/FIRST AND FINAL ADD - TO289 - MI Developments Inc. Earnings/ Notes to Interim Consolidated Financial Statements (All amounts in U.S. dollars and all tabular amounts in thousands unless otherwise noted) (All amounts as at September 30, 2004 and 2003 and for the three and nine months ended September 30, 2004 and 2003 are unaudited) 1. BASIS OF PRESENTATION The unaudited interim consolidated financial statements have been prepared in U.S. dollars following the accounting policies as set out in the annual consolidated financial statements for the year ended December 31, 2003, except as discussed in note 2 below. The Company has reclassified certain prior period amounts to conform to the current period's presentation. The unaudited interim consolidated financial statements include the accounts of MI Developments Inc. and its subsidiaries (collectively "MID" or the "Company"). MID is the former real estate division of Magna International Inc. ("Magna") and became a separate, publicly traded company on September 2, 2003. The Company's results for the three and nine months ended September 30, 2003 are presented on a carve-out basis from Magna. The Company holds an investment 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. The Company owns approximately 59% of MEC's total equity, representing 96.6% of the total voting power of its outstanding stock. MEC's results are consolidated with the Company's results, with minority ownership accounted for as minority interest. 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 2003 annual consolidated financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position at September 30, 2004 and 2003 and the results of operations and cash flows for the three and nine month periods ended September 30, 2004 and 2003. MEC's racing business is seasonal in nature. MEC's racing revenues and operating results for any quarter will not be indicative of the racing revenues and operating results for the year. A disproportionate share of annual revenues and net income is earned in the first quarter of each year. 2. ACCOUNTING CHANGES Stock-based Compensation In November 2003, the Canadian Institute of Chartered Accountants ("CICA") amended Handbook Section 3870, "Stock-based Compensation and Other Stock-based Payments", to require the expensing of all stock-based compensation awards for fiscal years beginning on or after January 1, 2004. The Company adopted these requirements effective January 1, 2004. The standard has been applied on a retroactive basis. The consolidated statements of income (loss) for the three and nine months ended September 30, 2003 have not been restated. During the three and nine months ended September 30, 2004, the cumulative impact of stock-based compensation for the fiscal years ended December 31, 2003 and 2002 was recognized in the financial statements as an adjustment to opening deficit. At the segment level, the impact of this recognition was an increase in MEC's minority interest of $3.2 million and a decrease in MEC's shareholders' equity of $3.2 million. On a consolidated basis, the impact of the restatement was an increase in minority interest of $3.2 million, an increase in deficit of $4.1 million, and an increase in contributed surplus of $0.9 million. In the three months ended September 30, 2004, the effect of the adoption of the fair value method for stock-based compensation expense was an increase in general and administrative expenses of $0.1 million (Real Estate Business - $(0.2) million; MEC - $0.3 million) and a decrease in minority interest expense of $0.1 million. In the nine months ended September 30, 2004, the effect of the adoption of the fair value method for stock-based compensation expense was an increase in general and administrative expenses of $2.4 million (Real Estate Business - $1.6 million; MEC - $0.8 million) and a decrease in minority interest expense of $0.3 million. Compensation expense is recognized for stock options based upon the fair value of the options at the grant date. The fair value of the options is recognized over the vesting period of the options as general and administrative expense with a corresponding amount included in equity as contributed surplus. The fair value of stock options is estimated at the grant date using the Black-Scholes option pricing model. This model requires the input of a number of assumptions, including expected dividend yields, expected stock price volatility, expected time until exercise and risk-free interest rates. Although the assumptions used reflect management's best estimates, they involve inherent uncertainties based on market conditions outside of the Company's control. If other assumptions are used, stock-based compensation expense could be significantly impacted. The contributed surplus balance is reduced as the options are exercised and the amount initially recorded for the options in contributed surplus is credited to Class A Subordinate Voting Shares, along with the proceeds received on exercise. Asset Retirement Obligations In March 2003, the CICA issued Handbook Section 3110, "Asset Retirement Obligations" ("CICA 3110"). CICA 3110 establishes standards for the recognition, measurement and disclosure of asset retirement obligations and the related asset retirement costs. CICA 3110 is effective for fiscal years beginning on or after January 1, 2004. The adoption of CICA 3110 did not have any impact on the Company's unaudited interim consolidated financial statements for the three and nine months ended September 30, 2004. Hedging Relationships The CICA previously approved certain amendments to Accounting Guideline 13, "Hedging Relationships" ("AcG-13") which were adopted by the Company effective January 1, 2004. AcG-13 provides guidance on the identification, designation, documentation and effectiveness of hedging relationships for the purpose of applying hedge accounting, and for the discontinuance of hedge accounting. The amendments clarified certain of the requirements in AcG-13 and provided additional application guidance. The adoption of AcG-13 did not have any impact on the Company's unaudited interim consolidated financial statements for the three and nine months ended September 30, 2004. 