AURORA, ON, March 27 /PRNewswire-FirstCall/ -- MI Developments Inc.
(TSX: MIM.A, MIM.B; NYSE: MIM) ("MID" or the "Company") today
announced its results for the three-month period and year ended
December 31, 2008. All figures are in U.S. dollars.
-------------------------------------------------------------------------
(in thousands, except per share figures) REAL ESTATE BUSINESS(1)
Three months ended Year ended December 31, December 31,
------------------------- ------------------------- 2008 2007 2008
2007 ------------ ------------ ------------ ------------ Revenues $
54,495 $ 51,391 $ 219,141 $ 189,547 Net income $ 32,574 $ 37,735 $
132,647 $ 110,311 Funds from operations ("FFO")(2) $ 42,552 $
39,403 $ 178,321 $ 142,180 Diluted FFO per share(2) $ 0.91 $ 0.84 $
3.82 $ 2.96
-------------------------------------------------------------------------
(in thousands, except per share figures) MID CONSOLIDATED(1) Three
months ended Year ended December 31, December 31,
------------------------- ------------------------- 2008 2007 2008
2007 ------------ ------------ ------------ ------------ Revenues
Real Estate Business $ 54,495 $ 51,391 $ 219,141 $ 189,547 Magna
Entertainment Corp. ("MEC")(3) 115,369 115,224 595,910 619,623
Eliminations (13,652) (7,203) (40,566) (22,539) ------------
------------ ------------ ------------ $ 156,212 $ 159,412 $
774,485 $ 786,631 ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income (loss) Real Estate Business $ 32,574 $ 37,735 $ 132,647
$ 110,311 MEC - continuing operations (78,272) (24,102) (112,879)
(9,279) Eliminations (642) (178) (1,085) (55,269) ------------
------------ ------------ ------------ Income (loss) from
continuing operations (46,340) 13,455 18,683 45,763 MEC -
discontinued operations(4) (8,219) (1,966) (21,899) (6,254)
------------ ------------ ------------ ------------ $ (54,559) $
11,489 $ (3,216) $ 39,509 ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted earnings (loss) per share from continuing operations $
(0.99) $ 0.28 $ 0.40 $ 0.95 Diluted earnings (loss) per share $
(1.17) $ 0.24 $ (0.07) $ 0.82
-------------------------------------------------------------------------
(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 investors 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 periods and years ended
December 31, 2008 and 2007 include the operations of Remington
Park, Thistledown, Portland Meadows and Magna Racino(TM). In
addition, MEC's discontinued operations for the year ended December
31, 2008 and the three-month period and year ended December 31,
2007 include the operations of Great Lakes Downs, which was sold in
July 2008.
-------------------------------------------------------------------------
2008 REAL ESTATE BUSINESS OPERATING HIGHLIGHTS
---------------------------------------------- - Annual FFO
increased by 25% to $178.3 million ($3.82 per share) from $142.2
million ($2.96 per share) in the prior year. - Annual rental
revenues and total revenues were $178.6 million and $219.1 million,
respectively, representing increases over the prior year of 7% and
16%, respectively. - Interest and other income earned from MID's
secured loans to MEC was $40.5 million, up from $22.5 million in
2007. - Annual net income of the Real Estate Business increased by
20% to $132.6 million from $110.3 million in the prior year. -
Eight Magna-related expansion projects and one third-party
expansion project were brought on-stream during 2008, adding an
aggregate of 154 thousand square feet of leaseable area, at a total
cost of $21.0 million. - The Real Estate Business' customer base
continued to expand with the signing of long-term leases with
affiliates of Cardinal Health and Siemens Canada. Dennis Mills,
MID's Vice-Chairman and Chief Executive Officer, stated, "We are
very pleased with the strong financial results MID achieved in
2008, marking our sixth consecutive year of year-over-year revenue
growth. Our continued success in the face of unprecedented economic
volatility in the latter half of 2008 is a testament to our solid
fundamentals, conservative balance sheet and the quality and
stability of our portfolio of assets. Looking ahead, we will
continue to seek new opportunities for growth with Magna when the
automotive industry recovers and, in the near-term, we are
committed to working to leverage our experience and expertise to
expand our third-party tenant roster and diversify our portfolio."
MEC CHAPTER 11 FILING AND PROCESS ---------------------------------
On March 5, 2009 (the "Petition Date"), MEC and certain of its
subsidiaries (collectively, the "Debtors") filed voluntary
petitions for reorganization under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Court") and
were granted recognition of the Chapter 11 proceedings from the
Ontario Superior Court of Justice under section 18.6 of the
Companies' Creditors Arrangement Act in Canada. MID holds a
controlling equity interest in MEC and, through a subsidiary of MID
(the "MID Lender"), is the largest secured creditor of MEC. At the
Petition Date, the balance of MID's existing loans to MEC,
including accrued interest, was approximately $372 million,
comprised of $171 million under the Gulfstream Park project
financing, $23 million under the Remington Park project financing,
$125 million under the bridge loan provided in September 2007 (the
"2007 MEC Bridge Loan"), and $53 million under the loan provided in
December 2008 discussed further below (the "2008 MEC Loan"). All of
these loans are secured. Mr. Mills commented, "Despite MEC's
significant financial challenges, we continue to believe that it
has a portfolio of valuable real estate that is attractive from a
development and redevelopment perspective. Our participation in the
MEC Chapter 11 process is intended to preserve the value of our
secured loans and ultimately create value for MID shareholders.
That is why MID made available to MEC the DIP loan and entered into
an agreement with MEC to be the stalking horse bidder for certain
of MEC's assets. At the same time, we are developing a plan to
segregate any racing or gaming assets that we may acquire in the
MEC Chapter 11 process in a separate and self-sustaining
subsidiary." DIP Loan In connection with the Debtors' Chapter 11
filing, MID, through the MID Lender, agreed to provide a six-month
secured debtor-in-possession financing facility to MEC (the "DIP
Loan") in the amount of up to $62.5 million. The DIP Loan initial
tranche of up to $13.4 million was made available to MEC on March
6, 2009 pursuant to approval of the Court. An interim order was
subsequently entered by the Court on March 13, 2009. The final
terms of the DIP Loan will be confirmed and the second tranche of
up to $49.1 million will be made available subject to, and upon
entry of, a final order of the Court. The hearing on this final
order is scheduled for April 3, 2009. Subject to entry of a final
order, a portion of the DIP Loan will be used to fund interest and
fees payable to secured creditors, including an estimated $26.2
million to MID. Subject to entry of a final order, the DIP Loan
will be secured by liens on substantially all assets of MEC and its
subsidiaries (subject to prior ranking liens), as well as a pledge
of capital stock of certain guarantors. Under the DIP Loan, MEC may
request funds to be advanced under the DIP Loan on a monthly basis
and such funds must be used in accordance with an approved budget.
The terms of the DIP Loan contemplate that MEC will sell all or
substantially all of its assets through an auction process and use
the proceeds from the asset sales to repay its creditors, including
the MID Lender. Miller Buckfire & Co., LLC, MEC's financial
advisor and investment banker, will conduct a marketing and sale
process for MEC's assets. Stalking Horse Bid MID has entered into
an agreement with MEC to purchase MEC's relevant interests
associated with the following assets (the "Stalking Horse Bid"):
Golden Gate Fields; Gulfstream Park, including MEC's interest in
The Village at Gulfstream Park(TM) (a joint venture with Forest
City Enterprises, Inc. ("Forest City")); Palm Meadows Training
Center and related excess lands; Lone Star Park; AmTote
International, Inc. ("AmTote"); XpressBet(R); and a holdback note
associated with MEC's sale of The Meadows in 2006 (the "Meadows
Holdback Note"). MID's aggregate offer price for these assets is
approximately $195 million, with $136 million to be satisfied
through a credit bid of the MID Lender's existing loans to MEC, $44
million in cash and $15 million through the assumption of a capital
lease. MEC has sought Court approval of the bid and auction
procedures for the sale of these assets, and MID's Stalking Horse
Bid may be topped by third parties during this auction process. MID
will not receive any termination fees if MEC sells any assets to a
third party, but may receive reimbursement for its expenses in
connection with the Stalking Horse Bid. A hearing on the bid and
auction procedures relating to the Stalking Horse Bid assets and
MEC's other assets is scheduled for April 3, 2009. MID has not made
an offer to purchase any other assets of MEC at this time, although
MID will continue to evaluate whether to do so during the course of
the Chapter 11 process. Post-Chapter 11 Operations; Forbearance
Agreement If MID acquires non-racing real estate assets from MEC in
the Chapter 11 auction process, MID would retain and develop these
assets. Any horseracing or gaming assets acquired by MID would be
segregated from MID's real estate business and held in one or more
new wholly-owned subsidiaries of MID ("RaceCo"). Subject to the
outcome of the Chapter 11 auction process, (a) MID would retain the
lands at Golden Gate Fields and Gulfstream Park, the joint venture
interest in The Village at Gulfstream Park(TM), and the Meadows
Holdback Note and (b) RaceCo would lease the racing and gaming
facilities at Gulfstream Park and Golden Gate Fields from MID
pursuant to triple-net leases at fair market rent and would own the
relevant interests in Lone Star Park, AmTote and XpressBet(R). If
MID acquires the Golden Gate Fields property, it intends to
immediately commence seeking all required approvals to develop the
property for commercial real estate uses. On closing of the asset
purchases, MID would execute a forbearance agreement providing
that, without the prior approval of a majority of the votes of
minority holders of MID Class A Shares, MID would not (a) make any
further debt or equity investment in, or otherwise give financial
assistance to, RaceCo or (b) enter into any transactions with, or
provide any services or personnel to, RaceCo, except for (i) the
triple-net leases referred to above and (ii) limited administrative
and office services. MID would also agree not to enter into any
transactions in the horseracing or gaming business except through
RaceCo. By December 31, 2011, MID would either (a) if RaceCo were
pro forma profitable and self-sustaining, sell it or spin it off to
its shareholders, or (b) otherwise, cease racing and gaming
operations at RaceCo and either sell or develop all of RaceCo's
remaining assets. MEC as a Going Concern The results of operations
and the financial position of MEC have been included in the
Company's unaudited interim consolidated financial statements
accompanying this press release using the same generally accepted
accounting principles as applicable prior to MEC's Chapter 11
filing. Although MEC has filed for relief under Chapter 11 of the
Bankruptcy Code, MEC's results of operations and financial position
continue to be included in the Company's consolidated financial
statements using the going concern concept, which assumes that MEC
will be able to realize its assets and discharge its liabilities in
the normal course of business for the foreseeable future. However,
MEC's realization of assets and discharge of liabilities is subject
to significant uncertainty and substantial doubt exists as to
whether MEC will be able to continue as a going concern. If the
going concern basis is not appropriate, reductions to the carrying
amounts and/or adjustments to the classification of MEC's assets
and liabilities will be necessary in the Company's 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. For further details of MEC's
Chapter 11 Filing and Process, the DIP Loan, the Stalking Horse Bid
and MEC's going concern assumption, please refer to notes 1(a) and
2 to the accompanying unaudited interim consolidated financial
statements below. DISCUSSIONS WITH MID SHAREHOLDERS AND
REORGANIZATION PROPOSALS
--------------------------------------------------------------
Since shortly after the time of the Company's spin-off from 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 Company has had a
controlling equity interest in MEC since the time of the Company's
spin-off and 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 (the "March 2008 Reorganization Proposal") on behalf of
various shareholders of MID, including entities affiliated with the
Stronach Trust (the "Stronach Group"), MID's controlling
shareholder. In the period following the announcement of the March
2008 Reorganization Proposal, certain of the Company's Class A
shareholders expressed their opposition to the proposal.
Accordingly, in June 2008, at the direction of a Special Committee
(the "MID Special Committee") of MID's Board of Directors (the
"Board"), MID management commenced discussions with a number of MID
Class A shareholders, including those shareholders that had
supported the March 2008 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. No consensus was reached with respect to amendments to the
March 2008 Reorganization Proposal that would have resulted in a
revised proposal that MID would have been asked to put before its
shareholders for their consideration, and, on November 7, 2008, MID
announced that discussions with shareholders with respect to the
March 2008 Reorganization Proposal had effectively terminated. MID
continued to work on developing an alternative for its investments
in MEC. On November 26, 2008, MID announced that the MID Special
Committee had recommended, and the Board had approved, holding a
vote of MID shareholders on a reorganization proposal developed by
MID management (the "November 2008 Reorganization Proposal"). The
November 2008 Reorganization Proposal included an additional loan
to MEC, as well as amendments to the existing financing
arrangements with MEC, all of which were implemented upon
announcement of the November 2008 Reorganization Proposal as
discussed further below. As a result of, among other things,
current global economic conditions, the continued disruptions in
the financial markets and ongoing uncertainty in the automotive
industry, MID determined that it was unlikely that it would be able
to arrange the new debt financing associated with the November 2008
Reorganization Proposal, nor would it be prudent to raise the new
debt until such time as the ongoing uncertainty in the automotive
industry has been resolved. As a result, on February 18, 2009, MID
announced that it was not proceeding with the November 2008
Reorganization Proposal. The termination of the transaction
agreement among MID, MEC and the Stronach Group with respect to the
November 2008 Reorganization Proposal resulted in the acceleration
of the maturity of various MEC loans, including a new maturity date
for MEC's $40.0 million senior secured revolving credit facility
with a Canadian financial institution (the "MEC Credit Facility")
of March 5, 2009, as discussed further below. Accordingly, MID and
MEC commenced discussions in February 2009 that resulted in the MEC
Chapter 11 filing. CHANGES TO MEC LOANS --------------------
Between May and October of 2008, the maximum commitment available
to MEC under the 2007 MEC Bridge Loan was increased to $125.0
million and the maturity date was extended to December 1, 2008. In
addition, the deadline for MEC to repay $100.0 million of
indebtedness under the Gulfstream Park project financing facility
with the MID Lender was extended to December 1, 2008. Concurrent
with these changes to the MEC financing arrangements with the MID
Lender, the maturity date of the MEC Credit Facility was extended
to November 17, 2008 and, subsequently, to November 28, 2008. On
November 26, 2008, concurrent with the announcement of the November
2008 Reorganization Proposal, MID announced that the MID Lender had
agreed to extend the maturity date of the 2007 MEC Bridge Loan to
March 31, 2009. At the same time, the MEC Credit Facility was
extended to mature on March 16, 2009. The maturity dates for the
2007 MEC Bridge Loan and the MEC Credit Facility were accelerated
to March 20, 2009 and March 5, 2009, respectively, when the
transaction agreement for the November 2008 Reorganization Proposal
was terminated as discussed above. As a result of MEC's Chapter 11
filing on March 5, 2009, neither of these facilities were paid when
due. MID also announced on November 26, 2008 that the MID Lender
had agreed to provide MEC with the 2008 MEC Loan in two tranches.
The first tranche of up to $50.0 million (plus costs and fees) was
set to mature on March 31, 2009 (accelerated to March 20, 2009 when
the transaction agreement for the November 2008 Reorganization
Proposal was terminated as discussed above) and was used solely to
fund operations, payments of principal or interest and other costs
under the 2008 MEC Loan and under other loans provided by the MID
Lender to MEC, mandatory payments of interest in connection with
other of MEC's existing debt, maintenance capital expenditures and
capital expenditures required pursuant to the terms of MEC's joint
venture arrangements. As a result of MEC's Chapter 11 filing on
March 5, 2009, the first tranche of the 2008 MEC Loan was not
repaid when due. The second tranche of up to $75.0 million (plus
costs and fees) was made available to fund the application by one
of MEC's subsidiaries for a Maryland slots licence (the "Slots
Application") and related matters and the construction of the
temporary slots facility at Laurel Park, following receipt of the
Maryland slots licence. In February 2009, MEC's subsidiary, Laurel
Park, submitted the Slots Application and drew $28.5 million under
Tranche 2 of the 2008 MEC Loan in order to place the initial
licence fee in escrow pending resolution of certain issues
associated with the application. Subsequently, MEC was informed by
the Maryland VLT Facility Location Commission that MEC's Slots
Application was not accepted for consideration. Accordingly, MEC
repaid $28.5 million to the MID Lender under Tranche 2 of the 2008
MEC Loan. The maturity date of the second tranche of the 2008 MEC
Loan was initially December 31, 2011, but as a result of the Slots
Application not being accepted for consideration, it was
accelerated in accordance with the terms of the loan to May 13,
2009. 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 four 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 ongoing disputes between
the Company and one of its shareholders, Greenlight Capital, Inc.
