May 31, 2008 to October 31, 2008, the maximum commitment under the MEC Bridge Loan was increased from $80.0 million to $110.0 million, MEC was given the ability to re-borrow $21.5 million that had been previously repaid from proceeds of asset sales (note 5) and MEC was permitted to use up to $2.0 million to fund costs associated with the November 2008 gaming referendum in Maryland. In October 2008, the maturity date of the MEC Bridge Loan was extended to December 1, 2008, the maximum commitment under the MEC Bridge Loan was increased to $125.0 million, MEC was given the ability to re-borrow $4.5 million that had been previously repaid from proceeds of an additional asset sale (note 4) and MEC was permitted to use up to an additional $1.0 million to fund costs associated with the November 2008 gaming referendum in Maryland. Draws under the MEC Bridge Loan are not permitted after November 17, 2008 unless the MEC Credit Facility (note 9) is further extended or replaced. 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 changes made in October 2008 cannot be re-borrowed. During the three and nine months ended September 30, 2008, $4.5 million and $26.0 million, respectively, of the MEC Bridge Loan was repaid from proceeds of MEC asset sales (notes 4 and 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 amendments during the nine months ended September 30, 2008, the MID Lender received aggregate fees of $3.2 million. Subsequent to quarter- end, the MID Lender received a fee of $1.3 million in connection with the changes made in October 2008 (1% of the increased maximum commitment). 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 changes thereto are paid by MEC. At September 30, 2008, $88.6 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 $0.6 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 $88.6 million (December 31, 2007 - $35.9 million), net of $0.6 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 amendments to the MEC Bridge Loan during the nine months ended September 30, 2008, 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 October 31, 2008. In connection with the October 2008 changes to the MEC Bridge Loan, the MID Lender also agreed to extend the repayment deadline under the Gulfstream Park project financing facility to December 1, 2008. Any repayments made under either of the MEC Project Financing Facilities on or prior to December 1, 2008 will not be subject to a make-whole payment. Subsequent to quarter-end, the MID Lender received a fee of $1.0 million in connection with the October 2008 extension (1% of the minimum required repayment). 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. There were no such payments made during the three months ended September 30, 2008 (2007 - $1.6 million), and $1.7 million of such payments made during the nine months ended September 30, 2008 (2007 - $3.3 million). 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 September 30, 2008, there were balances of $171.4 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 September 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 $92.3 million (including $25.3 million in MEC's "discontinued operations" (note 4)), respectively, with the non-current portion being net of $4.0 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 September 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 $8.9 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 nine months ended September 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 September 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 nine months ended September 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 had 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 sold its 50% joint venture equity interest in Fontana Immobilien GmbH to a related party. The sale price included nominal cash consideration equal to Fontana's initial capital contribution and a future profit participation in Fontana Immobilien GmbH. Fontana and Fontana Immobilien GmbH also agreed to amend the real estate sale agreement such that payment of the purchase price to Fontana was accelerated to, and paid on, August 7, 2008, resulting in a gain in the three and nine months ended September 30, 2008 of 0.6 million euros ($0.9 million), which is included in MEC's "gain on disposal of real estate". (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. In the three and nine months ended September 30, 2008, $0.1 million of cash consideration previously held back was released to MEC. 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-month and nine-month periods ended September 30, 2008 of $0.1 million (2007 - $0.1 million) and $0.1 million (2007 - $48.8 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 $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 nine months ended September 30, 2007. (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 nine months ended September 30, 2007. The founding members and officers of the not-for-profit organization are officers and employees of MID and Magna. 20. 