3. WRITE-DOWN OF MEC'S LONG-LIVED ASSETS (a) MEC has commenced a major redevelopment of its Gulfstream Park racetrack. As a result, MEC has recognized a non-cash write-down of $26.3 million in the nine months ended September 30, 2004 related to Gulfstream Park's long-lived assets in connection with the redevelopment. The project includes significant modifications and enhancements to the racing surfaces and stable area, including the construction of a new, wider turf course. It also includes the construction of a modern clubhouse/grandstand offering an array of restaurants and entertainment facilities. The capital budget for the redevelopment of Gulfstream Park is approximately $145 million. In the event that MEC is unable to secure sufficient financing or other sources of funds, MEC will not have the cash resources to continue the redevelopment of Gulfstream Park on the current schedule and the project would be delayed. MEC's goal is to minimize the disruption to the 2005 Gulfstream Park race meet during the construction period. To that end, it is MEC's expectation that the new racing surfaces will be completed prior to the start of the 2005 meet. However, since the project entails the demolition of a substantial portion of the current buildings and related structures, temporary facilities will be erected to house the 2005 meet. The new clubhouse/grandstand facility is expected to be operational for the 2006 Gulfstream Park race meet. Although the redevelopment is being scheduled to minimize any interference with Gulfstream Park's racing season, with a project of this magnitude, there will be a temporary disruption of Gulfstream Park's operations during the 2005 meet and there is a risk that the redevelopment will not be completed according to schedule. Any interference with the racing operations during the meet would result in a reduction in the revenues and earnings generated at Gulfstream Park during that meet. (b) MEC has also commenced the redevelopment of the racing surfaces at Laurel Park. As a result, MEC has recognized a non-cash write-down of $0.4 million in the nine months ended September 30, 2004 related to Laurel Park's long-lived assets in connection with the redevelopment. The project includes significant modifications and enhancements to the racing surfaces, including the construction of a new, wider turf course. It is MEC's expectation that the new dirt track will be completed by December 31, 2004 and the new turf track will be completed prior to the start of Laurel Park's 2005 summer meet, which commences on August 6, 2005. 4. SALE AND LEASE ARRANGEMENT OF GREAT LAKES DOWNS On August 24, 2004, MI Racing Inc., a wholly owned subsidiary of MEC, sold the real property and associated racetrack license of Great Lakes Downs to Richmond Racing Co., LLC ("Richmond Racing") for approximately $4.2 million. The consideration included cash of $0.2 million and the issuance of a 20-year promissory note with a principal amount of $4.0 million. The promissory note, which bears interest at 5% per annum, is repayable by Richmond Racing in monthly principal and interest payments of $26 thousand until maturity. MI Racing Inc. also has an option to repurchase the property and associated racetrack license of Great Lakes Downs from Richmond Racing in the event that MEC is unsuccessful in obtaining a racetrack license for the proposed Romulus racetrack or in the event that state law in Michigan is amended to allow an entity to hold more than one racetrack license. MI Racing Inc. has also entered into a lease agreement with Richmond Racing, which gives MI Racing Inc. the conditional right to continue operating Great Lakes Downs and conducting thoroughbred race meetings at the racetrack. The lease is for an initial term of five years with an option to renew the lease for up to three additional periods of five years each. The lease requires MI Racing Inc. to make monthly rental payments of $30 thousand to Richmond Racing. Based on the terms contained in the sale and lease arrangement between MI Racing Inc. and Richmond Racing, for accounting purposes the transaction has not been accounted for as a sale and leaseback, but rather using the financing method of accounting under generally accepted accounting principles. 5. EARNINGS (LOSS) PER SHARE Diluted earnings (loss) per share for the three and nine months ended September 30, 2004 are computed as follows: Three months Nine months ended ended September 30, September 30, 2004 2004 ------------------------------------------------------------------------- Net income (loss) $ (15,937) $ 5,268 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of Class A Subordinate Voting and Class B Shares outstanding during the period (thousands) 48,160 48,153 Stock options (thousands) - 37 ------------------------------------------------------------------------- 48,160 48,190 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted earnings per Class A Subordinate Voting or Class B Share $ (0.33) $ 0.11 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The computation of diluted earnings per share for the six months ended June 30, 2004 excludes the effect of the potential exercise of 100,000 options, as such options were not "in-the-money" and their impact would be anti-dilutive. For the three months ended September 30, 2004, the computation of diluted earnings per share excludes the effect of the potential exercise of 352,000 options, as such options were not "in-the-money" and their impact would be anti-dilutive. Earnings per share for the three and nine month periods ended September 30, 2003 include net income only for the period subsequent to August 29, 2003, the date when Magna's net investment was exchanged for Class A Subordinate Voting Shares of the Company as part of the Company's spin-off from Magna. The weighted average number of basic and fully diluted outstanding shares for the three and nine month periods ended September 30, 2003 is calculated for the same period as earnings per share. For purposes of determining fully diluted earnings per share, only the rights to acquire Class A Subordinate Voting Shares that would be dilutive to earnings have been considered. A weighted average of 261,364 options to acquire Class A Subordinate Voting Shares were outstanding from August 29 to September 30, 2003. These were not included in the computation of diluted earnings per share because the exercise price was greater than the average trading price of the Class A Subordinate Voting Shares during the period, and therefore their inclusion would be anti-dilutive. The Company's net income was $0.9 million for the period from August 30 to September 30, 2003. The basic and diluted weighted average number of shares outstanding for the same period was 48,130,321. Basic and diluted earnings per share for the three and nine month periods ended September 30, 2003 were $0.02. 