("Greenlight"). Although MID continues to explore alternatives to
re-establish a strong and active relationship with Magna, and
although Greenlight's oppression application 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 at the end of 2006 to 105 properties at the end of 2008
and we have incurred a net reduction in total leaseable area of
approximately 0.2 million square feet since the end of 2006. 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, many of which considerably
intensified over the course of 2008 as a result of negative
economic developments, falling consumer confidence and other
related factors, include: - declining global light vehicle
production volumes and sales levels; - the restructuring of the
global automotive industry and the growing risk of original
equipment manufacturer ("OEM") insolvency proceedings; -
significant government financial intervention in the global
automotive and financial services industries; - the accelerated
deterioration of the financial condition of the automotive supply
base and the corresponding increase in Magna's operational and
financial exposure as many of these suppliers could become
bankrupt, insolvent or cease operations; - the continued exertion
of significant pricing pressure by OEMs; - increasing governmental
intervention in the global automotive industry, particularly fuel
economy and emissions regulations; - increasing government
incentives and consumer demand for more fuel- efficient and
environmentally-friendly vehicles with alternative- energy fuel
systems and additional safety features; - the growth of the
automotive industry in China, Thailand, India, Russia, Brazil and
other low cost countries, and the migration of component and
vehicle design, development, engineering and manufacturing to
certain of these lower cost countries; - the growth of the A to D
vehicle segments (micro to mid-size cars), particularly in emerging
markets; and - the continued consolidation of vehicle platforms.
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 2009 and that it expects to take
additional steps to offset the production declines and capacity
reductions, which might include closing additional facilities and
growing its manufacturing presence in new markets where MID to date
has not had a significant presence. Magna's rationalization
strategy currently includes eight facilities under lease from the
Company in North America with an aggregate net book value of $35.3
million at December 31, 2008. These eight facilities represent 1.2
million square feet of leaseable area with annualized lease
payments of approximately $4.7 million, or 2.8%, of MID's
annualized lease payments at December 31, 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
-------------------------------------- Fourth Quarter Highlights In
respect of our core rental portfolio, during the fourth quarter of
2008 we brought on-stream two expansion projects in Austria for
Magna, and one third-party expansion project, representing an
aggregate of ten thousand square feet of leaseable area, at a cost
of $1.7 million. At December 31, 2008, the Real Estate Business had
three minor projects under development: one in each of Canada, the
United States and Austria. These projects commenced in 2008 and
will add an aggregate of nine thousand square feet of leaseable
area to the Real Estate Business' income-producing portfolio. The
total anticipated cost of these projects is approximately $3.3
million, of which $1.2 million had been incurred at December 31,
2008. At December 31, 2008, the Real Estate Business had 27.3
million square feet of leaseable area, with annualized lease
payments of $167.7 million, representing a return of 10.9% on the
gross carrying value of our income-producing portfolio. Three
Months Ended December 31, 2008 Revenues were $54.5 million in the
fourth quarter of 2008, a 6% increase from revenues of $51.4
million in the fourth quarter of 2007. The higher revenues are due
to a $6.4 million increase in interest and other income earned from
MEC, primarily due to a $4.8 million increase in interest and fees
earned under the 2007 MEC Bridge Loan established in September 2007
and the increased level of borrowings and arrangement fees under
the Gulfstream Park project financing facility, partially offset by
a $3.3 million reduction in rental revenues. The decrease in rental
revenues is primarily due to foreign exchange, which had a $4.5
million negative impact as the U.S. dollar strengthened, compared
to the prior year period, against the foreign currencies (primarily
the Canadian dollar and the euro) in which the Real Estate Business
operates. Property vacancies and lease replacements and renewals
also had a negative impact, reducing revenue for the quarter by
$0.7 million compared to the prior year period. These negative
contributions to rental revenues were partially offset by
contractual rent adjustments which increased revenues by $1.8
million, primarily due to cumulative CPI-based increases (being
increases that occur every five years or once a specified
cumulative increase in CPI has occurred) implemented in 2008. FFO
for the fourth quarter of 2008 was $42.6 million ($0.91 per share)
compared to $39.4 million ($0.84 per share) in the prior year
period, representing an increase of 8%. This $3.2 million increase
is due to increases of $3.1 million in revenues and $1.8 million in
foreign exchange gains and a $0.3 million reduction in net interest
expense, partially offset by increases of $0.8 million in general
and administrative expenses and $1.2 million in current income tax
expense. General and administrative expenses in the fourth quarter
of 2008 increased by $0.8 million to $5.6 million from $4.8 million
in the fourth quarter of 2007. General and administrative expenses
for the fourth quarter of 2008 include (i) $1.9 million of advisory
and other costs incurred in connection with the reorganization
proposals and the exploration of alternatives in respect of MID's
investments in MEC (see "DISCUSSIONS WITH MID SHAREHOLDERS AND
REORGANIZATION PROPOSALS") and (ii) a $0.9 million net recovery of
costs incurred in connection with the litigation brought by
Greenlight (the "Greenlight Litigation"). Excluding these items,
general and administrative expenses of $4.6 million for the fourth
quarter of 2008 decreased slightly compared to $4.8 million in the
fourth quarter of 2007. The Real Estate Business recognized net
foreign exchange gains of $1.8 million in the fourth quarter of
2008 (nominal amount in the prior year period) from the
re-measurement of certain foreign currency denominated assets and
liabilities. The drivers of such net gains are primarily (i) the
re-measurement of certain net current and future tax liabilities of
MID subsidiaries having a functional currency other than that in
which income taxes are required to be paid and (ii) the
re-measurement of U.S. dollar denominated net liabilities held
within MID's corporate entity, which has a Canadian functional
currency. Net interest expense was $2.3 million in the fourth
quarter of 2008 ($3.3 million of interest expense less $1.0 million
of interest income) compared to $2.7 million in the third quarter
of 2007 ($4.3 million of interest expense less $1.6 million of
interest income). The $0.6 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 $1.0 million, primarily due to foreign exchange as the
Company's senior unsecured debentures are denominated in Canadian
dollars. During the fourth quarter of 2007, the Real Estate
Business recognized $7.1 million of currency translation gains.
These gains, which were previously included in the "accumulated
other comprehensive income" component of shareholders' equity, were
recognized in the determination of net income as a result of the
Real Estate Business repatriating funds from certain of its foreign
operations. These gains have been excluded from the determination
of the Real Estate Business' FFO. The Real Estate Business had an
income tax expense for the fourth quarter of 2008 of $5.7 million,
compared to an income tax expense for the fourth quarter of 2007 of
$2.3 million. Excluding net unusual tax recoveries in the three
months ended December 31, 2008 and 2007 of $1.3 million and $3.8
million, respectively (see note 13 to the accompanying financial
statements) and the currency translation gains in the fourth
quarter of 2007 discussed previously (which are not subject to
tax), the income tax expense for the fourth quarter of 2008 was
$7.0 million, representing an effective tax rate of 18.4%, compared
to $6.1 million for the fourth quarter of 2007, representing an
effective tax rate of 18.6%. The Real Estate Business reported net
income of $32.6 million for the fourth quarter of 2008 compared to
$37.7 million in the prior year period. The decrease in net income
is due to $7.1 million of currency translation gains in the prior
year period and increases of $0.8 million in general and
administrative expenses and $3.4 million in income tax expense,
partially offset by increases of $3.1 million in revenues and $1.8
million in foreign exchange gains and reductions of $0.9 million in
depreciation and amortization (due primarily to the impact of
foreign exchange) and $0.3 million in net interest expense. Year
Ended December 31, 2008 Revenues were $219.1 million in 2008, a 16%
increase from revenues of $189.5 million in 2007. The higher
revenues are due to an $11.6 million increase in rental revenues
and an $18.0 million increase in interest and other income earned
from MEC, primarily due to a $16.0 million increase in interest and
fees earned under the 2007 MEC Bridge Loan and the increased level
of borrowings and arrangement fees under the Gulfstream Park
project financing facility. The higher rental revenues are
partially due to foreign exchange, which had a $5.2 million
positive impact as the U.S. dollar weakened, compared to the prior
year, against most foreign currencies (primarily the euro) in which
the Real Estate Business operates. Contractual rent adjustments
(primarily being the cumulative CPI-based increases discussed
previously) and projects coming on-stream also had positive
impacts, increasing revenues by $6.9 million and $2.3 million,
respectively. These positive contributions to rental revenues were
partially offset by a $2.7 million reduction from property
disposals and vacancies and lease renewals and replacements,
resulting partially from activities related to Magna's plant
rationalization strategy and the general economic downturn. FFO for
2008 was $178.3 million ($3.82 per share) compared to $142.2
million ($2.96 per share) in the prior year. FFO for 2008 includes
a $7.4 million current tax recovery from revisions to estimates of
certain tax exposures (see note 13 to the attached financial
statements). FFO for 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 previous
year. Excluding the above income tax items and a $3.9 million 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 2008 was $168.3 million ($3.60 per share), representing a 19%
increase from FFO for 2007 of $141.1 million ($2.93 per share).
This $27.2 million increase is due to increases of $29.6 million in
revenues and $0.9 million in foreign exchange gains and a $1.4
million reduction in current income tax expense (excluding current
income taxes associated with disposal gains in 2007), partially
offset by increases of $2.6 million in general and administrative
expenses and $2.1 million in net interest expense. General and
administrative expenses increased by $2.6 million to $26.1 million
for 2008 from $23.5 million in the prior year. General and
administrative expenses for 2008 include (i) $7.4 million of
advisory and other costs incurred in connection with the
reorganization proposals and the exploration of alternatives in
respect of MID's investments in MEC, (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 and (iii) a
net $1.2 million recovery of costs incurred in connection with the
Greenlight Litigation. General and administrative expenses for 2007
include (i) $2.2 million of advisory and other costs in connection
with the exploration of alternatives in respect of MID's
investments 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 were approximately $18.9 million in each of
the years ended December 31, 2007 and 2008. The Real Estate
Business recognized net foreign exchange gains of $1.6 million and
$0.7 million in 2008 and 2007, respectively, from the
re-measurement of certain foreign currency denominated assets and
liabilities as discussed previously. Net interest expense was $10.2
million in 2008 ($15.2 million of interest expense less $5.0
million of interest income) compared to $8.1 million for 2007
($15.4 million of interest expense less $7.3 million of interest
income). The 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. The Real Estate Business' income tax expense
was $11.7 million in 2008 compared to $16.0 million in the prior
year. Excluding net unusual tax recoveries in 2008 and 2007 of
$13.4 million and $6.5 million, respectively (see note 13 to the
attached financial statements), a $1.5 million gain on disposal of
real estate and related tax expense in 2007 and $7.7 million of net
currency translation gains in 2007, the income tax expense for 2008
was $25.1 million, representing an effective tax rate of 17.4%,
compared to $22.1 million for 2007, representing an effective tax
rate of 18.9%. This 1.5% 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 $132.6
million for 2008 increased by 20% compared to net income of $110.3
million for 2007. The $22.3 million increase is due to increases of
$29.6 million in revenues and $0.9 million in foreign exchange
gains and a $4.3 million reduction in income tax expense, partially
offset by increases of $2.6 million in general and administrative
expenses, $1.9 million in depreciation and amortization (due
primarily to the impact of foreign exchange and projects brought
on-stream in 2007 and 2008) and $2.1 million in net interest
expense. Net income was also negatively impacted, compared to the
prior year, by a write-down of long-lived assets of $0.5 million
recognized in 2008, $3.9 million less of other gains and the $1.5
million gain on disposal of real estate recognized in 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
discontinued operations for the three-month periods and years ended
December 31, 2008 and 2007 include the operations of Remington
Park, Thistledown, Portland Meadows and Magna Racino(TM). In
addition, MEC's discontinued operations for the year ended December
31, 2008 and the three-month period and year ended December 31,
2007 include the operations of Great Lakes Downs, which was sold in
July 2008. MEC's revenues from continuing operations for the fourth
quarter of 2008 were relatively stable at $115.4 million compared
to $115.2 million in the prior year period. MEC's revenues for the
fourth quarter of 2008 compared to the fourth quarter of 2007 were
impacted by positive factors including (i) 25 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 to 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 (i) one
less live race date at Laurel Park, (ii) three fewer live race days
at Lone Star Park, (iii) lower average daily attendance and handle
at Laurel Park and Pimlico (collectively "MJC") and Lone Star Park
and (iv) fewer housing unit sales at MEC's Austrian residential
housing development. MEC's revenues from continuing operations for
the year ended December 31, 2008 decreased 4% to $595.9 million
from $619.6 million in the prior year, primarily due to (i) 14
fewer live race days at Laurel Park, (ii) lower handle and wagering
on the 2008 Preakness(R), (iii) 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, (iv) reduced simulcasting wagering at Golden Gate
Fields, particularly in the first quarter, due to fewer live race
days at Santa Anita Park, which is a popular simulcasting signal at
Golden Gate Fields and (v) lower average daily attendance and
handle at The Meadows, MJC and Lone Star Park. These negative
factors were partially offset by increased revenues in MEC's
Florida operations for the reasons discussed above. Earnings before
interest, taxes, depreciation and amortization from MEC's
continuing operations excluding write-downs of long-lived and
intangible assets, real estate disposal gains, other net gains and
the minority interest impact ("EBITDA") for the fourth quarter of
2008 was a loss of $23.8 million compared to a loss of $15.4
million in the prior year period. This increase in EBITDA loss is
primarily due to increases of $5.2 million in purses, awards and
other costs, $4.4 million in operating costs and $1.4 million in
foreign exchange losses, partially offset by a $2.5 million
reduction in general and administrative expenses. The increase in
purses, awards and other expenses is primarily due to the increase
in live race days at Golden Gate Fields. The increase in operating
costs is primarily due to increased predevelopment and pre-opening
costs, including increased legal costs relating to the protection
of MEC's content distribution rights and increased costs to pursue
alternative gaming opportunities. 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. EBITDA for the year ended December 31, 2008 was a loss
of $20.0 million compared to a loss of $8.9 million in the prior
year. This $11.1 million increase in EBITDA loss is due to a $23.7
million reduction in revenues and increases of $0.8 million in
operating costs and $0.7 million in foreign exchange losses,
partially offset by reductions of $5.6 million in purses, awards
and other costs and $8.5 million in general and administrative
expenses. The reduction in purses, awards and other expenses is
primarily due to the reasons provided above for the decline in
revenues from MEC's racing and gaming operations. The reduction in
general and administrative expenses is primarily attributable to
the cost reduction initiatives discussed above and reduced
severance costs in 2008 compared to the prior year. MEC's
continuing operations recorded a total charge of $125.8 million in
2008 ($120.8 million in the fourth quarter) in relation to
write-downs of long-lived and intangible assets of MJC, Golden Gate
Fields, Lone Star Park and The Meadows and real estate held for
sale in Dixon, California. Impairment charges were recorded in the
fourth quarter relating to (i) the entire amount of $47.8 million
of MJC's racing licence, (ii) the entire amount of $34.4 million of
Lone Star Park's racing licence, (iii) the entire amount of $27.7
million of Golden Gate Fields' racing licence (iv) $1.1 million of
fixed assets used in the operation of The Meadows, (v) $2.0 million
at MJC and $2.8 million at Golden Gate Fields of development
projects that were determined unlikely to have any future benefit
and (vi) $5.1 million of real estate property held for sale in
Dixon, California (in addition to the $5.0 million impairment
charge recorded in the first quarter of 2008). During 2007, MEC
recognized a non-cash impairment charge of $1.3 million in
connection with the planned sale of real estate in Porter, New
York. For further details of MEC's impairment charges, refer to
note 6 to the accompanying financial statements. MEC recorded a net
loss of $87.2 million for the fourth quarter of 2008 compared to
$26.8 million in the fourth quarter of 2007. Net loss in the fourth
quarter of 2008 was negatively impacted by the $8.4 million
increase in EBITDA loss discussed above, a $7.0 million increase in
net interest expense, the $120.8 million of impairment charges
recorded in the fourth quarter of 2008 and a $6.2 million increase
in the loss from discontinued operations. These negative factors
were partially offset by $3.5 million of dilution losses incurred
in the fourth quarter of 2007 related to MEC's issuance of its
Class A Stock, a $28.8 million increase in income tax recovery
(primarily related to the impairment charges discussed above) and a
$49.8 million increase in the minority interest recovery caused by
the increase in MEC's net loss from continuing operations before
the impact of dilution losses and minority interest. The increase
in net interest expense is primarily attributable to (i) increased
amounts outstanding under the 2007 MEC Bridge Loan and (ii)
increased fees related to extensions to the 2007 MEC Bridge Loan,
Gulfstream Park project financing facility and the MEC Credit
Facility. The increase in the loss from discontinued operations is
primarily due to $16.0 million of impairment charges relating to
long-lived assets at Magna Racino(TM) ($11.9 million) and Portland
Meadows ($4.1 million), partially offset by the related minority
interest recovery. For the year ended December 31, 2008, MEC
recorded a net loss of $137.7 million compared to $18.8 million in
the prior year. MEC's results of operations for 2008 include $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. MEC's results of
operations for 2007 include $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. Excluding these items, the $94.6 million increase in net
loss is due to the $11.1 million increase in EBITDA loss discussed
above, increases of $23.6 million in net interest expense and
$124.5 million in impairment charges (both as discussed
previously), a $5.8 million increase in depreciation and
amortization and a $15.3 million increase in the loss from
discontinued operations, partially offset by increases of $5.1
million in other net gains, $26.4 million in income tax recovery
(as discussed above) and $54.2 million in the minority interest
recovery (as discussed above). 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 loss from
discontinued operations in 2008 includes $48.3 million of
impairment charges relating to long-lived assets at Magna
Racino(TM) ($41.1 million) and Portland Meadows ($7.2 million). For
further details of MEC's loss from discontinued operations for 2008
and 2007, refer to note 4 to the accompanying financial statements.