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 15), the Company had $4.1 million (Real Estate Business - $3.2 million; MEC - $0.9 million) of letters of credit issued with various financial institutions at September 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 September 30, 2008, these indemnities amounted to $6.5 million, with expiration dates through 2009. (g) At September 30, 2008, the Company's contractual commitments related to construction and development projects outstanding amounted to approximately $5.0 million (Real Estate Business - $4.8 million; MEC - $0.2 million). (h) On March 4, 2007, MEC entered into a series of customer-focused agreements with CDI in order to enhance wagering integrity and security, to own and operate HRTV(R), to buy and sell horseracing content, and to promote the availability of horseracing signals to customers worldwide. These agreements involved the formation of a joint venture, TrackNet Media, a reciprocal content swap agreement and the purchase by CDI from MEC of a 50% interest in HRTV(R). TrackNet Media is the vehicle through which MEC and CDI horseracing content is made available to third parties, including racetracks, OTB facilities, casinos and advance deposit wagering ("ADW") companies. TrackNet Media purchases horseracing content from third parties and makes it available through the respective MEC and CDI outlets. Under the reciprocal content swap agreement, MEC and CDI exchange their respective horseracing signals. On March 4, 2007, HRTV, LLC was created, with an effective date of April 27, 2007, in order to facilitate the sale of 50% of HRTV(R) to CDI. Both MEC and CDI are required to make quarterly capital contributions, on an equal basis, until October 2009 to fund the operations of HRTV, LLC, however, MEC may, under certain circumstances, be responsible for additional capital commitments. As of September 30, 2008, MEC has not made any additional capital contributions. MEC's share of the required capital contributions to HRTV, LLC is expected to be approximately $7.0 million, of which $4.3 million had been contributed prior to September 30, 2008. (i) On December 8, 2005, legislation authorizing the operation of slot machines within existing, licensed Broward County, Florida pari- mutuel facilities that had conducted live racing or games during each of 2002 and 2003 was passed by the Florida Legislature. On January 4, 2006, the Governor of Florida signed the legislation into law and, subsequently, the Division of Pari-mutuel Wagering developed the governing rules and regulations. Prior to the opening of the slots facility at Gulfstream Park on November 15, 2006, MEC was awarded a gaming licence for slot machine operations at Gulfstream Park in October 2006 despite an August 2006 decision rendered by the Florida First District Court of Appeals that ruled that a trial is necessary to determine whether the constitutional amendment adopting the slots initiative was invalid because the petitions bringing the initiative forward did not contain the minimum number of valid signatures. Previously, a lower court decision had granted summary judgment in favour of "Floridians for a Level Playing Field" ("FLPF"), a group in which GPRA is a member. Though FLPF pursued various procedural options in response to the Florida First District Court of Appeals decision, the Florida Supreme Court ruled in late September 2007 that the matter was not procedurally proper for consideration by the court. Its order effectively remanded the matter to the trial court for a trial on the merits. MEC has disclosed that it expects that a trial on the merits will likely take an additional year or more to fully develop and that it could take as many as three years to achieve a full factual record and trial court ruling for an appellate court to review. At September 30, 2008, the carrying value of MEC's fixed assets related to the slots facility is approximately $25.1 million. If the matter is ultimately decided in a manner adverse to MEC, a write-down of these fixed assets may be required. (j) In May 2005, MEC entered into a Limited Liability Company Agreement with Forest City (collectively with MEC, the "Partnership Members") concerning the planned development of "The Village at Gulfstream Park(TM)". That agreement contemplates the development of a mixed-use project consisting of residential units, parking, restaurants, hotels, entertainment, retail outlets and other commercial use projects on a portion of the Gulfstream Park property. Under the Limited Liability Company Agreement, Forest City is required to contribute up to a maximum of $15.0 million as an initial capital contribution. MEC is obligated to contribute 50% of any equity amounts in excess of $15.0 million as and when needed and, to September 30, 2008, MEC has contributed $4.2 million. At September 30, 2008, approximately $72.5 million of net costs have been incurred by The Village at Gulfstream Park, LLC, which have been funded by a construction loan from a third party bank, as well as equity contributions from MEC and Forest City. Included in MEC's "accounts payable and accrued liabilities" is an obligation of approximately $2.6 million reflecting MEC's unpaid share of equity contributions in excess of $15.0 million. If either of the Partnership Members fails to make required capital contributions when due, then the other Partnership Member may advance such funds to the Limited Liability Company, equal to the required capital contributions, as a recourse loan or as a capital contribution for which the capital accounts of the Partnership Members would be adjusted accordingly. The Limited Liability Company Agreement also contemplated additional agreements with MEC, including a ground lease, a reciprocal easement agreement, a development agreement, a leasing agreement and a