6. DEFICIT Deficit reflects only the operations of the Company subsequent to August 29, 2003, which was the date when Magna's net investment was fixed for the purpose of the distribution of the Company's Class A Subordinate Voting Shares and Class B Shares to Magna's shareholders. 7. DETAILS OF CASH FROM OPERATING ACTIVITIES (a) Items not involving current cash flows: Three months ended Nine months ended September 30, September 30, 2004 2003 2004 2003 ------------------------------------------------------------------------- Real Estate Business Loss (gain) on disposal of real estate $ (348) $ 155 $ (216) $ 134 Straight-line rent adjustment 136 (637) (104) (2,404) Depreciation and amortization 8,533 8,154 25,405 23,509 Future income taxes 147 926 4,157 3,808 Stock-based compensation expense (206) - 1,558 - Other - (51) 120 457 ------------------------------------------------------------------------- 8,262 8,547 30,920 25,504 ------------------------------------------------------------------------- MEC Gain on disposal of real estate - - (9,626) - Depreciation and amortization 10,374 7,923 27,952 23,157 Future income taxes (1,663) (2,023) (7,182) (3,338) Minority interest (18,426) (6,263) (19,726) (1,113) Stock-based compensation expense 260 - 752 - Dilution losses and other gains (1,026) - (883) - Write-down of long-lived assets - - 26,685 - Other (99) 459 1,332 2,412 ------------------------------------------------------------------------- (10,580) 96 19,304 21,118 ------------------------------------------------------------------------- Consolidated $ (2,318) $ 8,643 $ 50,224 $ 46,622 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (b) Changes in non-cash balances: Three months ended Nine months ended September 30, September 30, 2004 2003 2004 2003 ------------------------------------------------------------------------- Real Estate Business Accounts receivable $ 455 $ 1,232 $ 6,728 $ (807) Prepaid expenses and other - 1,252 (135) (1,936) Deferred rent receivable (765) - (87) 56 Accounts payable and accrued liabilities 1,508 17,481 7,329 1,471 Dividends payable - - (4,334) - Income taxes payable 2,907 (4,496) 4,462 (7,447) ------------------------------------------------------------------------- 4,105 15,469 13,963 (8,663) ------------------------------------------------------------------------- MEC Restricted cash 2,801 (7,127) (2,134) (1,240) Accounts receivable 2,160 2,878 (4,383) 12,515 Prepaid expenses and other 948 (2,780) (6,109) (1,534) Accounts payable and accrued liabilities 13,743 6,895 23,192 (20,467) Deferred revenue 1,087 1,395 (7,633) 3,208 Income taxes receivable/payable (749) (9,753) (3,993) (2,878) ------------------------------------------------------------------------- 19,990 (8,492) (1,060) (10,396) ------------------------------------------------------------------------- Consolidated $ 24,095 $ 6,977 $ 12,903 $ (19,059) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. REAL ESTATE PROPERTIES Real estate properties consist of: September 30, December 31, 2004 2003 ------------------------------------------------------------------------- Real Estate Business Income-producing properties under operating leases Land $ 185,166 $ 179,848 Buildings, parking lots and roadways - cost 1,080,333 1,058,948 Buildings, parking lots and roadways - accumulated depreciation (178,029) (150,913) ------------------------------------------------------------------------- 1,087,470 1,087,883 ------------------------------------------------------------------------- Development properties Land and improvements 101,436 124,926 Properties under development 12,824 8,700 ------------------------------------------------------------------------- 114,260 133,626 ------------------------------------------------------------------------- Properties held for sale 30,193 6,003 ------------------------------------------------------------------------- 1,231,923 1,227,512 ------------------------------------------------------------------------- MEC Revenue-producing racetrack properties Land and improvements 220,269 210,859 Buildings - cost 390,686 253,619 Buildings - accumulated depreciation (68,013) (36,454) Construction in progress 97,334 101,216 ------------------------------------------------------------------------- 640,276 529,240 ------------------------------------------------------------------------- Under-utilized racetrack properties 96,973 97,201 ------------------------------------------------------------------------- Development properties Land and improvements 45,997 60,089 Properties under development 916 62,441 ------------------------------------------------------------------------- 46,913 122,530 ------------------------------------------------------------------------- Revenue-producing non-racetrack properties Land and improvements 35,567 35,236 Buildings - cost 53,931 53,939 Buildings - accumulated depreciation (9,756) (8,621) ------------------------------------------------------------------------- 79,742 80,554 ------------------------------------------------------------------------- Properties held for sale 2,509 9,345 ------------------------------------------------------------------------- 866,413 838,870 ------------------------------------------------------------------------- Consolidated $ 2,098,336 $ 2,066,382 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. BANK INDEBTEDNESS During the three months ended September 30, 2004, MID extended its $50.0 million credit facility to November 24, 2004. MID is currently in discussions with the bank to further extend the agreement and expects that the facility will be renewed for an additional 364 days. As at September 30, 2004, no amounts were borrowed under the facility, but the Company had issued letters of credit totalling $0.3 million. In the three months ended September 30, 2004, MEC borrowed $25.0 million under its $50.0 million senior revolving credit facility. Loans under the credit facility are secured 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 subsidiaries of MEC which own and operate Golden Gate Fields, Gulfstream Park and Santa Anita Park and operate Bay Meadows. The loans under the credit facility bear interest at either the U.S. Base rate or London Interbank Offered Rate ("LIBOR") plus a margin based on MEC's ratio of debt to earnings before interest, income taxes, depreciation and amortization. At September 30, 2004, the interest rate on the loan outstanding under the credit facility was 4.67% per annum. 