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 fourth quarter ended December 31, 2008. The
dividend is payable on or about April 15, 2009 to shareholders of
record at the close of business on March 31, 2009. 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. 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. At December 31, 2008, MEC was 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. On March 5,
2009, MEC and certain of its subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of Title 11 of the United
States Code in the United States Bankruptcy Court for the District
of Delaware. 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 Year Ended December 31, December 31,
------------------------- ------------------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
Net income $ 32,574 $ 37,735 $ 132,647 $ 110,311 Add back (deduct):
Depreciation and amortization 10,060 10,960 43,419 41,541 Future
income tax expense (recovery) (82) (2,225) 1,700 (864) Write-down
of long-lived assets - - 450 - Gain on disposal of real estate, net
of income tax - - - (1,089) Currency translation loss (gain) -
(7,067) 105 (7,719)
-------------------------------------------------------------------------
Funds from operations $ 42,552 $ 39,403 $ 178,321 $ 142,180
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted funds from operations per share $ 0.91 $ 0.84 $
3.82 $ 2.96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of shares outstanding (thousands) Basic
46,708 47,249 46,708 48,073 Diluted 46,708 47,249 46,708 48,083
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 and uncertainties inherent in MEC's
Chapter 11 process (see note 1(a) to the accompanying unaudited
interim financial statements), including in relation to the
treatment of stockholders and creditors and the auction of MEC's
assets, and 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 Three
Months Ended - note 4) December 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues Rental revenue $ 40,843 $ 44,188 $ 40,843 $ 44,188 Racing
and other revenue 115,369 115,224 - - Interest and other income
from MEC (note 19) - - 13,652 7,203
-------------------------------------------------------------------------
156,212 159,412 54,495 51,391
-------------------------------------------------------------------------
Operating costs and expenses Purses, awards and other 54,246 49,018
- - Operating costs 68,598 64,219 - - General and administrative
(notes 3, 19) 21,533 23,443 5,618 4,812 Foreign exchange losses
(gains) (1,171) (810) (1,788) (32) Depreciation and amortization
21,931 22,869 10,060 10,960 Interest expense, net 11,853 10,921
2,343 2,660 Write-down (adjustment to write-down) of long-lived and
intangible assets (note 6) 120,778 (136) - -
-------------------------------------------------------------------------
Operating income (loss) (141,556) (10,112) 38,262 32,991 Gain on
disposal of real estate (note 19) - - - - Other gains (losses), net
(notes 12, 19) - 3,600 - 7,067
-------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (141,556)
(6,512) 38,262 40,058 Income tax expense (recovery) (note 13)
(27,686) (2,280) 5,688 2,323 Minority interest (67,530) (17,687) -
-
-------------------------------------------------------------------------
Income (loss) from continuing operations (46,340) 13,455 32,574
37,735 Loss from discontinued operations (note 4) (8,219) (1,966) -
-
-------------------------------------------------------------------------
Net income (loss) $ (54,559) $ 11,489 $ 32,574 $ 37,735
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings (loss) per Class A Subordinate Voting or
Class B Share (note 7) - Continuing operations $ (0.99) $ 0.28 -
Discontinued operations (note 4) (0.18) (0.04)
----------------------------------------------- Total $ (1.17) $
0.24 -----------------------------------------------
----------------------------------------------- Basic and diluted
weighted average number of Class A Subordinate Voting and Class B
Shares outstanding during the period (in thousands) (note 7) 46,708
47,249 -----------------------------------------------
----------------------------------------------- Magna Entertainment
Corp. ------------------------- (restated Three Months Ended - note
4) December 31, 2008 2007
----------------------------------------------- Revenues Rental
revenue $ - $ - Racing and other revenue 115,369 115,224 Interest
and other income from MEC (note 19) - -
----------------------------------------------- 115,369 115,224
----------------------------------------------- Operating costs and
expenses Purses, awards and other 54,246 49,018 Operating costs
68,598 64,219 General and administrative (notes 3, 19) 15,667
18,183 Foreign exchange losses (gains) 617 (778) Depreciation and
amortization 11,914 11,952 Interest expense, net 22,725 15,713
Write-down of long-lived and intangible assets (note 6) 120,778
(136) ----------------------------------------------- Operating
income (loss) (179,176) (42,947) Gain on disposal of real estate
(note 19) - 22 Other gains (losses), net (notes 12, 19) - (3,467)
----------------------------------------------- Income (loss)
before income taxes and minority interest (179,176) (46,392) Income
tax expense (recovery) (note 13) (33,374) (4,603) Minority interest
(67,530) (17,687) -----------------------------------------------
Income (loss) from continuing operations (78,272) (24,102) Loss
from discontinued operations (note 4) (8,897) (2,724)
----------------------------------------------- Net income (loss) $
(87,169) $ (26,826) -----------------------------------------------
----------------------------------------------- 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 Year Ended - note 4) December 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues Rental revenue $ 178,575 $ 167,008 $ 178,575 $ 167,008
Racing and other revenue 595,910 619,623 - - Interest and other
income from MEC (note 19) - - 40,566 22,539
-------------------------------------------------------------------------
774,485 786,631 219,141 189,547
-------------------------------------------------------------------------
Operating costs and expenses Purses, awards and other 283,161
288,793 - - Operating costs 272,724 271,887 - - General and
administrative (notes 3, 19) 85,915 94,996 26,083 23,461 Foreign
exchange losses (gains) (799) (588) (1,557) (664) Depreciation and
amortization 88,444 80,759 43,419 41,541 Interest expense, net
45,702 38,991 10,195 8,065 Write-down of long-lived and intangible
assets (notes 6, 8) 126,228 1,308 450 -
-------------------------------------------------------------------------
Operating income (loss) (126,890) 10,485 140,551 117,144 Gain on
disposal of real estate (note 19) 24,340 1,478 - 1,478 Other gains
(losses), net (notes 12, 14, 19, 20) 5,376 4,256 3,787 7,719
-------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (97,174)
16,219 144,338 126,341 Income tax expense (recovery) (note 13)
(18,717) 13,354 11,691 16,030 Minority interest (97,140) (42,898) -
-
-------------------------------------------------------------------------
Income (loss) from continuing operations 18,683 45,763 132,647
110,311 Loss from discontinued operations (note 4) (21,899) (6,254)
- -
-------------------------------------------------------------------------
Net income (loss) $ (3,216) $ 39,509 $ 132,647 $ 110,311
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings (loss) per Class A Subordinate Voting or
Class B Share (note 7) - Continuing operations $ 0.40 $ 0.95 -
Discontinued operations (note 4) (0.47) (0.13)
----------------------------------------------- Total $ (0.07) $
0.82 -----------------------------------------------
----------------------------------------------- Weighted average
number of Class A Subordinate Voting and Class B Shares outstanding
during the year (in thousands) (note 7) - Basic 46,708 48,073 -
Diluted 46,708 48,083
-----------------------------------------------
----------------------------------------------- Magna Entertainment
Corp. ------------------------- (restated Year Ended - note 4)
December 31, 2008 2007
----------------------------------------------- Revenues Rental
revenue $ - $ - Racing and other revenue 595,910 619,623 Interest
and other income from MEC (note 19) - -
----------------------------------------------- 595,910 619,623
----------------------------------------------- Operating costs and
expenses Purses, awards and other 283,161 288,793 Operating costs
272,724 271,887 General and administrative (notes 3, 19) 59,300
67,750 Foreign exchange losses (gains) 758 76 Depreciation and
amortization 45,197 39,390 Interest expense, net 75,470 51,916
Write-down of long-lived and intangible assets (notes 6, 8) 125,778
1,308 ----------------------------------------------- Operating
income (loss) (266,478) (101,497) Gain on disposal of real estate
(note 19) 24,462 48,776 Other gains (losses), net (notes 12, 14,
19, 20) 1,589 (3,463)
----------------------------------------------- Income (loss)
before income taxes and minority interest (240,427) (56,184) Income
tax expense (recovery) (note 13) (30,408) (4,007) Minority interest
(97,140) (42,898) -----------------------------------------------
Income (loss) from continuing operations (112,879) (9,279) Loss
from discontinued operations (note 4) (24,813) (9,483)
----------------------------------------------- Net income (loss) $
(137,692) $ (18,762)
-----------------------------------------------
----------------------------------------------- See accompanying
notes Consolidated Statements of Comprehensive Income (Loss) (U.S.
dollars in thousands) (Unaudited) Three Months Ended Year Ended
December 31, December 31, -------------------------
------------------------- 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income (loss) $ (54,559) $ 11,489 $ (3,216) $ 39,509 Other
comprehensive income (loss): Change in fair value of interest rate
swaps, net of taxes and minority interest (note 12) (587) (337)
(582) (584) Foreign currency translation adjustment, net of
minority interest (note 12) (68,693) 25,326 (88,483) 106,043
Reversal of foreign currency translation gain related to shares
purchased for cancellation (note 10) - (16,576) - (22,354)
Recognition of foreign currency translation gain in net income
(note 12) - (7,067) 105 (7,719)
-------------------------------------------------------------------------
Comprehensive income (loss) $ (123,839) $ 12,835 $ (92,176) $
114,895
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes Consolidated Statements of Changes in
Deficit (U.S. dollars in thousands) (Unaudited) Three Months Ended
Year Ended December 31, December 31, -------------------------
------------------------- 2008 2007 2008 2007
-------------------------------------------------------------------------
Deficit, beginning of period $ (28,112) $ (62,858) $ (58,436) $
(69,112) Net income (loss) (54,559) 11,489 (3,216) 39,509 Dividends
(7,006) (7,067) (28,025) (28,833)
-------------------------------------------------------------------------
Deficit, end of period $ (89,677) $ (58,436) $ (89,677) $ (58,436)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes Consolidated Statements of Cash Flows (U.S.