management agreement, all of which have been executed. Upon the opening of The Village at Gulfstream Park(TM), annual cash receipts (adjusted for certain disbursements and reserves) will first be distributed to Forest City, subject to certain limitations, until the initial contribution accounts of the Partnership Members are equal. Thereafter, the cash receipts are generally expected to be distributed to the Partnership Members equally, provided they maintain their equal interest in the partnership. The annual cash payments made to Forest City to equalize the Partnership Members' initial contribution accounts will not exceed the amount of annual ground rent otherwise payable to a subsidiary of MEC. (k) On September 28, 2006, certain of MEC's affiliates entered into definitive operating agreements with Caruso regarding the proposed development of The Shops at Santa Anita on approximately 51 acres of excess land surrounding Santa Anita Park. Westfield Corporation ("Westfield"), a developer of a neighbouring parcel of land, has challenged the manner in which the entitlement process for such development has proceeded. On May 16, 2007, Westfield commenced civil litigation in the Los Angeles Superior Court in an attempt to overturn the Arcadia City Council's approval and granting of entitlements related to the construction of The Shops at Santa Anita. In addition, on May 21, 2007, Arcadia First! filed a petition against the City of Arcadia to overturn the entitlements and named MEC and certain of its subsidiaries as parties of interest. The first hearings on the merits of the petitioners' claims were heard in May 2008. On July 23, 2008, the court issued a tentative opinion in favour of the petitioners in part, concluding that eleven parts of the final environmental impact report were deficient. On September 29, 2008, the court heard the respondents' motion to vacate the tentative opinion and to enter a new and different decision. That motion was denied and the court declared its tentative opinion to be its final decision. The respondents are considering whether to amend and supplement the environmental impact report in an attempt to cure the eleven defects or, in the alternative, to file a notice of appeal. The last day to file an appeal is December 16, 2008. As a result of this legal challenge, development efforts may be delayed or suspended. Under an April 2004 Letter of Intent, MEC is also exploring the possibility of a joint venture with Caruso to develop excess lands surrounding Golden Gate Fields. To September 30, 2008, MEC has expended $10.7 million on these development initiatives, of which $0.7 million was paid in the nine months ended September 30, 2008. These amounts have been included in MEC's "real estate properties, net" on the Company's consolidated balance sheets. Under the terms of these arrangements, MEC may be responsible to fund additional costs. However, to September 30, 2008, no such payments have been made. (l) In November 2006, MEC sold its wholly-owned interest in The Meadows, a standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc., and a fund managed by Oaktree Capital Management, LLC (together, "Millennium- Oaktree"). On closing, MEC received cash consideration of $171.8 million, net of transaction costs of $3.2 million, and a $25.0 million holdback note payable to MEC over a five-year period, subject to offset for certain indemnification obligations (the "Meadows Holdback Note"). Based on the indemnification obligations and other terms pertaining to the Meadows Holdback Note, the Meadows Holdback Note will be recognized in the consolidated financial statements upon the settlement of the indemnification obligations and as payments are received. The parties also entered into a racing services agreement whereby MEC pays $50 thousand per annum and continues to operate, for its own account, the racing operations at The Meadows until at least July 2011. On December 12, 2007, Cannery Casino Resorts, LLC, the parent company of Millennium-Oaktree, announced it had entered into an agreement to sell Millennium-Oaktree to Crown Limited. If the deal is consummated, either party to the racing services agreement will have the option to terminate the arrangement. $5.6 million of the gain from the sale of The Meadows was initially deferred and included in MEC's "other long-term liabilities" representing the estimated net present value of the future operating losses expected over the term of the racing services agreement. Such amount is being recognized as a reduction of "general and administrative" expenses in MEC's results of operations over the term of the racing services agreement. Effective January 1, 2008, The Meadows entered into an agreement with the Meadows Standardbred Owners Association, which expires on December 31, 2009, whereby the horsemen will make contributions to subsidize backside maintenance and marketing expenses at The Meadows. As a result, the estimated operating losses expected over the remaining term of the racing services agreement have been revised, resulting in an additional $2.0 million of previously deferred gains being recognized in MEC's "other gains, net" for the nine months ended September 30, 2008. Until December 25, 2007, The Meadows participated in a multi-employer defined benefit pension plan for which the pension plan's total vested liabilities exceeded the plan's assets. The New Jersey Sports & Exposition Authority