10. LONG-TERM DEBT On March 19, 2004, MID received a receipt for a final Base Shelf Prospectus (the "Prospectus") from Canadian securities regulatory authorities for the issuance, from time to time, of up to Cdn. $650 million of unsecured debt securities. Unless otherwise specified in a prospectus supplement, the net proceeds resulting from the issue of debt securities under the Prospectus will be used for the Company's general corporate purposes, including developments and acquisitions arising from the Company's ongoing relationship with the Magna group, as well as development and redevelopment projects that the Company may enter into with respect to land and facilities owned by MEC. In the first quarter of 2004, one of MEC's European subsidiaries entered into a 15 million Euro term loan facility. The facility, which bears interest at the European Interbank Offered Rate ("EURIBOR") plus 2% per annum, is secured by a first and second mortgage on land in Austria owned by the European subsidiary. At September 30, 2004, $18.6 million (15 million Euro) was outstanding on this fully drawn facility, which matures on December 15, 2006. Prior to the spin-off of MID from Magna, the Real Estate Business' continuing funding requirements were advanced by Magna. These advances bore interest at rates not exceeding the borrowing jurisdiction's bank prime rate and were recorded as part of Magna's net investment. Consolidated long-term debt at September 30, 2004 includes secured obligations of $178.1 million (Real Estate Business - $6.6 million; MEC - $171.5 million). 11. SHARE CAPITAL Changes in Class A Subordinate Voting Shares and Class B Shares for the three and nine months ended September 30, 2004 are shown in the following table: Number Book Value ------------------------------------------------------------------------- Class A Subordinate Voting Shares issued and outstanding at December 31, 2003 47,582,083 $ 1,552,901 Issued on exercise of stock options 30,000 910 ------------------------------------------------------------------------- Class A Subordinate Voting Shares issued and outstanding at September 30, 2004 47,612,083 $ 1,553,811 ------------------------------------------------------------------------- Class B Shares issued and outstanding at December 31, 2003 and September 30, 2004 548,238 $ 17,893 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 12. STOCK-BASED COMPENSATION (a) In 2003, MID's Board of Directors approved the Incentive Stock Option Plan (the "MID Plan"), which allows for the grant of stock options or stock appreciation rights to directors, officers, employees and consultants. A maximum of 2.85 million MID Class A Subordinate Voting Shares are available to be issued under the MID Plan. MID grants stock options to certain directors, officers, key employees and consultants to purchase MID's Class A Subordinate Voting Shares. 1/5th of options vest on the date of grant, and remaining options vest over a period of 4 years at a rate of 1/5th on each anniversary of the date of grant. Options expire on the tenth anniversary of the date of grant, subject to earlier cancellation in the events specified in the stock option agreement entered into by MID with each recipient of options. Activity in MID's option plan was as follows: Weighted Weighted Average Average Exercise Remaining Price Contractual Number ($Cdn) Life (years) --------------------------------------------------------------------- Stock options outstanding at December 31, 2003 575,000 $ 31.85 9.7 Options granted 100,000 39.26 Options exercised (30,000) 31.85 Options cancelled (193,000) 31.85 Options cancelled (100,000) 39.26 --------------------------------------------------------------------- Stock options outstanding at September 30, 2004 352,000 $ 31.85 8.9 --------------------------------------------------------------------- --------------------------------------------------------------------- Stock options exercisable at September 30, 2004 124,000 $ 31.85 8.8 --------------------------------------------------------------------- --------------------------------------------------------------------- There were no MID stock options granted or exercised in the three months ended September 30, 2004. During the three months ended March 31, 2004, there were 100,000 MID stock options granted with an average fair value of $7.57 per option. These 100,000 MID stock options and an additional 193,000 stock options were subsequently cancelled during the three months ended September 30, 2004. Net income of the Real Estate Business for the three and nine months ended September 30, 2004 reflect a stock-based compensation recovery of $0.2 million as a result of the cancelled options. During the three and nine months ended September 30, 2003 there were 575,000 MID stock options granted with an average fair value of $6.25 per option. The fair value of the MID stock options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: Nine Months Ended September 30, 2004 --------------------------------------------------------------------- Risk-free interest rate 3.0% Expected dividend yield 1.20% Expected volatility of MID's Class A Subordinate Voting Shares 30.2% Weighted average expected life (years) 4 --------------------------------------------------------------------- --------------------------------------------------------------------- (b) MEC