dollars in thousands) (Unaudited) Consolidated (notes 1, 19) Real
Estate Business -------------------------- --------------------
(restated Three Months Ended - note 4) December 31, 2008 2007 2008
2007
-------------------------------------------------------------------------
OPERATING ACTIVITIES Income (loss) from continuing operations $
(46,340) $ 13,455 $ 32,574 $ 37,735 Items not involving current
cash flows (note 16) 42,870 (6,634) 5,463 969 Changes in non-cash
balances (note 16) (1,934) 13,890 1,176 (3,882)
-------------------------------------------------------------------------
Cash provided by (used in) operating activities (5,404) 20,711
39,213 34,822
-------------------------------------------------------------------------
INVESTING ACTIVITIES Property and fixed asset additions (5,871)
(35,146) (4,853) (9,883) Proceeds on disposal of real estate and
fixed assets, net - 2,439 - - Decrease (increase) in other assets
(2,385) 934 (191) 45 Loan advances to MEC, net - - (52,771)
(27,147) Loan repayments from MEC - - 2,249 1,139
-------------------------------------------------------------------------
Cash used in investing activities (8,256) (31,773) (55,566)
(35,846)
-------------------------------------------------------------------------
FINANCING ACTIVITIES Proceeds from bank indebtedness 12,347 32,891
- - Repayment of bank indebtedness (16,136) (19,617) - - Issuance
of long-term debt 7,233 15,409 - - Repayment of long-term debt
(2,280) (22,374) (101) (115) Loan advances from MID, net - - - -
Loan repayments to MID - - - - Shares purchased for cancellation -
(40,236) - (40,236) Minority investment in subsidiary - 19,581 - -
Dividends paid (7,006) (7,067) (7,006) (7,067)
-------------------------------------------------------------------------
Cash provided by (used in) financing activities (5,842) (21,413)
(7,107) (47,418)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents
(11,258) 1,185 (10,461) 1,140 Net cash flows provided by (used in)
continuing operations (30,760) (31,290) (33,921) (47,302)
DISCONTINUED OPERATIONS Cash provided by (used in) operating
activities 1,469 (4,788) - - Cash used in investing activities
(476) (1,434) - - Cash provided by (used in) financing activities
(2,089) 1 - -
-------------------------------------------------------------------------
Net cash flows (used in) discontinued operations (1,096) (6,221) -
-
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents during the
period (31,856) (37,511) (33,921) (47,302) Cash and cash
equivalents, beginning of period 187,742 192,371 156,332 158,247
-------------------------------------------------------------------------
Cash and cash equivalents, end of period 155,886 154,860 122,411
110,945 Less: cash and cash equivalents of discontinued operations,
end of period (10,110) (9,241) - -
-------------------------------------------------------------------------
Cash and cash equivalents, of continuing operations end of period $
145,776 $ 145,619 $ 122,411 $ 110,945
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp. ------------------------- (restated Three
Months Ended - note 4) December 31, 2008 2007
----------------------------------------------- OPERATING
ACTIVITIES Income (loss) from continuing operations $ (78,272) $
(24,102) Items not involving current cash flows (note 16) 37,735
(6,346) Changes in non-cash balances (note 16) (2,979) 18,294
----------------------------------------------- Cash provided by
(used in) operating activities (43,516) (12,154)
----------------------------------------------- INVESTING
ACTIVITIES Property and fixed asset additions (1,018) (25,263)
Proceeds on disposal of real estate and fixed assets, net - 2,460
Decrease (increase) in other assets (2,194) 889 Loan advances to
MEC, net - - Loan repayments from MEC - -
----------------------------------------------- Cash used in
investing activities (3,212) (21,914)
----------------------------------------------- FINANCING
ACTIVITIES Proceeds from bank indebtedness 12,347 32,891 Repayment
of bank indebtedness (16,136) (19,617) Issuance of long-term debt
7,233 15,409 Repayment of long-term debt (2,179) (22,259) Loan
advances from MID, net 52,329 25,884 Loan repayments to MID (490)
(434) Shares purchased for cancellation - - Minority investment in
subsidiary - 19,581 Dividends paid - -
----------------------------------------------- Cash provided by
(used in) financing activities 53,104 51,455
----------------------------------------------- Effect of exchange
rate changes on cash and cash equivalents (797) 45
----------------------------------------------- Net cash flows
provided by (used in) continuing operations 5,579 17,432
----------------------------------------------- DISCONTINUED
OPERATIONS Cash provided by (used in) operating activities 810
(5,503) Cash used in investing activities (476) (1,434) Cash
provided by (used in) financing activities (3,848) (704)
----------------------------------------------- Net cash flows
(used in) discontinued operations (3,514) (7,641)
----------------------------------------------- Net increase
(decrease) in cash and cash equivalents during the period 2,065
9,791 Cash and cash equivalents, beginning of period 31,410 34,124
----------------------------------------------- Cash and cash
equivalents, end of period 33,475 43,915 Less: cash and cash
equivalents of discontinued operations, end of period (10,110)
(9,241) ----------------------------------------------- Cash and
cash equivalents, of continuing operations end of period $ 23,365 $
34,674 -----------------------------------------------
----------------------------------------------- See accompanying
notes Consolidated Statements of Cash Flows (U.S. dollars in
thousands) (Unaudited) Consolidated (notes 1, 19) Real Estate
Business -------------------------- -------------------- (restated
Year Ended - note 4) December 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING ACTIVITIES Income (loss) from continuing operations $
18,683 $ 45,763 $ 132,647 $ 110,311 Items not involving current
cash flows (note 16) 67,328 26,381 37,200 31,873 Changes in
non-cash balances (note 16) (6,540) 11,649 1,924 6,681
-------------------------------------------------------------------------
Cash provided by (used in) operating activities 79,471 83,793
171,771 148,865
-------------------------------------------------------------------------
INVESTING ACTIVITIES Property and fixed asset additions (63,634)
(107,260) (20,850) (115,839) Proceeds on disposal of real estate
and fixed assets, net 34,123 14,298 - 6,321 Decrease (increase) in
other assets (3,976) (797) (435) 99 Loan advances to MEC, net - -
(126,660) (54,610) Loan repayments from MEC - - 31,535 5,564
-------------------------------------------------------------------------
Cash provided by (used in) investing activities (33,487) (93,759)
(116,410) (158,465)
-------------------------------------------------------------------------
FINANCING ACTIVITIES Proceeds from bank indebtedness 61,052 73,831
- - Repayment of bank indebtedness (60,806) (41,132) - - Issuance
of long-term debt 22,992 19,754 - - Repayment of long-term debt
(13,331) (54,339) (449) (413) Loan advances from MID, net - - - -
Loan repayments to MID - - - - Issuance of shares - 1,058 - 1,058
Shares purchased for cancellation (10) (52,072) - (52,072) Minority
investment in subsidiary - 19,581 - - Dividends paid (28,025)
(28,833) (28,025) (28,833)
-------------------------------------------------------------------------
Cash provided by (used in) financing activities (18,128) (62,152)
(28,474) (80,260)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents
(16,357) 9,086 (15,421) 8,939
-------------------------------------------------------------------------
Net cash flows provided by (used) in continuing operations 11,499
(63,032) 11,466 (80,921)
-------------------------------------------------------------------------
DISCONTINUED OPERATIONS Cash provided by (used in) operating
activities 6,104 (7,307) - - Cash used in investing activities
(2,760) (5,375) - - Cash used in financing activities (13,817)
(19,681) - -
-------------------------------------------------------------------------
Net cash flows used in discontinued operations (10,473) (32,363) -
-
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents during the
year 1,026 (95,395) 11,466 (80,921) Cash and cash equivalents,
beginning of year 154,860 250,255 110,945 191,866
-------------------------------------------------------------------------
Cash and cash equivalents, end of year 155,886 154,860 122,411
110,945 Less: cash and cash equivalents of discontinued operations,
end of year (10,110) (9,241) - -
-------------------------------------------------------------------------
Cash and cash equivalents of continuing operations, end of year $
145,776 $ 145,619 $ 122,411 $ 110,945
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp. ------------------------- (restated Year
Ended - note 4) December 31, 2008 2007
----------------------------------------------- OPERATING
ACTIVITIES Income (loss) from continuing operations $ (112,879) $
(9,279) Items not involving current cash flows (note 16) 32,869
(53,688) Changes in non-cash balances (note 16) (8,714) 4,946
----------------------------------------------- Cash provided by
(used in) operating activities (88,724) (58,021)
----------------------------------------------- INVESTING
ACTIVITIES Property and fixed asset additions (42,906) (80,902)
Proceeds on disposal of real estate and fixed assets, net 34,245
95,712 Decrease (increase) in other assets (3,541) (896) Loan
advances to MEC, net - - Loan repayments from MEC - -
----------------------------------------------- Cash provided by
(used in) investing activities (12,202) 13,914
----------------------------------------------- FINANCING
ACTIVITIES Proceeds from bank indebtedness 61,052 73,831 Repayment
of bank indebtedness (60,806) (41,132) Issuance of long-term debt
22,992 19,754 Repayment of long-term debt (12,882) (53,926) Loan
advances from MID, net 124,889 52,361 Loan repayments to MID
(27,903) (1,564) Issuance of shares - - Shares purchased for
cancellation (10) - Minority investment in subsidiary - 19,581
Dividends paid - - -----------------------------------------------
Cash provided by (used in) financing activities 107,332 68,905
----------------------------------------------- Effect of exchange
rate changes on cash and cash equivalents (936) 147
----------------------------------------------- Net cash flows
provided by (used) in continuing operations 5,470 24,945
----------------------------------------------- DISCONTINUED
OPERATIONS Cash provided by (used in) operating activities 3,339
(10,363) Cash used in investing activities (2,760) (5,375) Cash
used in financing activities (16,489) (23,681)
----------------------------------------------- Net cash flows used
in discontinued operations (15,910) (39,419)
----------------------------------------------- Net increase
(decrease) in cash and cash equivalents during the year (10,440)
(14,474) Cash and cash equivalents, beginning of year 43,915 58,389
----------------------------------------------- Cash and cash
equivalents, end of year 33,475 43,915 Less: cash and cash
equivalents of discontinued operations, end of year (10,110)
(9,241) ----------------------------------------------- Cash and
cash equivalents of continuing operations, end of year $ 23,365 $
34,674 -----------------------------------------------
----------------------------------------------- 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) As at December 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
ASSETS Current assets: Cash and cash equivalents $ 145,776 $
145,619 $ 122,411 $ 110,945 Restricted cash (note 19) 20,255 32,722
946 4,458 Accounts receivable 34,278 39,958 2,256 7,425 Loans
receivable from MEC, net (note 19) - - 247,075 139,168 Due from MID
(note 19) - - - - Income taxes receivable 1,887 1,631 1,887 402
Prepaid expenses and other 21,187 17,173 930 1,206 Assets held for
sale (note 5) - 1,493 - - Discontinued operations (note 4) 24,507
24,724 - -
-------------------------------------------------------------------------
247,890 263,320 375,505 263,604 Restricted cash 9,651 - - - Real
estate properties, net (note 8) 2,075,022 2,224,502 1,401,848
1,561,921 Fixed assets, net 71,087 86,196 244 445 Racing licences -
109,868 - - Other assets 10,049 6,865 1,110 879 Loans receivable
from MEC (note 19) - - 93,824 97,589 Deferred rent receivable
13,001 14,898 13,001 14,898 Future tax assets 62,163 52,430 5,414
5,497 Assets held for sale (note 5) 21,732 38,647 - - Discontinued
operations (note 4) 69,954 110,927 - -
-------------------------------------------------------------------------
$ 2,580,549 $ 2,907,653 $ 1,890,946 $ 1,944,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank
indebtedness (note 9) $ 39,460 $ 39,214 $ - $ - Accounts payable
and accrued liabilities 130,990 140,473 12,411 16,678 Income taxes
payable 10,368 13,040 7,638 13,040 Loan payable to MID, net (note
19) - - - - Due to MEC (note 19) - - 946 4,464 Long-term debt due
within one year, net (note 9) 104,774 11,142 3,309 488 Note
obligations due within one year, net 73,726 - - - Deferred revenue
9,368 6,189 3,254 2,078 Liabilities related to assets held for sale
(note 5) - 171 - - Discontinued operations (note 4) 33,028 47,981 -
-
-------------------------------------------------------------------------
401,714 258,210 27,558 36,748 Long-term debt, net (note 9) 17,173
102,261 2,063 6,646 Senior unsecured debentures, net 216,550
267,578 216,550 267,578 Note obligations, net 146,292 216,050 - -
Loans payable to MID, net (note 19) - - - - Other long-term
liabilities 17,900 18,170 - - Future tax liabilities 107,213
138,197 42,105 48,257 Minority interest 37,995 156,359 - -
Liabilities related to assets held for sale (note 5) 876 876 - -
Discontinued operations (note 4) 18,915 14,492 - -
-------------------------------------------------------------------------
964,628 1,172,193 288,276 359,229
-------------------------------------------------------------------------
Shareholders' equity: Share capital (note 10) 1,524,440 1,524,440
Contributed surplus (note 11) 28,179 27,517 Deficit (89,677)
(58,436) Accumulated other comprehensive income (note 12) 152,979
241,939
-------------------------------------------------------------------------
1,615,921 1,735,460 1,602,670 1,585,604
-------------------------------------------------------------------------
$ 2,580,549 $ 2,907,653 $ 1,890,946 $ 1,944,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp. ------------------------- (restated -
notes 4, 5) As at December 31, 2008 2007
----------------------------------------------- ASSETS Current
assets: Cash and cash equivalents $ 23,365 $ 34,674 Restricted cash
(note 19) 19,309 28,264 Accounts receivable 32,022 32,533 Loans
receivable from MEC, net (note 19) - - Due from MID (note 19) 946
4,464 Income taxes receivable - 1,229 Prepaid expenses and other
20,300 16,335 Assets held for sale (note 5) - 1,493 Discontinued
operations (note 4) 24,507 24,724
----------------------------------------------- 120,449 143,716
Restricted cash 9,651 - Real estate properties, net (note 8)
728,511 717,968 Fixed assets, net 70,843 85,751 Racing licences -
109,868 Other assets 8,939 5,986 Loans receivable from MEC (note
19) - - Deferred rent receivable - - Future tax assets 56,749
46,933 Assets held for sale (note 5) 21,732 38,647 Discontinued
operations (note 4) 70,026 110,999
----------------------------------------------- $ 1,086,900 $
1,259,868 -----------------------------------------------
----------------------------------------------- LIABILITIES AND
SHAREHOLDERS' EQUITY Current liabilities: Bank indebtedness (note
9) $ 39,460 $ 39,214 Accounts payable and accrued liabilities
118,579 124,140 Income taxes payable 2,730 - Loan payable to MID,
net (note 19) 246,428 137,002 Due to MEC (note 19) - - Long-term
debt due within one year, net (note 9) 101,465 10,654 Note
obligations due within one year, net 73,726 - Deferred revenue
6,114 4,339 Liabilities related to assets held for sale (note 5) -
171 Discontinued operations (note 4) 33,431 48,378
----------------------------------------------- 621,933 363,898
Long-term debt, net (note 9) 15,110 95,615 Senior unsecured
debentures, net - - Note obligations, net 146,292 216,050 Loans
payable to MID, net (note 19) 66,373 67,107 Other long-term
liabilities 17,900 18,170 Future tax liabilities 63,777 88,609
Minority interest 37,995 156,359 Liabilities related to assets held
for sale (note 5) 876 876 Discontinued operations (note 4) 42,529
40,635 ----------------------------------------------- 1,012,785
1,047,319 -----------------------------------------------
Shareholders' equity: Share capital (note 10) Contributed surplus
(note 11) Deficit Accumulated other comprehensive income (note 12)
----------------------------------------------- 74,115 212,549
----------------------------------------------- $ 1,086,900 $
1,259,868 -----------------------------------------------
----------------------------------------------- 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 December 31, 2008 and 2007 and for the three-month
periods and years ended December 31, 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 December 31, 2008, the Company owned approximately 54%
of MEC's total equity, representing approximately 96% of the total
voting power of its outstanding stock (note 19(e)). MEC's results
are consolidated with the Company's results, with outside ownership
accounted for as a minority interest. (a) Magna Entertainment Corp.
- Creditor Protection and Restructuring MEC has incurred net losses
(before the amount attributed to the minority interest) of $256.1
million, $68.8 million and $65.4 million for the years ended
December 31, 2008, 2007 and 2006, respectively. At December 31,
2008, MEC had a working capital deficiency of $501.5 million and
$453.4 million of debt (excluding debt of joint venture interests -
note 9) due in the 12-month period ending December 31, 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 was scheduled to
mature on March 5, 2009 (note 9), (ii) $125.3 million (including
accrued interest) under a fully drawn bridge loan (the "2007 MEC
Bridge Loan") from a wholly-owned subsidiary of MID (the "MID
Lender"), which was scheduled to mature on March 20, 2009 (note
19), (iii) $23.7 million (including accrued interest and fees)
under the first tranche of a loan (the "2008 MEC Loan") from the
MID Lender, which was scheduled to mature on March 20, 2009 (note
19), (iv) $100.0 million of indebtedness under the Gulfstream Park
project financing facility with the MID Lender, which was due to be
repaid by March 20, 2009 (note 19) and (v) $75.0 million of 7.25%
convertible subordinated notes due on December 15, 2009. MID's real
estate business has not guaranteed any of MEC's debt obligations or
other commitments. Chapter 11 Filing and Process On March 5, 2009
(the "Petition Date"), MEC and certain of its subsidiaries
(collectively, the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of Title 11 of the United States
Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") and were granted
recognition of the Chapter 11 proceedings from the Ontario Superior
Court of Justice under section 18.6 of the Companies' Creditors
Arrangement Act in Canada. Under Chapter 11, the Debtors will
operate as "debtors-in-possession" under the jurisdiction of the
Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Court. In general, the Debtors
are authorized under Chapter 11 to continue to operate as an
ongoing business, but may not engage in transactions outside the
ordinary course of business without the prior approval of the
Court. In light of the DIP Loan discussed below, all of MEC's
businesses, including racetracks, alternative gaming operations,
XpressBet(R) (note 18) and AmTote International, Inc. ("AmTote" -
note 18) are expected to remain functional and continue to conduct
business during the Chapter 11 proceedings. Shortly after the
Petition Date, the Debtors began notifying all known current or
potential creditors of the Chapter 11 filing. Subject to certain
exceptions under the Bankruptcy Code, the Debtors' Chapter 11
filing automatically enjoined, or stayed, the continuation of any
judicial or administrative proceedings or other actions against the
Debtors or their property to recover on, collect or secure a claim
arising prior to the Petition Date. The Court has approved payment
of certain of the Debtors' pre-petition obligations, including,
among other things, employee wages, salaries and benefits and
horsemen and customer winnings. The Bankruptcy Code also permits
the payment of vendors and other providers in the ordinary course
for goods and services received from and after the Petition Date
and other business-related payments that arise after the Petition
Date and that are necessary to maintain the operation of MEC's
businesses. Under the priority scheme established by the Bankruptcy
Code, unless creditors agree to different treatment, allowed
pre-petition claims and allowed post-petition expenses must be
satisfied in full before stockholders are entitled to receive any
distribution or retain any property in a Chapter 11 proceeding. The
ultimate recovery to MID, as a stockholder of MEC, if any, in the
Debtors' Chapter 11 proceedings will likely not be determined until
confirmation of a plan of reorganization for MEC. In this regard,
however, such a plan is likely to result in MID not receiving any
value for its existing MEC stock and in the cancellation of such
stock. Furthermore, no assurance can be given as to the treatment
the MID Lender's claims will receive in the Debtors' Chapter 11
proceedings, although, as a general matter, secured creditors are
entitled to priority over unsecured creditors to the extent of the
value of the collateral securing such claims. MID management
believes that the MID Lender's claims are adequately secured and
therefore has no reason to believe that the amount of the MEC loan
facilities with the MID Lender is impaired. The filing of the
Chapter 11 petitions constituted an event of default under certain
of MEC's debt obligations, including those with the MID Lender and
those debt obligations became automatically and immediately due and
payable, subject to the automatic stay of any action to collect,
assert, or recover a claim against the Debtors under the applicable
Bankruptcy Code provisions. MEC filed for Chapter 11 protection in
order to implement a comprehensive financial restructuring and
conduct an orderly sales process for its assets. Miller Buckfire
& Co., LLC, MEC's financial advisor and investment banker, will
conduct a marketing and sale process for MEC's assets. Subject to
Court approval, MID has entered into an agreement with MEC to
purchase the relevant interests in certain of MEC's assets for an
aggregate consideration of approximately $195.0 million (the
"Stalking Horse Bid" - see note 2). DIP Loan In connection with the
Debtors' Chapter 11 filing, MID, through the MID Lender, agreed to
provide a six-month secured debtor-in- possession financing
facility to MEC (the "DIP Loan") in the amount of up to $62.5
million. The DIP Loan, combined with MEC's cash flows from
operations, is expected to provide the Debtors with sufficient
liquidity to satisfy their obligations associated with the ongoing
operation of their businesses during this six-month period. The DIP
Loan initial tranche of up to $13.4 million was made available to
MEC on March 6, 2009 pursuant to approval of the Court. An interim
order was subsequently entered by the Court on March 13, 2009. The
final terms of the DIP Loan will be confirmed and the second
tranche of up to $49.1 million will be made available subject to,
and upon entry of, a final order of the Court. The hearing on this
final order is scheduled for April 3, 2009. Under the terms of the
DIP Loan, MEC is required to pay an arrangement fee of 3% under the
DIP Loan (on each tranche as it is made available) and advances
bear interest at a rate per annum equal to the London Interbank
Offered Rate ("LIBOR") plus 12.0%. MEC is also required to pay a
commitment fee equal to 1% per annum on all undrawn amounts.