previously withdrew from the pension plan effective November 1, 2007. As the only remaining participant in the pension plan, The Meadows withdrew from the pension plan effective December 25, 2007, which constituted a mass withdrawal. An updated actuarial valuation is in the process of being obtained, however, based on allocation information provided by the plan, the estimated withdrawal liability of The Meadows is approximately $6.2 million. This liability may be satisfied by annual payments of approximately $0.3 million. As part of the indemnification obligations provided for in the Meadows Holdback Note, the mass withdrawal liability that has been triggered as a result of The Meadows' withdrawal from the plan will be set-off against the amount owing to MEC under the Meadows Holdback Note. (m) MJC was party to agreements with the Maryland Thoroughbred Horsemen's Association ("MTHA") and the Maryland Breeders' Association, which expired on December 31, 2007, under which the horsemen and the breeders each contributed 4.75% of the costs of simulcasting to MJC. On August 28, 2008, MJC entered into an agreement under which the MTHA paid $0.6 million as an expense contribution towards the costs associated with simulcasting at MJC. In return, MJC agreed to conduct 65 live racing days during the period from September 4, 2008 to December 31, 2008, maintain overnight purses at an average of $160 thousand per day during the aforementioned period, and maintain stabling facilities at Laurel Park and the Bowie Training Center during the aforementioned period. (n) On February 12, 2008, MEC received notice from the Nasdaq Stock Market ("Nasdaq") advising that, in accordance with Nasdaq Marketplace Rule 4450(e)(2), MEC had until August 11, 2008 to regain compliance with the minimum bid price required for the continued listing of the MEC Class A Stock on Nasdaq, as set forth in Nasdaq Marketplace Rule 4450(a)(5). MEC received this notice because the bid price of its publicly held MEC Class A Stock closed below the $1.00 per share minimum for 30 consecutive business days prior to February 12, 2008. In order to provide MEC with flexibility in addressing market-related issues affecting its capitalization and to address the Nasdaq continuous listing requirements, MEC's Board of Directors adopted a resolution, approved by MEC stockholders on May 6, 2008, to amend MEC's Certificate of Incorporation to permit a one-time reverse stock split of MEC's Class A Stock and MEC Class B Stock, prior to May 6, 2009, in any whole number consolidated ratio from 1:10 to 1:20. Effective July 22, 2008, MEC completed a reverse stock split of its Class A Stock and Class B Stock utilizing a 1:20 consolidation ratio. On August 5, 2008, MEC received notice from Nasdaq that it had regained compliance with the minimum bid continued listing requirement and the matter had been closed. As a result of the reverse stock split, 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. The reverse stock split affects all shares of common stock, stock options and convertible securities of MEC outstanding prior to the effective date. The 58.6 million outstanding shares of MEC Class A Stock (4.4 million of which were held by MID) and 58.4 million outstanding shares of MEC Class B Stock (all of which were held by MID) were reduced to 2.9 million shares of MEC Class A Stock (0.2 million of which are held by MID) and 2.9 million shares of MEC Class B Stock (all of which continue to be held by MID), respectively. Because the reverse stock split applies to all issued shares of MEC Class A Stock and MEC Class B Stock, it did not alter the relative rights and preferences of MID's interest in MEC, nor did it affect MID's proportionate equity or voting interest in MEC, except to the extent the reverse stock split resulted in fractional shares being cashed out. The Company recorded a gain of $19 thousand, included in "other gains" reported under the MEC segment for the three and nine months ended September 30, 2008 in association with fractional shares of MEC Class A Stock redeemed pursuant to MEC's reverse stock split. As a result of the reverse stock split, the conversion price for which each of MEC's $150.0 million of 8.55% convertible subordinated notes and $75.0 million of 7.25% convertible subordinated notes are convertible into shares of MEC Class A Stock has been adjusted from $7.05 and $8.50 per share, respectively, to $141.00 and $170.00 per share, respectively. (o) On May 8, 2008, one of MEC's wholly-owned subsidiaries, Los Angeles Turf Club, Incorporated, commenced civil litigation in the District Court in Los Angeles for breach of contract. It is seeking damages in excess of $8.4 million from Cushion Track Footing USA, LLC and other defendants for failure to install a racing surface at Santa Anita Park suitable for the purpose for which it was intended. The defendants were served with the complaint and filed a motion to dismiss the action for lack of personal jurisdiction. On October 22, 2008, the presiding judge denied the defendant's motions, such that they are now required to file answers to the complaint within 20 days of the judge's decision. DATASOURCE: MI Developments Inc. CONTACT: please contact Richard J. Smith, Executive Vice- President and Chief Financial Officer, at (905) 726-7507; for teleconferencing questions, please contact Andrea Sanelli at (905) 726-7504

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