has a Long-term Incentive Plan (the "MEC Plan"), adopted in 2000, which allows for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock and performance shares to directors, officers, employees, consultants, independent contractors and agents. A maximum of 7.6 million shares of MEC's Class A Subordinate Voting Stock are available to be issued under the MEC Plan, of which 6.3 million are available for issuance pursuant to stock options and tandem stock appreciation rights and 1.3 million are available for issuance pursuant to any other type of award under the MEC Plan. During the three months ended September 30, 2004, no MEC shares were issued under the MEC Plan. During the nine months ended September 30, 2004, 199,000 MEC shares were issued under the MEC Plan, including 175,000 MEC shares issued on the exercise of MEC stock options. MEC grants stock options to certain directors, officers, key employees and consultants to purchase shares of MEC's Class A Subordinate Voting Stock. All of such stock options give the grantee the right to purchase Class A Subordinate Voting Stock of MEC at a price no less than the fair market value of such stock at the date of grant. Generally, stock options under the MEC Plan vest over a period of two to six years from the date of grant at rates of 1/7th to 1/3rd per year and expire on or before the tenth anniversary of the date of grant, subject to earlier cancellation upon the occurrence of certain events specified in the stock option agreements entered into by MEC with each recipient of options. During the three months ended September 30, 2004, 50,000 MEC stock options were granted, 100,000 stock options were cancelled and no stock options were exercised or expired. During the nine months ended September 30, 2004, 200,000 MEC stock options were granted with an average fair value of $2.38 per option, 175,000 MEC stock options were exercised, and 244,000 MEC stock options were cancelled. During the nine months ended September 30, 2003, 640,000 MEC stock options were granted with an average fair value of $1.50 per option. At September 30, 2004, there were 4,622,500 MEC stock options outstanding with exercise prices ranging from $3.91 to $9.43 per share and a weighted average exercise price of $6.17 per share. There were 3,925,596 MEC stock options exercisable at September 30, 2004 with a weighted average exercise price of $6.11 per share. The fair value of MEC stock option grants is estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: Three months ended Nine months ended September 30, September 30, 2004 2003 2004 2003 --------------------------------------------------------------------- Risk-free interest rate 3.0% N/A 3.0% 2.0% Expected dividend yield 0.84% N/A 0.84% 0.84% Expected volatility of MEC's Class A Subordinate Voting Stock 0.562 N/A 0.562 0.534 Weighted average expected life (years) 4.0 N/A 4.0 4.0 --------------------------------------------------------------------- --------------------------------------------------------------------- Pro Forma Results Under Fair Value Method ----------------------------------------- If the fair value method of accounting for stock-based compensation had been applied to the Company's results prior to the adoption of the fair value method effective January 1, 2004, the Company's pro forma net income would have been as follows: Three months Nine months ended ended September 30, September 30, 2003 2003 --------------------------------------------------------------------- Net income, as reported $ 1,374 $ 18,062 Stock-based compensation expense - MID (37) (37) Stock-based compensation expense, net of tax - MEC (303) (2,065) Minority interest in MEC stock-based compensation expense 125 855 --------------------------------------------------------------------- Pro forma net income $ 1,159 $ 16,815 --------------------------------------------------------------------- --------------------------------------------------------------------- For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. 13. SEGMENTED INFORMATION The Company's reportable segments reflect how the Company is organized and managed by senior management. The Company's operations are segmented in the Company's internal financial reports between wholly-owned operations (the Real Estate Business) and publicly traded operations (MEC). The segregation of operations between wholly-owned and publicly traded operations recognizes the fact that in the case of the Real Estate Business, the Company's management has direct responsibility for the key operating, financing and resource allocation decisions, whereas in the case of MEC, such responsibility resides with its separate board of directors and executive management. The Company's reporting segments are as follows: Real Estate Business The Real Estate Business owns real estate assets in Canada, Austria, the United States, Germany, Mexico, the United Kingdom, Poland, the Czech Republic, Belgium and Spain. Substantially all these real estate assets are leased to, or are under development for subsequent lease to, Magna's automotive operating units. The Real Estate Business also owns certain properties that are being held for future development or sale. MEC MEC currently operates or manages twelve thoroughbred racetracks, two standardbred (harness racing) racetracks, two racetracks that run both thoroughbred and standardbred meets, one greyhound track, and three thoroughbred training centres. In addition, MEC operates off-track betting facilities, XpressBet(TM), a national Internet and telephone account wagering business, owns and operates HorseRacing TV(TM), a television channel focused on horse racing, and owns a 30% equity investment in AmTote International, Inc., a provider of totalisator services. MEC also operates two golf courses and related facilities. The Company's interim Consolidated Statements of Income (Loss), Consolidated Statements of Cash Flows, and Consolidated Balance Sheets have been arranged so as to provide detailed, discrete financial information on the Real Estate Business and MEC reporting segments. 