Subject to entry of a final order, a portion of the DIP Loan will
be used to fund interest and fees payable to secured creditors,
including an estimated $26.2 million to MID. Subject to entry of a
final order, the DIP Loan will be secured by liens on substantially
all assets of MEC and its subsidiaries (subject to prior ranking
liens), as well as a pledge of capital stock of certain guarantors.
Under the DIP Loan, MEC may request funds to be advanced under the
DIP Loan on a monthly basis and such funds must be used in
accordance with an approved budget. The terms of the DIP Loan
contemplate that MEC will sell all or substantially all of its
assets through an auction process and use the proceeds from the
asset sales to repay its creditors, including the MID Lender. MEC
Stock Exchange Listings On March 2, 2009, MEC received a letter
from the Toronto Stock Exchange (the "TSX") indicating that the
Listings Committee of the TSX determined to delist the shares of
MEC's Class A Subordinate Voting Stock ("MEC Class A Stock")
effective at the close of market on April 1, 2009 for failure to
meet the continued listing requirements of the TSX, as detailed in
Part VII of the TSX Company Manual. In addition, on March 5, 2009,
MEC received a staff Determination Letter from the Nasdaq Stock
Market ("Nasdaq") indicating that, as a result of MEC's Chapter 11
filing, Nasdaq determined that MEC's securities are to be delisted
from Nasdaq. As a result, trading of MEC Class A Stock on Nasdaq
will be suspended at the opening of business on March 16, 2009. MEC
as a Going Concern The results of operations and the financial
position of MEC have been included in the unaudited interim
consolidated financial statements using the same GAAP as applicable
prior to MEC's Chapter 11 filing. Although MEC has filed for relief
under Chapter 11 of the Bankruptcy Code, MEC's results of
operations and financial position continue to be included in the
unaudited interim consolidated financial statements using the going
concern concept, which assumes that MEC will be able to realize its
assets and discharge its liabilities in the normal course of
business for the foreseeable future. The Chapter 11 filing provides
MEC with a period of time to stabilize its operations and financial
condition and implement a comprehensive financial restructuring,
including asset sales. Given these actions and the availability of
the DIP Loan, the going concern basis is considered to be
appropriate. However, the restructuring of MEC under the protection
of Chapter 11 is subject to certain material conditions, some of
which are beyond MEC's and MID's control. There is no certainty
with regard to how long the Chapter 11 proceedings or the process
for the marketing and sale of the Debtors' assets will take,
whether the Debtors' restructuring plan will be successful, whether
or at what prices the Debtors' assets will be sold, whether the
Stalking Horse Bid or any other offer by MID or any third party for
the Debtor's assets will materialize or be successful, and as to
the outcome of litigation or regulatory proceedings, if any,
related to the Chapter 11 proceedings or MID's involvement therein.
Further, it is not possible to predict whether the actions taken in
any restructuring will result in improvements to the financial
condition of MEC sufficient to allow it to continue as a going
concern. Accordingly, MEC's realization of assets and discharge of
liabilities is subject to significant uncertainty and substantial
doubt exists as to whether MEC will be able to continue as a going
concern. If the going concern basis is not appropriate, reductions
to the carrying amounts and/or adjustments to the classification of
MEC's assets and liabilities will be necessary in the Company's
consolidated financial statements. The results of operations and
the financial position of MEC included in the unaudited interim
consolidated financial statements do not purport to reflect or
provide for the consequences of the Chapter 11 filing. In
particular, they do not purport to show: (i) as to MEC's assets,
their realizable value on a liquidation basis or their availability
to satisfy liabilities; (ii) as to MEC's pre- petition liabilities,
the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; or (iii) as to MEC's operations, the
effect of any changes that may be made in its business. 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. (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 December 31, 2008 and 2007, and the results of
operations and cash flows for the three-month periods and years
ended December 31, 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 at December 31, 2008, 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. As a consequence of MEC's Chapter 11
filing and process, the Company will be evaluating the possibility
that it may no longer control MEC or certain of its subsidiaries in
subsequent periods. 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(b) and 20(o)). Certain other prior period
amounts have been reclassified to conform to the current year's
presentation. (c) Seasonality 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. (d) Accounting Changes (i) 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 Section 3862, "Financial Instruments - Disclosures", and
Handbook Section 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 December 31, 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. (ii)
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. (iii) 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 above in note 1 to the unaudited interim
consolidated financial statements with respect to MEC. 2.
PARTICIPATION IN MEC BANKRUPTCY PROCESS In addition to the
provision of the DIP Loan (note 1), MID's participation in the MEC
bankruptcy process is anticipated to be as follows: (a) Stalking
Horse Bid MEC's Chapter 11 filing (note 1) contemplates MEC selling
all or substantially all of its assets through an auction process.
MID has entered into an agreement with MEC to purchase MEC's
relevant interests associated with the following assets (the
"Stalking Horse Bid"): Golden Gate Fields; Gulfstream Park,
including MEC's joint venture interest in The Village at Gulfstream
Park(TM) (note 20(k)); Palm Meadows Training Center and related
excess lands; Lone Star Park; AmTote (note 18); XpressBet(R) (note
18); and a holdback note associated with MEC's sale of The Meadows
in 2006 (the "Meadows Holdback Note" - note 20(m)). MID's aggregate
offer price for these assets is approximately $195.0 million, with
$136.0 million to be satisfied through a credit bid of the MID
Lender's existing loans to MEC (note 23(a)), $44.0 million in cash
and $15.0 million through the assumption of a capital lease. MEC
has sought Court approval of the bid and auction procedures for the
sale of these assets, and MID's Stalking Horse Bid may be topped by
third parties during this auction process. MID will not receive any
termination fees if MEC sells any assets to a third party, but may
receive reimbursement for its expenses in connection with the
Stalking Horse Bid. A hearing on the bid and auction procedures
relating to the Stalking Horse Bid assets and MEC's other assets is
scheduled for April 3, 2009. Pursuant to the terms of the Stalking
Horse Bid purchase agreement, MID provided a deposit of
approximately $18.0 million in the form of a pledge of outstanding
indebtedness under the Gulfstream Park project financing facility.
In the event that the Stalking Horse Bid purchase agreement is
terminated as a result of MID breaching its limited covenants under
that agreement, the deposit is forfeited. MID has not made an offer
to purchase any other assets of MEC at this time, although MID will
continue to evaluate whether to do so during the course of the
Chapter 11 process. (b) Post-Chapter 11 Operations; Forbearance
Agreement In conjunction with MEC's Chapter 11 filing and the
Stalking Horse Bid discussed above, on March 5, 2009, MID announced
the following: (i) If MID acquires non-racing real estate assets
from MEC in the Chapter 11 auction process, MID would retain and
develop these assets. Any horseracing or gaming assets acquired by
MID would be segregated from MID's real estate business and held in
one or more new wholly-owned subsidiaries of MID ("RaceCo").
Subject to the outcome of the Chapter 11 auction process, (a) MID
would retain the lands at Golden Gate Fields and Gulfstream Park,
the joint venture interest in The Village at Gulfstream Park(TM),
and the Meadows Holdback Note and (b) RaceCo would lease the racing
and gaming facilities at Gulfstream Park and Golden Gate Fields
from MID pursuant to triple-net leases at fair market rent and
would own the relevant interests in Lone Star Park, AmTote and
XpressBet(R). If MID acquires the Golden Gate Fields property, it
intends to immediately commence seeking all required approvals to
develop the property for commercial real estate uses. (ii) On
closing of the asset purchases, MID would execute a forbearance
agreement providing that, without the prior approval of a majority
of the votes of minority holders of MID Class A Shares, MID would
not (a) make any further debt or equity investment in, or otherwise
give financial assistance to, RaceCo or (b) enter into any
transactions with, or provide any services or personnel to, RaceCo,
except for (i) the triple-net leases referred to above and (ii)
limited administrative and office services. MID would also agree
not to enter into any transactions in the horseracing or gaming
business except through RaceCo. (iii) By December 31, 2011, MID
would either (a) if RaceCo were pro forma profitable and
self-sustaining, sell it or spin it off to its shareholders, or (b)
otherwise, cease racing and gaming operations at RaceCo and either
sell or develop all of RaceCo's remaining assets. 3. DISCUSSIONS
WITH MID SHAREHOLDERS AND REORGANIZATION PROPOSALS (a) March 2008
Reorganization Proposal On March 31, 2008, MID received a
reorganization proposal (the "March 2008 Reorganization Proposal")
on behalf of various shareholders of MID, including entities
affiliated with the Stronach Trust (the "Stronach Group"), MID's
controlling shareholder. The principal components of the March 2008
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 March 2008 Reorganization Proposal was
subject to applicable court and shareholder approvals. Following
the announcement of the March 2008 Reorganization Proposal, certain
of the Company's Class A shareholders expressed their opposition to
the proposal. Accordingly, in 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 March 2008 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. as a financial advisor to liaise with shareholders
in an attempt to develop a consensus on how best to reorganize MID.
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 investments in MEC,
and one other person that is involved in the U.S. horseracing
industry has proposed that MID sell to such person certain of MID's
loans to MEC. Many of these letters have been publicly filed with
the United States Securities and Exchange Commission. No consensus
was reached with respect to amendments to the March 2008
Reorganization Proposal that would have resulted in a revised
proposal that MID would have been asked to put before its
shareholders for their consideration, and, on November 7, 2008, MID
announced that discussions with shareholders with respect to the
March 2008 Reorganization Proposal had effectively terminated. (b)
November 2008 Reorganization Proposal MID continued to work on
developing an alternative for its investments in MEC. On November
26, 2008, MID announced that the MID Special Committee had
recommended, and the Board had approved, holding a vote of MID
shareholders on a reorganization proposal developed by MID
management (the "November 2008 Reorganization Proposal"). The
principal components of the November 2008 Reorganization Proposal
are set out in MID's press release dated November 26, 2008, which
can be found on the Company's website at
http://www.midevelopments.com/ and on SEDAR at
http://www.sedar.com/. The November 2008 Reorganization Proposal
included an additional loan to MEC, as well as amendments to the
existing financing arrangements with MEC, all of which were
implemented upon announcement of the November 2008 Reorganization
Proposal (see note 19 for further details). As a result of, among
other things, current global economic conditions, the continued
disruptions in the financial markets and ongoing uncertainty in the
automotive industry, MID determined that it was unlikely that it
would be able to arrange the new debt financing associated with the
November 2008 Reorganization Proposal, nor would it be prudent to
raise the new debt until such time as the ongoing uncertainty in
the automotive industry has been resolved. As a result, on February
18, 2009, MID announced that it was not proceeding with the
November 2008 Reorganization Proposal. The termination of the
transaction agreement among MID, MEC and the Stronach Group with
respect to the November 2008 Reorganization Proposal resulted in
the acceleration of various MEC loans, including the MEC Credit
Facility of March 5, 2009 (notes 9 and 19(a)). Accordingly, MID and
MEC commenced discussions in February 2009 that resulted in the MEC
Chapter 11 filing (note 1). During the three-month period and year
ended December 31, 2008, $1.9 million and $7.4 million,
respectively, of advisory and other costs have been incurred in
connection with the reorganization proposals and the exploration of
alternatives in respect of MID's investments 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 On September 12, 2007, MEC's Board of Directors approved
a debt elimination plan (the "MEC Debt Elimination Plan") to
generate funds from, among other things, the sale of Great Lakes
Downs in Michigan, Thistledown in Ohio, Remington Park in Oklahoma
City and MEC's interest in Portland Meadows in Oregon. In September
2007, MEC engaged a U.S. investment bank to assist in soliciting
potential purchasers and managing the sale process for certain of
these assets. In October 2007, the U.S. investment bank began
marketing Thistledown and Remington Park for sale and initiated an
active program to locate potential buyers. However, MEC
subsequently took over the sales process from the U.S. investment
bank and was in discussions with potential buyers of these assets
at December 31, 2008. In November 2007, MEC initiated a program to
locate a buyer for Portland Meadows and was marketing for sale its
interest in this property at December 31, 2008. In March 2008, MEC
committed to a plan to sell Magna Racino(TM). MEC had initiated a
program to locate potential buyers and, at December 31, 2008, was
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 2007 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 year ended
December 31, 2008. MEC's results of operations, assets and
liabilities related to discontinued operations are shown in the
following tables: Three Months Ended Year Ended December 31,
December 31, ------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues $ 35,057 $ 31,482 $ 134,085 $ 130,161 Costs and expenses
34,336 34,446 131,461 136,624
-------------------------------------------------------------------------
721 (2,964) 2,621 (6,463) Depreciation and amortization - 1,143 605
6,395 Interest expense, net 833 1,030 3,463 4,159 Write-down of
long-lived assets (note 6) 16,001 - 48,295 -
-------------------------------------------------------------------------
Loss before undernoted (16,113) (5,137) (49,742) (17,017) Gain on
disposition - - 536 -
-------------------------------------------------------------------------
Loss before income taxes and minority interest (16,113) (5,137)
(49,206) (17,017) Income tax expense (recovery) (note 13) 461 (81)
(3,098) (376) Minority interest (7,677) (2,332) (21,295) (7,158)
-------------------------------------------------------------------------
MEC's loss from discontinued operations (8,897) (2,724) (24,813)
(9,483)
-------------------------------------------------------------------------
Eliminations (note 19) 678 758 2,914 3,229
-------------------------------------------------------------------------
Consolidated loss from discontinued operations $ (8,219) $ (1,966)
$ (21,899) $ (6,254)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008 2007
-------------------------------------------------------------------------
ASSETS Current assets: Cash and cash equivalents $ 10,110 $ 9,241
Restricted cash 7,043 7,069 Accounts receivable 5,306 6,602 Prepaid
expenses and other 2,048 1,812
-------------------------------------------------------------------------
24,507 24,724
-------------------------------------------------------------------------
Real estate properties, net 39,052 81,035 Fixed assets, net 12,989
16,295 Other assets 105 122 Future tax assets 17,880 13,547
-------------------------------------------------------------------------
70,026 110,999
-------------------------------------------------------------------------
MEC's assets related to discontinued operations 94,533 135,723
-------------------------------------------------------------------------
Eliminations (note 19) (72) (72)
-------------------------------------------------------------------------
Consolidated assets related to discontinued operations $ 94,461 $
135,651
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES Current liabilities: Accounts payable and accrued
liabilities $ 23,318 $ 21,446 Income taxes payable 597 3,182
Long-term debt due within one year 8,367 22,096 Loan payable to MID
403 397 Deferred revenue 746 1,257
-------------------------------------------------------------------------
33,431 48,378
-------------------------------------------------------------------------
Long-term debt - 115 Loan payable to MID, net 23,614 26,143 Other
long-term liabilities 1,035 830 Future tax liabilities 17,880
13,547
-------------------------------------------------------------------------
42,529 40,635
-------------------------------------------------------------------------
MEC's liabilities related to discontinued operations 75,960 89,013
-------------------------------------------------------------------------
Eliminations (note 19) (24,017) (26,540)
-------------------------------------------------------------------------
Consolidated liabilities related to discontinued operations $
51,943 $ 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 two remaining parcels were sold
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 2007 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. 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 (note 9) and the remaining portion of the net proceeds
to repay $19.8 million of the 2007 MEC Bridge Loan (note 19). (c)
On August 9, 2007, MEC announced its intention to sell real estate
properties located in Dixon, California and Ocala, Florida. At
December 31, 2008, MEC was marketing these properties for sale and
had listed them with real estate brokers. (d) In March 2008, MEC
committed to a plan to sell excess real estate in Oberwaltersdorf,
Austria. On March 5, 2009, MEC announced that one of its
subsidiaries in Austria has entered into an agreement to sell to a
subsidiary of Magna approximately 100 acres of real estate,
including the excess real estate in Oberwaltersdorf, Austria, for a
purchase price of approximately 4.6 million euros ($5.7 million).