14. TRANSACTIONS WITH RELATED PARTIES Mr. F. Stronach, Magna's Chairman of the Board, and three other members of his family are trustees of the Stronach Trust. The Stronach Trust controls the Company through the right to direct the votes attaching to 66% of the Company's Class B Shares. The Stronach Trust also controls Magna through the right to direct the votes attaching to 66% of Magna's Class B Shares. Since the Company and Magna are under the common control of the Stronach Trust, they are considered to be related parties for accounting purposes. (a) Proposed offer to take MEC private On July 13, 2004, the Company announced an intention to make an offer to acquire all the outstanding shares of Class A Subordinate Voting Stock of MEC not owned by MID. On September 16, 2004, the Company announced that it would not proceed with the offer. In the three months ended September 30, 2004, the Company incurred costs related to this proposed offer of $2.7 million which have been included in general and administrative expenses of the Real Estate Business. In connection with the intended offer, the Company entered into a share purchase agreement dated July 12, 2004 (the "Share Purchase Agreement") with Fair Enterprise Limited ("Fair Enterprise"), a company controlled by Mr. F. Stronach. Pursuant to the Share Purchase Agreement, the Company purchased from Fair Enterprise 3,682,515 shares of Class A Subordinate Voting Stock of MEC for aggregate consideration of $3.3 million in cash and the issuance, subject to regulatory approval, of 707,725 of the Company's Class A Shares. The Share Purchase Agreement provided Fair Enterprise with an option to repurchase the MEC shares from the Company in the event that, among other things, prior to December 30, 2004, the Company publicly announced that it would not be proceeding with the offer. As a result of the Company not proceeding with the offer, on September 16, 2004 Fair Enterprise exercised its option under the Share Purchase Agreement and repurchased the MEC shares from the Company in consideration for the termination of the Company's obligation to issue the 707,725 Class A Shares and pay the cash consideration (which shares had not been issued and cash consideration had not been paid on such date). The Company has recorded an increased amount of the net loss of MEC during the period that the Company owned these additional MEC shares. The recovery of minority interest expense in the Company's Consolidated Statement of Income (Loss) for the three months ended September 30, 2004 has been reduced by approximately $1.0 million to reflect the increased amount of MEC losses attributable to the Company during the period of ownership. Also included in the Company's Consolidated Statement of Income (Loss) for the three months ended September 30, 2004 is a non-cash gain on disposal of approximately $1.0 million as a result of the Fair Enterprise repurchase of the MEC shares on September 16, 2004. (b) Charges to Magna Substantially all of the Company's rental revenue relates to leases with Magna and its wholly-owned and publicly traded subsidiaries. During the year ended December 31, 2001, MEC entered into an access agreement with Magna for Magna's use of the golf course and the clubhouse meeting, dining and other facilities in Aurora, Ontario. The agreement, which expired on December 31, 2003, stipulated an annual access fee of $3.9 million (Cdn. $5.0 million). During the three and nine months ended September 30, 2004, no revenue was recognized related to this agreement (three and nine months ended September 30, 2003 - $0.7 million and $2.1 million, respectively). Effective March 1, 1999, MEC began charging Magna an access fee for Magna's use of the golf course and related facilities in Oberwaltersdorf, Austria. The agreement, which expired on March 1, 2004, stipulated a yearly fee of $3.1 million (2.5 million Euro). During the three months ended September 30, 2004, no revenue was recognized related to this agreement (three months ended September 30, 2003 - $0.7 million). During the nine months ended September 30, 2004, $0.5 million of revenue was recognized related to this agreement (nine months ended September 30, 2003 - $2.4 million). MEC has granted Magna a right of first refusal to purchase its two golf courses. At September 30, 2004, the Real Estate Business had no amounts due from Magna and its subsidiaries (December 31, 2003 - $8.2 million). (c) Charges from Magna During the three and nine months ended September 30, 2003, the Company incurred $3.5 million and $24.8 million, respectively, of interest charges from Magna. Magna charges the Company for certain administrative services which have continued to be provided following the spin-off of the Company from Magna. In the three and nine months ended September 30, 2004, these charges totalled $0.1 million and $0.2 million, respectively (three and nine months ended September 30, 2003 - nil), and are included in the Real Estate Business' general and administrative expenses. Included in the Real Estate Business' accounts payable and accrued liabilities at September 30, 2004 are amounts due to Magna and its subsidiaries in the amount of $0.1 million (December 31, 2003 - $0.7 million). Included in MEC's accounts payable and accrued liabilities at September 30, 2004 are amounts due to Magna and its subsidiaries in the amount of $0.3 million (December 31, 2003 - nil). (d) MEC option In September 2004, the Company granted MEC an option, exercisable at any time on or prior to June 30, 2005, to purchase the shares of one of the Company's subsidiaries, which owns property in Romulus, Michigan. 15. COMMITMENTS AND CONTINGENCIES (a) MEC generates a substantial amount of its revenues from wagering activities and, therefore, it is subject to the risks inherent in the ownership and operation of a racetrack. These include, among others, the risks normally associated with changes in the general economic climate, trends in the gaming industry, including competition from other gaming institutions and state lottery commissions, and changes in tax laws and gaming laws. (b) In the ordinary course of business activities, the Company and its subsidiaries may be contingently liable for litigation and claims with 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. (c) In connection with its acquisition of a controlling interest in The Maryland Jockey Club, Maryland Racing, Inc. ("MRI"), a wholly-owned subsidiary of MEC, agreed with the Maryland Racing Commission to spend a minimum of $5.0 million by August 31, 2003, an additional $5.0 million by December 31, 2003, and an additional $5.0 million by June 30, 2004 on capital expenditures and renovations at Pimlico, Laurel Park, Bowie Training Center and their related facilities and operations. As a result of delays in permitting of several projects related to this commitment, $10.0 million had been spent by September 30, 2004 and MEC has placed $5.0 million in an escrow account to be applied to future capital expenditures and renovations for the remainder of the commitment. MEC's capital expenditure plan for 2004 anticipates satisfying this spending commitment by the end of 2004. (d) In connection with its acquisition of a controlling interest in The Maryland Jockey Club, MEC has an obligation to pay $18.3 million on exercise of either the put or call options for the remaining interest in The Maryland Jockey Club. At September 30, 2004, this obligation has been reflected on MEC's balance sheet as long-term debt due after one year. (e) The Maryland Jockey Club is a party to an agreement (the "Maryland Operating Agreement") with Cloverleaf Enterprises, Inc. ("Cloverleaf"), the current owner of Rosecroft Raceway ("Rosecroft"), a standardbred track located in Prince George's County in Maryland. The Maryland Operating Agreement replaced a previous agreement (the "Maryland Revenue Sharing Agreement"), which was effective as of January 1, 2000 and expired on April 18, 2004. The Maryland Operating Agreement was effective from June 9, 2004, and has been extended until December 31, 2004. The Maryland Revenue Sharing Agreement enabled wagering to be conducted, both day and evening, on live and simulcast thoroughbred and harness races at Pimlico, Laurel Park and Rosecroft and the three Maryland OTBs operated by them. Under the agreement, wagering revenue from these sources was pooled and certain expenses and obligations were pooled and paid from those revenues to generate net wagering revenue. This net wagering revenue was then distributed 80% to The Maryland Jockey Club and 20% to Rosecroft. Commencing April 19, 2004, The Maryland Jockey Club and Rosecroft are no longer pooling their wagering revenue and distributing net wagering revenue as they did under the Maryland Revenue Sharing Agreement. From April 19, 2004 until June 9, 2004, they operated under a state law which precluded The Maryland Jockey Club from operating after 6:15 p.m. without Rosecroft's consent, and the federal Interstate Horseracing Act, which provides that, without the consent of The Maryland Jockey Club, Rosecroft cannot accept simulcast wagering on horse racing during the times that Pimlico or Laurel Park are running live races. Since coming into effect on June 9, 2004, The Maryland Operating Agreement has enabled Pimlico, Laurel Park and Rosecroft to conduct simulcast wagering on thoroughbred and harness race signals during the day and evening hours without restriction. Under the Maryland Operating Agreement, Cloverleaf agrees to pay the thoroughbred industry a 12% premium on pari-mutuel wagering (net of refunds) conducted at Rosecroft on all thoroughbred race signals, and The Maryland Jockey Club agrees to pay Cloverleaf a 12% premium on pari-mutuel wagering (net of refunds) conducted at Pimlico and Laurel Park on all standardbred race signals. Under the Maryland Operating Agreement, the parties have agreed to make a good faith effort to reach a long-term agreement on cross-breed simulcasting and OTB facilities in the State of Maryland. Without an arrangement similar in effect to the Maryland Revenue Sharing Agreement or the Maryland Operating Agreement, there would be a material decline in the revenues, earnings and purses of The Maryland Jockey Club. (f) MEC's Bay Meadows lease expires on December 31, 2004. Although MEC is continuing to explore alternative venues, including vacant land that has been purchased in Dixon, California for future development of a thoroughbred racetrack with an associated retail shopping and entertainment complex, this project is still in the early stages of planning and is subject to regulatory and other approvals. At this time, MEC does not expect the Bay Meadows lease to be extended beyond December 31, 2004. If this lease is not renewed, MEC's operating results would be materially adversely affected, at least until such time as an alternative venue could be opened or additional revenue source arrangements secured. There can be no assurance that operating at an alternative venue in the future will be as profitable as MEC's Bay Meadows operation has been. Bay Meadows has budgeted earnings before income taxes for 2005 of $3.0 million. (g) MEC is considering a redevelopment of the entire stable area at Laurel Park (the "Laurel Park Redevelopment"). In the event this redevelopment were to proceed as currently contemplated, the Laurel Park Redevelopment would include the construction of new barns, dormitories and grooms' quarters. The aggregate carrying value at September 30, 2004 of the assets that would be demolished if the Laurel Park Redevelopment is completed is approximately $3.1 million. If MEC decides to proceed with the Laurel Park Redevelopment and obtains the approval of its Board of Directors, a reduction in the expected life of the existing assets would occur and a write-down would be necessary. If MEC proceeds, the project would be scheduled to minimize any interference with Laurel Park's racing season, however, with a project of this magnitude, there will likely be a temporary disruption of Laurel Park's operations during a racing season and there is risk that the redevelopment will not be completed according to schedule. Any interference with the racing operations would result in a reduction in the revenues and earnings generated at Laurel Park during that season. (h) MEC is considering a redevelopment of the clubhouse/grandstand at The Meadows ("The Meadows Redevelopment"). In the event MEC obtains a slot machine license for The Meadows and this development were to proceed as currently contemplated, The Meadows