The closing of the transaction is expected to occur during the
second quarter of 2009 following the satisfaction of customary
closing conditions, including obtaining all necessary regulatory
approvals. MEC's assets classified as held for sale and
corresponding liabilities are shown in the table below. As at
December 31, 2008 2007
-------------------------------------------------------------------------
ASSETS Current assets: Real estate properties, net Porter, New York
(note 6) $ - $ 1,493
-------------------------------------------------------------------------
Real estate properties, net Dixon, California (note 6) 9,077 19,139
Ocala, Florida 8,407 8,407 Oberwaltersdorf, Austria 4,248 4,482
Ebreichsdorf, Austria - 6,619
-------------------------------------------------------------------------
21,732 38,647
-------------------------------------------------------------------------
$ 21,732 $ 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 AND INTANGIBLE ASSETS The
carrying values of MEC's long-lived assets (including real estate
properties and fixed assets) not held for sale are periodically
assessed to determine whether there are indicators of impairment.
If such indicators are present, a net recoverable amount analysis
for the long-lived assets is completed by determining whether the
carrying value of such assets can be recovered through projected
undiscounted cash flows. If the sum of expected future cash flows,
undiscounted and without interest charges, is less than net book
value, the excess of the net book value over the estimated fair
value, based on discounted future cash flows and, if appropriate,
appraisals, is charged to operations in the period in which such
impairment is determined. For long-lived assets classified as held
for sale or discontinued operations, the carrying value is reduced,
if necessary, to the estimated net realizable value. Net realizable
value is determined based on discounted net cash flows of the
assets and, if appropriate, appraisals and/or estimated net sales
proceeds from pending offers. Racing licences are intangible assets
that meet the definition of indefinite life intangibles and are not
subject to amortization but are evaluated for impairment on an
annual basis or when impairment indicators are present. Racing
licence impairment is assessed based on a comparison of the fair
value of each of MEC's individual reporting unit's racing licence
to its carrying value. An impairment write-down to fair value
occurs if the estimated discounted cash flows from operations, less
charges for contributory assets assumed to be owned by third
parties, are less than the carrying value of the racing licence.
Write-downs, and adjustments thereto, relating to MEC's long-lived
and intangible assets have been recognized as follows: Three Months
Ended Year Ended December 31, December 31,
------------------------- ------------------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
Continuing Operations and Assets Held For Sale The Maryland Jockey
Club(i) $ 49,795 $ - $ 49,795 $ - Golden Gate Fields(i) 30,475 -
30,475 - Lone Star Park(i) 34,357 - 34,357 - The Meadows(i) 1,059 -
1,059 - Dixon, California(ii) 5,092 - 10,092 - Porter, New
York(iii) - (136) - 1,308
-------------------------------------------------------------------------
120,778 (136) 125,778 1,308
-------------------------------------------------------------------------
Discontinued Operations Magna Racino(TM)(iv) 11,868 - 41,063 -
Portland Meadows(v) 4,133 - 7,232 -
-------------------------------------------------------------------------
16,001 - 48,295 -
-------------------------------------------------------------------------
$ 136,779 $ (136) $ 174,073 $ 1,308
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the year ended December 31, 2008, The Maryland Jockey
Club ("MJC"), Lone Star Park and Golden Gate Fields experienced
lower average daily attendance and decreased wagering activity
compared to previous years. In addition, the 2009 business plans
for these operations reflected reductions in estimated future cash
flows based on lower expectations for growth and profitability
resulting primarily from the downturn in the economy. Based on
these impairment indicators, the long-lived and intangible assets
of MJC, Lone Star Park and Golden Gate Fields were tested for
recoverability. An expected present value approach of estimated
future cash flows was used to determine the fair value of the
long-lived and intangible assets. Based on this analysis,
impairment charges were required in the three-month period and year
ended December 31, 2008 relating to (a) the entire amount of $47.8
million of MJC's racing licence, (b) the entire amount of $34.4
million of Lone Star Park's racing licence, (c) the entire amount
of $27.7 million of Golden Gate Fields' racing licence and (d) $1.1
million of fixed assets used in the operation of The Meadows. In
addition, impairment charges of $2.0 million at MJC and $2.8
million at Golden Gate Fields were required during the three-month
period and year ended December 31, 2008, relating to development
projects that were determined unlikely to have any future benefit.
(ii) As a result of significant weakness in the Northern California
real estate market and the U.S. financial market, MEC recorded
impairment charges of $5.1 million and $10.1 million in the
three-month period and year ended December 31, 2008, respectively,
related to the Dixon, California real estate property (note 5(c)),
which represented the excess of the carrying value of the asset
over the estimated net realizable value. (iii) In connection with
the sales plan relating to the real estate in Porter, New York
(note 5(a)), MEC recognized an impairment charge of $1.3 million
for the year ended December 31, 2007, which represented the excess
of the carrying value over the estimated net realizable value of
these properties. (iv) As a result of the classification of Magna
Racino(TM) as discontinued operations (note 4), an evaluation of
whether the carrying value of the assets exceeds their estimated
net realizable value is made at each reporting period. As a result,
MEC recorded impairment charges, included in discontinued
operations, of $11.9 million and $41.1 million in the three-month
period and year ended December 31, 2008, respectively, which
represented the excess of the carrying value of the assets over the
estimated net realizable value. (v) In June 2003, the Oregon Racing
Commission (the "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 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 in the year ended December 31, 2008 related
to the instant racing terminals and build-out of the instant racing
facility. In addition, as a result of the classification of
Portland Meadows as discontinued operations (note 4), an evaluation
of whether the carrying value of the assets exceeds their estimated
net realizable value is made at each reporting period. As a result,
MEC recorded a further impairment charge of $4.1 million during the
three-month period and year ended December 31, 2008 to reflect a
decline in the estimated net realizable value of the assets. These
impairment charges are included in discontinued operations. 7.
EARNINGS (LOSS) PER SHARE Basic and diluted earnings (loss) per
share are computed as follows: Three Months Ended Years Ended
December 31, December 31, -------------------------
------------------------- (restated (restated - note 4) - note 4)
2008 2007 2008 2007
-------------------------------------------------------------------------
Income (loss) from continuing operations $ (46,340) $ 13,455 $
18,683 $ 45,763 Loss from discontinued operations (8,219) (1,966)
(21,899) (6,254)
-------------------------------------------------------------------------
Net income (loss) $ (54,559) $ 11,489 $ (3,216) $ 39,509
-------------------------------------------------------------------------
Weighted average number of Class A Subordinate Voting and Class B
Shares outstanding during the period (thousands) 46,708 47,249
46,708 48,073 Dilutive impact of stock options (thousands) - - - 10
-------------------------------------------------------------------------
46,708 47,249 46,708 48,083
-------------------------------------------------------------------------
Basic and diluted earnings (loss) per Class A Subordinate Voting or
Class B Share - from continuing operations $ (0.99) $ 0.28 $ 0.40 $
0.95 - from discontinued operations (0.18) (0.04) (0.47) (0.13)
-------------------------------------------------------------------------
$ (1.17) $ 0.24 $ (0.07) $ 0.82
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The computation of diluted earnings (loss) per share for the
three-month period and year ended December 31, 2008 excludes the
effect of the potential exercise of 500,544 (2007 - 516,544) and
516,544 (2007 - 361,544) 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) As at December 31,
2008 2007
-------------------------------------------------------------------------
Real Estate Business Revenue-producing properties Land $ 207,454 $
226,269 Buildings, parking lots and roadways - cost 1,334,858
1,444,241 Buildings, parking lots and roadways - accumulated
depreciation (355,360) (345,825)
-------------------------------------------------------------------------
1,186,952 1,324,685
-------------------------------------------------------------------------
Development properties Land and improvements 213,247 226,248
Properties under development 1,163 9,541
-------------------------------------------------------------------------
214,410 235,789
-------------------------------------------------------------------------
Properties held for sale 486 1,447
-------------------------------------------------------------------------
1,401,848 1,561,921
-------------------------------------------------------------------------
MEC Revenue-producing racetrack and gaming properties Land and
improvements 166,752 164,856 Buildings - cost 513,841 498,894
Assets under capital lease - cost 45,648 45,648 Buildings -
accumulated depreciation (122,897) (102,549) Assets under capital
lease - accumulated depreciation (13,196) (11,071) Construction in
progress 60,116 42,014
-------------------------------------------------------------------------
650,264 637,792
-------------------------------------------------------------------------
Under-utilized racetrack real estate 76,130 76,130
-------------------------------------------------------------------------
Revenue-producing non-racetrack properties Land and improvements
153 2,016 Buildings - cost 1,972 2,123 Buildings - accumulated
depreciation (8) (93)
-------------------------------------------------------------------------
2,117 4,046
-------------------------------------------------------------------------
728,511 717,968
-------------------------------------------------------------------------
Eliminations (note 19) (55,337) (55,387)
-------------------------------------------------------------------------
Consolidated $ 2,075,022 $ 2,224,502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 $2.9 million, has been included in
"revenue-producing properties" as at December 31, 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 December 31,
2008. 9. BANK INDEBTEDNESS AND LONG-TERM DEBT Real Estate Business
The Real Estate Business has an unsecured senior revolving credit
facility in the amount of $50.0 million that is available by way of
U.S. or Canadian dollar loans or letters of credit (the "MID Credit
Facility"). During the year ended December 31, 2008, the maturity
date of the MID Credit Facility was extended from December 21, 2008
to January 21, 2009. In January 2009, the maturity date was
extended to December 18, 2009, unless further extended with the
consent of both parties. Interest on drawn amounts is calculated
based on an applicable margin determined by the Real Estate
Business' ratio of funded debt to earnings before interest, income
tax expense, depreciation and amortization. The Real Estate
Business is subject to the lowest applicable margin available, with
drawn amounts incurring interest at LIBOR or bankers' acceptance
rates, in each case plus 2.75%, or the U.S. base or Canadian prime
rate, in each case plus 1.75%. At December 31, 2008 and 2007, the
Company had no borrowings under the MID Credit Facility, but had
issued letters of credit totalling $0.2 million (December 31, 2007
- $0.3 million). MEC (a) During the year ended December 31, 2008,
the maturity date of the MEC Credit Facility was extended from
March 31, 2008 to March 16, 2009. However, as a result of the
November 2008 Reorganization Proposal not proceeding (note 3), such
maturity date was accelerated subsequent to year-end to March 5,
2009. 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 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 December 31, 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 December 31, 2008 was
7.2% (December 31, 2007 - 11.0%). At December 31, 2008, MEC was not
in compliance with a financial covenant contained in the MEC Credit
Facility agreement. As a result of MEC's Chapter 11 filing on March
5, 2009 (note 1), no waiver was obtained for this violation nor was
the MEC Credit Facility repaid when due. (b) MEC's wholly-owned
subsidiary, The Santa Anita Companies, Inc. ("SAC"), which owns and
operates Santa Anita Park, has a $7.5 million revolving loan under
its existing credit facility and a $67.5 million secured term loan
with a U.S. financial institution, which are both scheduled to
mature on October 31, 2012. The revolving loan must be fully repaid
for a period of 60 consecutive days during each year. The term loan
requires monthly principal repayments of $375 thousand. At December
31, 2008 and 2007, MEC had outstanding interest rate swap contracts
in connection with SAC's term loan facility, entered into on each
of March 1, 2007, April 27, 2007 and July 26, 2007, with each
contract being effective on October 1, 2007 and fixing the rate of
interest at 7.0%, 7.1% and 7.2% per annum, respectively, to October
8, 2009 on a notional amount per contract of $10.0 million.
Additionally, on October 4, 2007, MEC entered into an interest rate
swap contract, with an effective date of October 8, 2009, which
fixes the rate of interest at 7.2% per annum to October 31, 2012 on
a notional amount of $23.4 million. The revolving loan and term
loan are guaranteed by MEC's wholly-owned subsidiary, The Los
Angeles Turf Club, Incorporated ("LATC"), and are collateralized by
a first deed of trust on Santa Anita Park and the surrounding real
property, an assignment of the lease between LATC and SAC, and a
pledge of all of the outstanding capital stock of LATC and SAC.
Borrowings under the revolving loan and term loan bear interest at
the U.S. prime rate and LIBOR plus 2.0%, respectively. The term
loan contains cross-default provisions with the MEC Credit
Facility. At December 31, 2008, MEC had borrowings of $3.0 million
(December 31, 2007 - $3.5 million) under the revolving loan and
$61.9 million (December 31, 2007 - $66.4 million) was outstanding
under the fully drawn term loan. At December 31, 2008, MEC was not
in compliance with certain financial covenants contained in these
loan agreements. As a result of MEC's Chapter 11 filing on March 5,
2009 (note 1), no waiver was obtained for these violations.
Consequently, all amounts outstanding under these loan agreements
at December 31, 2008 are included in "long-term debt due within one
year, net" on the Company's consolidated balance sheet. (c) At
December 31, 2007, MEC's wholly-owned subsidiary 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 31, 2008, the
maturity dates were amended to May 31, 2008 for the AmTote Credit
Facility and May 30, 2009 for both term loan facilities. On May 31,
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 December 31, 2008, $2.3 million
and $2.3 million (December 31, 2007 - $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 December 31, 2008. (d) Two of
MEC's subsidiaries, which are part of MJC, are party to secured
term loan facilities with a U.S. financial institution, with one of
the facilities bearing interest at LIBOR plus 2.6% per annum with a
maturity date of December 1, 2013 (the "Floating-Rate Facility"),
and the other facility bearing interest at 7.7% per annum with a
maturity date of June 7, 2017 (the "Fixed-Rate Facility"). The
Fixed-Rate Facility has an interest rate adjustment clause that
resets to the market rate for a U.S. Treasury security of an
equivalent term plus 2.6% on June 7, 2012. At December 31, 2008,
these two facilities were fully drawn with $5.8 million and $2.8
million outstanding under the Floating-Rate Facility and Fixed-Rate
Facility, respectively. Both loan facilities are collateralized by
deeds of trust on land, buildings and improvements and security
interests in all other assets of certain affiliates of MJC. In
addition, one of MEC's subsidiaries, Pimlico Racing Association,
Inc., has a revolving term loan facility with the same U.S.
financial institution that permits the prepayment of outstanding
principal without penalty. This facility matures on December 1,
2013, bears interest at 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 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 December
31, 2008, MEC had borrowings of $4.1 million (December 31, 2007 -
nil) under this facility. At December 31, 2008, MEC was not in
compliance with certain financial covenants contained in these
three facilities. As a result of MEC's Chapter 11 filing on March
5, 2009 (note 1), no waiver was obtained for these violations.