Redevelopment would include the construction of a new clubhouse/grandstand with a facility to house slot machines. The aggregate carrying value at September 30, 2004 of the assets that would be demolished if The Meadows Redevelopment is completed is approximately $8.6 million. If MEC decides to proceed with The Meadows Redevelopment and obtains approval of its Board of Directors, a reduction in the expected life of the existing assets would occur and a write-down would be necessary. If MEC proceeds, MEC's goal would be to minimize any interference with The Meadows' operations, however, with a project of this magnitude, there will likely be a temporary disruption of The Meadows' operations and there is risk that the redevelopment will not be completed according to schedule. Any interference with the racing operations would result in a reduction in the revenues and earnings at The Meadows during the period of such interruption. (i) In June 2003, MEC purchased an approximately 22% interest in the real property upon which Portland Meadows is located, and also purchased the long-term rights to operate the facility pursuant to an operating lease. The operating lease requires MEC to pay rent equal to one percent of the wagers made at the track (including wagers on both live and import races), and also an additional percentage of revenues for other activities as follows: (a) one percent of revenues for horse-related activities, including simulcasting of horse races during the non-live season, (b) five percent of revenues not related to horse racing up to $0.8 million, and (c) three percent of revenues not related to horse racing in excess of $0.8 million. As the owner of an approximately 22% interest in the real property, MEC receives approximately 22% of the rent payments, which are applied to the rental payments made by MEC in order to reduce rent expense, which is reflected in MEC's operating costs on the Consolidated Statements of Income (Loss). (j) MEC's contractual commitments related to construction and development projects outstanding at September 30, 2004 amounted to approximately $40.1 million. MID's contractual commitments related to construction and development projects outstanding at September 30, 2004 amounted to approximately $3.0 million. 16. SUBSEQUENT EVENTS (a) A subsidiary of MEC, Pimlico Racing Association, Inc., had a $10.0 million revolving credit loan facility that was scheduled to mature on September 7, 2004, but was extended until October 28, 2004, at which date the facility was converted to a term loan facility, which matures on December 15, 2019. The term loan facility, that bears interest at either the U.S. Prime rate or LIBOR plus 2.6% per annum, is secured by deeds of trust on land, buildings and improvements and security interests in all other assets of the subsidiary and certain affiliates of The Maryland Jockey Club. At November 1, 2004, $10.0 million (September 30, 2004 - $8.7 million) was outstanding on this term loan facility. (b) A subsidiary of MEC, The Santa Anita Companies, Inc. ("SAC"), is party to a secured term loan facility that was scheduled to mature on November 30, 2004, however, the facility was amended and extended until October 7, 2007, subject to a further extension at MEC's option to October 7, 2009. Under the facility, MEC's subsidiary is entitled to borrow up to a maximum of $75.0 million. Borrowings under the facility bear interest at either the U.S. Prime rate or LIBOR plus 2.0% per annum. The facility is guaranteed by the Los Angeles Turf Club, Incorporated ("LATC"), a wholly-owned subsidiary of MEC, and is secured by a First Deed of Trust on Santa Anita Park and the surrounding real property, an assignment of the lease between LATC, the racetrack operator, and SAC, and a pledge of all of the outstanding capital stock of LATC and SAC. At November 1, 2004, the facility is fully drawn (September 30, 2004 - $48.0 million) and is repayable in monthly principal amounts of $417 thousand until maturity. Effective November 1, 2004, MEC entered into an interest rate swap contract. Under the terms of the contract, MEC receives a LIBOR-based variable interest rate and pays a fixed rate of 5.38% per annum on a notional amount of 40% of the outstanding balance under the SAC facility. (c) MEC's senior secured revolving credit facility in the amount of $50.0 million was amended and extended until October 10, 2005, and may be further extended with the consent of both parties. The facility is available by way of U.S. dollar loans and letters of credit for general corporate purposes. Loans under the facility are secured 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 subsidiaries of MEC which own and operate Golden Gate Fields, Santa Anita Park, Gulfstream Park, Palm Meadows, Lone Star Park, the off-track betting operations in Pennsylvania and operate Bay Meadows. The loans under the facility bear interest at either the U.S. Base rate or LIBOR plus a margin based on MEC's ratio of debt to earnings before interest, income taxes, depreciation and amortization. At November 1, 2004, MEC had borrowings under the credit facility of $25.0 million (September 30, 2004 - $25.0 million) and had issued letters of credit totalling $21.7 million (September 30, 2004 - $21.7 million) under the credit facility, such that $3.3 million (September 30, 2004 - $3.3 million) was unused and available. (d) On November 1, 2004, wholly-owned subsidiaries of MEC entered into access agreements with Magna and one of its subsidiaries for their use of the golf courses and associated clubhouse, meeting, dining and other facilities at the Magna Golf Club in Aurora, Ontario and Fontana Sports in Oberwaltersdorf, Austria. The agreements, which expire on December 31, 2014, stipulate annual fees of Cdn. $5.0 million, retroactive to January 1, 2004, and Euro 2.5 million, retroactive to March 1, 2004, respectively, for use of the Magna Golf Club and Fontana Sports facilities, which will result in the recognition of approximately $6.5 million of revenue in the fourth quarter of 2004 related to these access agreements. END FIRST AND FINAL ADD DATASOURCE: MI Developments Inc. CONTACT: PR Newswire -- Nov. 10

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