Consequently, all amounts outstanding under these three facilities
at December 31, 2008 are included in "long-term debt due within one
year, net" on the Company's consolidated balance sheet. (e)
Included in MEC's "long-term debt due within one year, net" on the
Company's unaudited interim consolidated balance sheet is an amount
of $22.1 million (December 31, 2007 - $5.9 million in MEC's
long-term debt, net"), representing MEC's 50% proportionate
interest in a leasehold mortgage facility, net of unamortized
financing costs, of a joint venture with Forest City Enterprises,
Inc. ("Forest City" - note 20(k)) with a maturity date of August
28, 2009 (with up to two one-year extensions subject to certain
covenants and project completion levels being achieved), bearing
interest at LIBOR plus 1.6% per annum (set at 3.0% at December 31,
2008; set at 6.8% at December 31, 2007). The leasehold mortgage
facility is collateralized by a first priority lien on the joint
venture's leasehold interest in the land (under a ground lease from
MEC) and construction in progress, assignment of leases and rents
from tenants of the joint venture and a guaranty by Forest City.
(f) 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. (g) One of MEC's
European subsidiaries, included in discontinued operations, is
party to a 15.0 million euro term loan facility with a European
financial institution, secured by a first and second mortgage on
land in Austria owned by the European subsidiary, which bears
interest at the European Interbank Offered Rate ("EURIBOR") plus
2.5% per annum (amended in November 2008 from EURIBOR plus 2.0% per
annum). On April 11, 2008, MEC used 7.5 million euros of the net
proceeds from the sale of excess real estate in Ebreichsdorf,
Austria (note 5) to permanently repay a portion of this term loan
facility. At December 31, 2008, MEC had borrowings of 6.0 million
euros ($8.4 million) under this facility which is repayable in two
instalments of 2.5 million euros and 3.5 million euros on June 30,
2009 and December 31, 2009, respectively (amended in November 2008
from the previous requirement that the term loan facility be fully
repaid by December 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, September 30, 2008 and December 31, 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,
September 30, 2008 and December 31, 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 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 the year ended December 31, 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 1,175,100 shares for cancellation
in the three months ended December 31, 2007 for cash consideration
of $36.7 million (Cdn. $30.53 per share on a weighted average
basis). The Company's historical Canadian carrying value of the
shares purchased for cancellation in excess of the purchase price
was $18.3 million and $24.5 million for the three-month period and
year ended December 31, 2008, respectively, 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 $16.6 million and $22.4
million for the three-month period and year ended December 31,
2007, respectively, 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 Ended Year Ended
December 31, December 31, -------------------------
------------------------- 2008 2007 2008 2007
-------------------------------------------------------------------------
Contributed surplus, beginning of period $ 28,091 $ 9,119 $ 27,517
$ 2,667 Carrying value of shares purchased for cancellation in
excess of purchase price (note 10) - 18,265 - 24,487 Stock-based
compensation 88 133 662 608 Transfer to share capital on exercise
of stock options - - - (245)
-------------------------------------------------------------------------
Contributed surplus, end of period $ 28,179 $ 27,517 $ 28,179 $
27,517
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. ACCUMULATED OTHER COMPREHENSIVE INCOME Changes in the Company's
accumulated other comprehensive income are shown in the following
table: Three Months Ended Year Ended December 31, December 31,
------------------------- ------------------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
Accumulated other comprehensive income, beginning of period $
222,259 $ 240,593 $ 241,939 $ 166,553 Change in fair value of
interest rate swaps, net of taxes and minority interest (587) (337)
(582) (584) Foreign currency translation adjustment, net of
minority interest(i) (68,693) 25,326 (88,483) 160,043 Reversal of
foreign currency translation gain related to shares purchased for
cancellation (note 10) - (16,576) - (22,354) Recognition of foreign
currency translation loss (gain) in net income (loss)(ii) - (7,067)
105 (7,719)
-------------------------------------------------------------------------
Accumulated other comprehensive income, end of period(iii) $
152,979 $ 241,939 $ 152,979 $ 241,939
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the three-month periods and years ended December 31,
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 period and year ended December 31,
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 period and year ended December 31, 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 (losses), net" for the year ended December 31, 2008 is
a $0.1 million currency translation loss (gain of $7.1 million and
$7.7 million for the three-month period and year ended December 31,
2007, respectively) realized from capital transactions that gave
rise to a reduction in the net investment in foreign operations.
(iii) Accumulated other comprehensive income consists of: As at
December 31, 2008 2007
-------------------------------------------------------------------------
Foreign currency translation adjustment, net of minority interest $
153,991 $ 242,369 Fair value of interest rate swaps, net of taxes
and minority interest (1,012) (430)
-------------------------------------------------------------------------
$ 152,979 $ 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 for the three-month period
and year ended December 31, 2008 is inclusive of an aggregate
income tax recovery of $1.3 million and $13.4 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 primarily by
the results of tax audits in certain tax jurisdictions. Similarly,
MEC's income tax recovery for the year ended December 31, 2008 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 period and year ended December 31, 2007 includes
recoveries of $3.8 million and $5.4 million, respectively, realized
from the reduction in future tax rates and changes in tax
legislation in a number of countries in which the Real Estate
Business operates. In addition, the Real Estate Business' income
tax expense for the year ended December 31, 2007 also includes 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, the Board 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,
2008, 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
Forfeited (6,000) 40.49 - -
-------------------------------------------------------------------------
Stock options outstanding, December 31 494,544 34.83 516,544 35.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options exercisable, December 31 407,544 34.47 322,544 34.60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subsequent to year-end, 8 thousand stock options with an exercise
price of Cdn. $39.12 were cancelled. 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 Ended Year Ended December 31, December 31,
------------------------- ------------------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
Risk-free interest rate - - - 4.3% Expected dividend yield - - -
1.92% Expected volatility of MID's Class A Subordinate Voting
Shares - - - 18.9% Weighted average expected life (years) - - - 4.0
Weighted average fair value per option granted - - - $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 Granted 19,711 3,299
-------------------------------------------------------------------------
DSUs outstanding, December 31 80,948 41,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subsequent to year-end, 11,245 DSUs were redeemed by two directors
who left the Board in 2008, for aggregate cash proceeds of $83
thousand. During the three-month period and year ended December 31,
2008, the Real Estate Business recognized a net stock-based
compensation recovery of $0.5 million (2007 - $35 thousand expense)
and a net stock-based compensation expense of $0.1 million (2007 -
$0.8 million), respectively. The amounts for the three-month period
and year ended December 31, 2008 include a $0.6 million recovery
(2007 - $0.1 million recovery) and $0.6 million recovery (2007 -
$0.2 million expense), respectively, pertaining to DSUs. (b) During
the third quarter of 2008, MEC completed a reverse stock split
whereby every 20 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(o)). 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 approximately 440
thousand shares of MEC Class A Stock are available to be issued
under the MEC Plan, of which approximately 390 thousand are
available for issuance pursuant to stock options and tandem stock
appreciation rights and approximately 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 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 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 year ended December 31,
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 year ended
December 31, 2008, MEC issued 21,698 (2007 - 2,048) shares of MEC
Class A Stock with a stated value of $0.2 million (2007 - $0.2
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 (losses), net") in the year ended
December 31, 2008 (2007 - nominal 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 Forfeited or expired - - (7,000) 138.40
-------------------------------------------------------------------------
MEC Stock Options outstanding, December 31 236,950 116.55 247,500
116.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MEC Stock Options exercisable, December 31 224,135 118.71 220,317
119.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Ended Year Ended
December 31, December 31, -------------------------
------------------------- 2008 2007 2008 2007
-------------------------------------------------------------------------
Risk-free interest rate - - - 4.2% Expected dividend yield - - - -
Expected volatility of MEC Class A Stock - - - 55.9% Weighted
average expected life (years) - - - 5.0 Weighted average fair value
per option granted - - - $27.20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three-month period and year ended December 31, 2008, MEC
recognized total stock-based compensation expense of $36 thousand
(2007 - $0.7 million) and $0.3 million (2007 - $1.4 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 the MID Credit Facility
(note 9) 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 December 31, 2008, the Real Estate Business' debt to total
capitalization was 12% (December 31, 2007 - 15%) and the Real
Estate Business was in compliance with all of its covenants. The
Real Estate Business' total capitalization at December 31, 2008 was
$1.82 billion (December 31, 2007 - $1.86 billion). The outstanding
total debt at December 31, 2008 is $221.9 million (December 31,
2007 - $274.7 million), which is comprised of $216.5 million
(December 31, 2007 - $267.6 million) of the Debentures and $5.4
million (December 31, 2007 - $7.1 million) of mortgages payable on
two properties. In January 2009, one of the two mortgages payable,
with a balance of $3.2 million at December 31, 2008, matured and
was repaid in full. The Real Estate Business generated cash flows
from operating activities of $171.8 million in the year ended
December 31, 2008 and had cash and cash equivalents of $122.4
million at December 31, 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. 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. At December 31, 2008, MEC's net debt was $687.8
million (December 31, 2007 - $570.5 million). MID's Real Estate
Business has not guaranteed any of MEC's indebtedness. Under MEC's
Chapter 11 process (note 1), MEC's capital management objective is
to significantly reduce or eliminate its net debt by generating
funds from the sale of assets. In order for MEC to fund its ongoing
operations through completion of its Chapter 11 process, MEC has
secured a six-month DIP Loan from the Company (note 1). The
availability of any further financing, if required, is not yet
determinable. 16. DETAILS OF CASH FROM OPERATING ACTIVITIES (a)
Items not involving current cash flows: Three Months Ended Year
Ended December 31, December 31, -------------------------
------------------------- (restated (restated - note 4) - note 4)
2008 2007 2008 2007
-------------------------------------------------------------------------
Real Estate Business Straight-line rent adjustment $ 113 $ 10 $ 75
$ 397 Interest and other income from MEC (4,211) (833) (9,034)
(1,132) Stock-based compensation expense (489) 35 112 798
Depreciation and amortization 10,060 10,960 43,419 41,541
Write-down of long-lived assets - - 450 - Gain on disposal of real
estate - - - (1,478) Future income taxes (82) (2,225) 1,700 (864)
Other losses (gains), net - (7,067) 105 (7,719) Other 72 89 373 330
-------------------------------------------------------------------------
5,463 969 37,200 31,873
-------------------------------------------------------------------------
MEC Stock-based compensation expense 36 653 303 1,388 Depreciation
and amortization 11,914 11,952 45,197 39,390 Interest expense with
MID - - - 75 Amortization of debt issuance costs 4,767 2,341 12,813
3,907 Write-down (adjustment to write-down) of long-lived and
intangible assets 120,778 (136) 125,778 1,308 Gain on disposal of
real estate - (22) (24,462) (48,776) Other losses (gains), net -
3,467 (1,589) 3,463 Future income taxes (34,805) (5,804) (33,329)
(7,496) Minority interest (67,530) (17,687) (97,140) (42,898) Other
2,575 (1,110) 5,298 (4,049)
-------------------------------------------------------------------------
37,735 (6,346) 32,869 (53,688)
-------------------------------------------------------------------------
Eliminations (note 19) (328) (1,257) (2,741) 48,196
-------------------------------------------------------------------------
Consolidated $ 42,870 $ (6,634) $ 67,328 $ 26,381
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Changes in non-cash balances: Three Months Ended Year Ended
December 31, December 31, -------------------------
------------------------- (restated (restated - note 4) - note 4)
2008 2007 2008 2007
-------------------------------------------------------------------------
Real Estate Business Accounts receivable $ 785 $ (1,143) $ 4,954 $
1,076 Loans receivable from MEC, net 671 (252) 17 (380) Prepaid
expenses and other 43 618 172 (126) Accounts payable and accrued
liabilities (5,289) (4,525) 988 861 Income taxes 2,788 1,258
(5,870) 5,834 Deferred revenue 2,178 162 1,663 (584)
-------------------------------------------------------------------------
1,176 (3,882) 1,924 6,681
-------------------------------------------------------------------------
MEC Restricted cash (15,602) (14,148) (696) 797 Accounts receivable
(4,693) (5,456) 4,288 (2,561) Prepaid expenses and other 888 341
(4,142) (1,994) Accounts payable and accrued liabilities 14,129
32,614 (12,062) 5,270 Income taxes (261) 2,342 2,140 2,926 Loans
Payable to MID, net (671) 252 (17) 380 Deferred revenue 3,231 2,349
1,775 128
-------------------------------------------------------------------------
(2,979) 18,294 (8,714) 4,946
-------------------------------------------------------------------------
Eliminations (note 19) (131) (522) 250 22
-------------------------------------------------------------------------
Consolidated $ (1,934) $ 13,890 $ (6,540) $ 11,649
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 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 year ended December 31, 2008 by approximately $0.6 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 December 31, 2008 were
outstanding throughout the entire year then ended, a 50 basis point
change in annual interest rates, with all other variables held
constant, would have impacted consolidated "interest expense, net"
for the year ended December 31, 2008 by approximately $0.5 million.
MEC occasionally utilizes interest rate swap contracts to hedge
exposure to interest rate fluctuations on variable rate debt. At
December 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 December 31, 2008, a 50
basis point change in interest rates would have impacted other
comprehensive income (loss) (excluding related minority interest
and tax effects) for the year ended December 31, 2008 by
approximately $0.5 million. (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 December 31, 2008, a 10% change in exchange rates
between the Canadian dollar and the relevant currencies at December
31, 2008 would not have had a material impact on the Company's
consolidated net loss for the year ended December 31, 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 December 31, 2008,
MEC's "accounts receivable" included on the Company's consolidated
balance sheet are net of an allowance for doubtful accounts of $1.8
million (December 31, 2007 - $1.8 million), which is estimated
based on a review of specific customer balances and related
historical collection experience. For the three-month period and
year ended December 31, 2008, MEC incurred a bad debt expense of
$0.6 million (2007 - $0.6 million) and $0.8 million (2007 - $0.9
million), respectively. 18. SEGMENTED INFORMATION The Company's
reportable segments reflect how the Company is organized and
managed by senior management at December 31, 2008. 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 December 31, 2008, the Real Estate
Business owns real estate assets in Canada, the United States,
Mexico, Austria, Germany, 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(i)). 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. On March 5, 2009, MEC and certain of its
subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of Title 11 of the United States Code in the United
States Bankruptcy Court for the District of Delaware and were
granted recognition of the Chapter 11 proceedings from the Ontario
Superior Court of Justice under section 18.6 of the Companies'
Creditors Arrangement Act in Canada (note 1). 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) Loans to MEC (i)
2007 MEC Bridge Loan On September 13, 2007, MID announced that the
MID Lender had agreed to provide MEC with the 2007 MEC Bridge Loan
of up to $80.0 million (subsequently increased to $125.0 million as
discussed below) through a non-revolving facility. The 2007 MEC
Bridge Loan, together with a $20.0 million private placement of 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, completed in October 2007 (the "FEL Equity
Investment" - note 19(e)), was intended to provide short-term
funding to MEC as it sought to implement the MEC Debt Elimination
Plan (note 4). The 2007 MEC Bridge Loan proceeds could only be used
by MEC in accordance with the MEC Debt Elimination Plan and were
available solely to fund: (i) operations; (ii) payments of
principal, interest and costs, fees and expenses due under the 2007
MEC Bridge Loan and the MEC Project Financing Facilities; (iii)
mandatory payments of interest in connection with permitted debt
under the 2007 MEC Bridge Loan; (iv) mandatory capital
expenditures; and (v) capital expenditures required pursuant to the
terms of the joint venture arrangements between MEC and Caruso
Affiliated ("Caruso") and Forest City (note 20). The 2007 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 2007 MEC
Bridge Loan was increased by a further 1.0% (set at 12.5% at
December 31, 2008). During the year ended December 31, 2008, the
maximum commitment under the 2007 MEC Bridge Loan was increased
from $80.0 million to $125.0 million, MEC was given the ability to
re-borrow $26.0 million that had been repaid during the year ended
December 31, 2008 from proceeds of asset sales (notes 4 and 5) and
MEC was permitted to use up to $3.0 million to fund costs
associated with the November 2008 gaming referendum in Maryland. In
addition, the maturity date of the 2007 MEC Bridge Loan was
extended from May 31, 2008 to March 31, 2009. However, as a result
of the November 2008 Reorganization Proposal not proceeding (note
3), such maturity date was accelerated subsequent to year-end to
March 20, 2009. As a result of MEC's Chapter 11 filing on March 5,
2009 (note 1), the 2007 MEC Bridge Loan was not repaid when due.
The 2007 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
2007 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 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 and maturity extensions during the
year ended December 31, 2008, the MID Lender received aggregate
fees of $7.0 million. The MID Lender also receives a commitment fee
equal to 1% per annum of the undrawn facility. All fees, expenses
and closing costs incurred by the MID Lender in connection with the
2007 MEC Bridge Loan and the changes thereto are paid by MEC. At
December 31, 2008, $123.5 million (December 31, 2007 - $36.9
million) due under the fully drawn 2007 MEC Bridge Loan (including
interest receivable) was included in the Real Estate Business'
current portion of "loans receivable from MEC, net" on the
Company's consolidated balance sheet, net of $1.8 million (December
31, 2007 - $1.4 million) of unamortized deferred arrangement fees.
MEC's current portion of "loans payable to MID, net" on the
Company's consolidated balance sheet includes an aggregate amount
of borrowings and interest payable of $123.4 million (December 31,
2007 - $35.9 million), net of $2.0 million (December 31, 2007 -
$2.4 million) of unamortized deferred financing costs. These net
balances will be accreted to the face value of the 2007 MEC Bridge
Loan over the remaining term to maturity. (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 (note 4), 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. During the year ended December 31, 2008, the deadline
for repayment of at least $100.0 million under the Gulfstream Park
project financing facility was extended from May 31, 2008 to March
31, 2009. However, as a result of the November 2008 Reorganization
Proposal not proceeding (note 3), such maturity date was
accelerated subsequent to year-end to March 20, 2009. As a result
of MEC's Chapter 11 filing on March 5, 2009 (note 1), the repayment
of at least $100.0 million under the Gulfstream Park project
financing facility was not made when due. In connection with the
amendments and maturity extensions during the year ended December
31, 2008, the MID Lender received aggregate fees of $3.0 million.
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. For the three-month
period and year ended December 31, 2008, $1.7 million (2007 - $0.7
million) and $3.4 million (2007 - $4.0 million), respectively, of
such payments were made. During the three months ended March 31,
2008, Remington Park agreed to purchase 80 Class III slot machines
from GPRA with funding from the Remington Park project financing
facility. Accordingly, $1.0 million was advanced under the existing
Remington Park project financing facility during the three months
ended March 31, 2008. At December 31, 2008, there were balances of
$169.5 million (December 31, 2007 - $172.1 million) and $25.0
million (December 31, 2007 - $27.7 million) due under the
Gulfstream Park project financing facility (net of $1.5 million of
unamortized deferred arrangement fees) 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 December 31, 2008 was
$100.7 million (net of $1.5 million of unamortized deferred
arrangement fees), 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
$100.7 million (including $0.4 million in MEC's "discontinued
operations" (note 4)) and $90.0 million (including $23.6 million in
MEC's "discontinued operations" (note 4)), respectively, net of
unamortized deferred financing costs of $1.5 million and $3.8
million (including $1.0 million in MEC's "discontinued operations"
(note 4)), respectively. These net balances will be accreted to the
face value of the MEC Project Financing Facilities over the
remaining terms to maturity. 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 December 31, 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 sheets. (iii) 2008 MEC Loan On
November 26, 2008, concurrent with the announcement of the November
2008 Reorganization Proposal (note 3), MID announced that the MID
Lender had agreed to provide MEC with the 2008 MEC Loan of up to a
maximum commitment, subject to certain conditions being met, of
$125.0 million (plus costs and fees). The 2008 MEC Loan bears
interest at the rate of LIBOR plus 12.0%, is guaranteed by certain
subsidiaries of MEC and is secured by substantially all the assets
of MEC (subject to prior encumbrances). The 2008 MEC Loan has been
made available through two tranches of a non-revolving facility.
Tranche 1 Tranche 1 in the amount of up to $50.0 million (plus
costs and fees) may be used by MEC solely to fund (i) operations,
(ii) payments of principal or interest and other costs under the
2008 MEC Loan and under other loans provided by the MID Lender to
MEC, (iii) mandatory payments of interest in connection with other
of MEC's existing debt, (iv) maintenance capital expenditures and
(v) capital expenditures required pursuant to the terms of MEC's
joint venture arrangements with Forest City and Caruso (note 20).
Tranche 1 had an initial maturity date of March 31, 2009 but as a
result of the November 2008 Reorganization Proposal not proceeding
(note 3), such maturity date was accelerated subsequent to year-end
to March 20, 2009. As a result of MEC's Chapter 11 filing on March
5, 2009 (note 1), Tranche 1 of the 2008 MEC Loan was not repaid
when due. In connection with Tranche 1 of the 2008 MEC Loan, the
MID Lender charged an arrangement fee of $1.0 million (2% of the
commitment), such amount being capitalized to the outstanding
balance of Tranche 1 of the 2008 MEC Loan. The MID Lender also
receives a commitment fee equal to 1% per annum of the undrawn
facility. All fees, expenses and closing costs incurred by the MID
Lender in connection with the 2008 MEC Loan are capitalized to the
outstanding balance of Tranche 1 of the 2008 MEC Loan. At December
31, 2008, $22.9 million due under Tranche 1 of the 2008 MEC Loan
was included in the Real Estate Business' current portion of "loans
receivable from MEC, net" on the Company's consolidated balance
sheet, net of $0.8 million 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 $22.8
million, net of $0.9 million of unamortized deferred financing
costs. These net balances will be accreted to the face value of
Tranche 1 of the 2008 MEC Loan over the remaining term to maturity.
Tranche 2 Tranche 2 in the amount of up to $45.0 million (plus
costs and fees) may be used by MEC solely to fund the application
by MEC's subsidiary Laurel Park for a Maryland slots licence and
related matters and construction of the temporary slots facility at
Laurel Park, following receipt of the Maryland slots licence. In
addition to being secured by substantially all the assets of MEC,
Tranche 2 of the 2008 MEC Loan was also to be guaranteed by the MJC
group of companies and secured by all of such companies' assets. At
December 31, 2008, Tranche 2 of the 2008 MEC Loan had not been made
available. In February 2009, MEC's subsidiary, Laurel Park,
submitted an application for a Maryland slots licence (the "Slots
Application") and subsequently placed the initial licence fee in
escrow pending resolution of certain issues associated with the
application. Accordingly, MEC drew $28.5 million under Tranche 2 of
the 2008 MEC Loan in connection with the escrow deposit.
Subsequently, MEC was informed by the Maryland VLT Facility
Location Commission (the "Commission") that MEC's Slots Application
was not accepted for consideration. The Commission stated that the
Slots Application did not meet certain minimum requirements set out
in the bidding process as it had been submitted without payment of
the initial licence fee of $28.5 million. Accordingly, MEC repaid
$28.5 million to the MID Lender under Tranche 2 of the 2008 MEC
Loan. The initial maturity date of Tranche 2 was December 31, 2011,
and as a result of the Slots Application not being accepted for
consideration was accelerated subsequent to year-end in accordance
with the terms of the loan to May 13, 2009. As a result of MEC's
Chapter 11 filing on March 5, 2009 (note 1), there is an automatic
stay of any action to collect, assert, or recover on the 2008 MEC
Loan. In connection with the February 2009 advance under Tranche 2
of the 2008 MEC Loan, the MID Lender charged an arrangement fee of
$0.6 million, such amount being capitalized to the outstanding
balance of Tranche 2 of the 2008 MEC Loan. The MID Lender also
receives a commitment fee equal to 1% per annum of the undrawn
amount made available under Tranche 2 of the 2008 MEC Loan. All
fees, expenses and closing costs incurred by the MID Lender in
connection with Tranche 2 are capitalized to the outstanding
balance of Tranche 2 under the 2008 MEC Loan. In conjunction with
certain loans to MEC and certain of the strategic initiatives
pursued by MEC, MID management has provided assistance to MEC
pursuant to a consulting agreement between MID and MEC, which
required MEC to reimburse MID for its expenses. In February 2009,
such consulting agreement was terminated. To December 31, 2008,
approximately $9.3 million of external third- party costs have been
incurred in association with the loan facilities between MEC and
the MID Lender, including $0.4 million and $0.8 million in the
three-month period and year ended December 31, 2008, respectively.
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 each of the loan
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 loan 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 year ended December
31, 2008 of 15.5 million euros ($24.3 million), which is included
in MEC's "gain on disposal of real estate". On March 5, 2009, MEC
announced that one of its subsidiaries in Austria has entered into
an agreement to sell to a subsidiary of Magna approximately 100
acres of real estate located in Oberwaltersdorf, Austria (note
5(d)) for a purchase price of approximately 4.6 million euros ($5.7
million). (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 December 31, 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 statement of income (loss)
for the year ended December 31, 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 year ended December 31, 2008 of 0.6 million euros
($0.9 million), which is included in MEC's "gain on disposal of
real estate" in the Company's unaudited interim consolidated
statement of income (loss). (e) FEL Equity Investment The closing
of the FEL Equity Investment occurred on October 29, 2007. FEL
purchased 444,444 shares of MEC Class A Stock at a price per share
of $45.00 (such amounts adjusted to reflect the reverse stock split
completed by MEC in 2008 (note 20(o)), with proceeds to MEC of
$19.6 million net of $0.4 million of transaction costs. The price
per share was set at the greater of (i) 90% of the volume weighted
average price per share of MEC Class A Stock on Nasdaq for the five
trading days commencing on September 13, 2007 (the date of
announcement of the FEL Equity Investment); and (ii) $38.20
(adjusted to reflect the reverse stock split), being 100% of the
volume weighted average price per share of MEC Class A Stock on
Nasdaq for the five trading days immediately preceding September
13, 2007. The shares of MEC Class A Stock issued pursuant to the
subscription agreement were issued and sold in a private
transaction exempt from registration under Section 4(2) of the
United States Securities Act of 1933, as amended. As a result of
the FEL Equity Investment, MID's voting interest and equity stake
in MEC were reduced from 96.3% and 58.3%, respectively, to 95.6%
and 53.9%, respectively, and the Company recorded a $3.5 million
dilution loss in the three-month period and year ended December 31,
2007, which is included in "other gains (losses), net" in the
Company's unaudited interim consolidated statement of income
(loss). (f) 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 year ended December 31, 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 year ended
December 31, 2008 of $0.1 million (2007 - $48.8 million), included
in MEC's "gain on disposal of real estate" in the Company's
unaudited interim consolidated statements of income (loss). The
effects of these transactions are eliminated from the Company's
unaudited interim consolidated results of operations and financial
position, except that $1.7 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 year ended December 31, 2007. (g) 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 2007, the Real Estate Business donated substantially
all of the 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 year ended December 31, 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) On May 8, 2008, one of
MEC's wholly-owned subsidiaries, LATC, 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 20, 2008, the presiding judge
denied the defendants' motions. The defendants have filed answers
and cross complaints against all other vendors who participated in
the removal and construction of the track. In addition, the
defendants filed a counter-claim against LATC, which was dismissed.
The case is now at issue and will be set for a status conference
with the court in early May 2009. (d) On May 18, 2007, ODS
Technologies, L.P., operating as TVG Network, filed a summons
against MEC, HRTV, LLC (which was subsequently removed from the
lawsuit) 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) 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. (f) In addition to the letters of credit issued
under the Company's credit facilities (note 9), the Company had
$3.8 million (Real Estate Business - $2.6 million; MEC - $1.2
million) of letters of credit issued with various financial
institutions at December 31, 2008 to guarantee various construction
projects. These letters of credit are secured by cash deposits of
the Company. (g) 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
December 31, 2008, these indemnities amounted to $6.3 million, with
expiration dates through 2010. (h) At December 31, 2008, the
Company's contractual commitments related to construction and
development projects outstanding amounted to approximately $5.3
million (Real Estate Business - $3.2 million; MEC - $2.1 million).
(i) 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 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 December 31, 2008, MEC had
not made any additional capital contributions, however, MEC has
subsequently made additional contributions of $0.4 million.
Subsequent to year-end, MEC's share of the total required capital
contributions to HRTV, LLC was renegotiated and is now expected to
be approximately $5.5 million, of which $4.3 million had been
contributed prior to December 31, 2008. (j) 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 December
31, 2008, the carrying value of MEC's fixed assets related to the
slots facility is approximately $22.5 million. If the matter is
ultimately decided in a manner adverse to MEC, a write-down of
these fixed assets may be required. (k) 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
December 31, 2008, MEC has contributed $8.3 million. At December
31, 2008, approximately $90.6 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. 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. Included in MEC's "accounts payable and
accrued liabilities" is an obligation of approximately $9.1 million
(December 31, 2007 - $5.8 million), which was paid subsequent to
year-end, reflecting MEC's unpaid share of equity contributions in
excess of $15.0 million. 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.
Accordingly, $7.5 million is included in MEC's "other long-term
liabilities" on the unaudited interim consolidated balance sheets
at December 31, 2008 and 2007, representing MEC's obligation to
forgo its proportion of cash receipts 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. (l) 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 11 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
working to amend and supplement the environmental impact report in
an attempt to cure the 11 defects. Accordingly, development efforts
may be delayed or suspended. To December 31, 2008, MEC has expended
$9.6 million relating to the proposed development of The Shops at
Santa Anita, of which $1.3 million was paid in the year ended
December 31, 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 December 31,
2008, no such payments have been made. (m) 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 the Meadows Holdback Note
in the amount of $25.0 million 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 $2.0 million of
previously deferred gains being recognized in MEC's "other gains,
net" for the year ended December 31, 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. 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. (n) The California Regional Water Quality Control
Board (the "Control Board") requires that MEC's wholly-owned
subsidiary, Santa Anita Park, apply for, and keep in force, a
wastewater discharge permit, which governs and regulates the amount
of contaminated water that may be discharged into the storm drain
and water table as a result of maintenance of the horse population
on site. With the issuance of the permit in 2006, there were
certain compliance efforts that the Control Board requested be
addressed over the five-year permit period. The Control Board did
not give deadlines for immediate compliance nor is Santa Anita
Park's current permit at risk for non- compliance. Citations are
not expected unless Santa Anita Park does not make an effort to
comply. MEC is in ongoing discussions with the Control Board
regarding the nature of the compliance requests and the planning
process as to how MEC will address these requirements over the
five-year permit period. A number of these requirements have been,
or are expected to be, addressed through planned capital projects,
including the installation of a new, synthetic racing surface in
2007 and the anticipated rebuild of barns on the backside over the
next several years. Given the fact that a number of these
remediation requirements would be better addressed through capital
projects rather than a repair or fix of existing facilities, the
ultimate cost of remediation will be impacted by the decision on
how to best address the remediation requirement. This process will
span several years as each of these requirements are addressed. The
exact scope, cost and timing of the remediation efforts has not
been finalized and a compliance plan has not been agreed upon with
the Control Board. No accrual was required at December 31, 2008,
since the Control Board had granted a permit for a five-year
period, there were no manifestations by the Control Board for
immediate compliance and MEC had not finalized a compliance plan
with the Control Board. (o) 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. As a result of the reverse
stock split, every 20 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 (losses), net" reported under the MEC segment for
the year ended December 31, 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. DATASOURCE: MI
Developments Inc. CONTACT: Richard J. Smith, Executive
Vice-President and Chief Financial Officer, at (905) 726-7507.
Copyright