MI Developments announces fourth quarter and 2007 results
AURORA, ON, March 5 /CNW/ - MI Developments Inc. (TSX: MIM.A, MIM.B;
NYSE: MIM) ("MID" or the "Company") today announced its results for the
three months and year ended December 31, 2007. All figures are in
U.S. dollars.
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(in thousands,
except per share
figures) REAL ESTATE BUSINESS(1)
Three months ended Year ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenues $ 51,391 $ 46,591 $ 189,547 $ 184,782
Net income $ 37,735 $ 23,303 $ 110,311 $ 98,510
Funds from operations
("FFO")(2) $ 39,403 $ 33,934 $ 142,180 $ 138,158
Diluted FFO per
share(2) $ 0.84 $ 0.70 $ 2.96 $ 2.86
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(in thousands,
except per share
figures) MID CONSOLIDATED(1)
Three months ended Year ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenues
Real Estate
Business $ 51,391 $ 46,591 $ 189,547 $ 184,782
Magna Entertainment
Corp. ("MEC")(3) 117,846 102,557 627,584 582,982
Eliminations (7,203) (7,033) (22,539) (29,249)
------------ ------------ ------------ ------------
$ 162,034 $ 142,115 $ 794,592 $ 738,515
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss)
Real Estate
Business $ 37,735 $ 23,303 $ 110,311 $ 98,510
MEC - continuing
operations (25,553) (5,183) (15,432) (45,821)
Eliminations (178) (178) (55,269) (3,626)
------------ ------------ ------------ ------------
Income (loss) from
continuing
operations 12,004 17,942 39,610 49,063
Discontinued
operations(4) (515) 10,574 (101) 10,807
------------ ------------ ------------ ------------
$ 11,489 $ 28,516 $ 39,509 $ 59,870
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings
(loss) per share
from continuing
operations $ 0.25 $ 0.37 $ 0.82 $ 1.02
Diluted earnings
(loss) per share $ 0.24 $ 0.59 $ 0.82 $ 1.24
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(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,
2007 and 2006 include the operations of Remington Park, Thistledown,
Portland Meadows and Great Lakes Downs. MEC's discontinued operations
for 2006 also include the operations of a restaurant and related real
estate in the United States, the sale of which was completed on
May 26, 2006, the operations of the Magna Golf Club, the sale of
which was completed on August 25, 2006, and the operations of the
Fontana Golf Club, the sale of which was completed on November 1,
2006.
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REAL ESTATE BUSINESS OPERATING HIGHLIGHTS
-----------------------------------------
In respect of our core rental portfolio of Magna International Inc.
("Magna") facilities, during the fourth quarter of 2007 we brought on-stream
two expansion projects, representing an aggregate of 39 thousand square feet
of leaseable area, at a cost of $5.5 million. For the year ended December 31,
2007, the Real Estate Business brought on-stream four expansion projects for
Magna, representing an aggregate of 67 thousand square feet of leaseable area,
at a total cost of $16.3 million.
At December 31, 2007, the Real Estate Business had two properties in
Germany under development for Magna. These expansions to existing facilities
commenced in the fourth quarter of 2007 and will add an aggregate of
85 thousand square feet of leaseable area to the Real Estate Business'
income-producing portfolio. The total anticipated cost of these projects is
approximately $12.1 million, of which $9.5 million had been incurred at
December 31, 2007. Subsequent to year-end, we commenced two additional
expansion projects for Magna, one in each of Germany and Mexico, representing
an aggregate of 57 thousand square feet of leaseable area, at an estimated
total cost of $6.6 million.
At December 31, 2007, the Real Estate Business had 27.3 million
square feet of leaseable area, with annualized lease payments of
$177.2 million, representing a return of 10.6% on the gross carrying value of
our income-producing portfolio.
"2007 was a challenging and somewhat disappointing year for our real
estate business," said John Simonetti, Chief Executive Officer. "Primarily due
to the impact of foreign exchange, we achieved record results. However, the
underlying growth of our core rental portfolio of Magna facilities has
stalled. Despite the challenges in the automotive industry, Magna is well
positioned to grow and so I remain hopeful that we will be able to
re-establish a strong and active working relationship with them."
REAL ESTATE BUSINESS FINANCIAL RESULTS
--------------------------------------
Three Months Ended December 31, 2007
For the three months ended December 31, 2007, revenues were
$51.4 million, an increase of 10% from revenues of $46.6 million for the
three months ended December 31, 2006. The higher revenues are due to a
$4.6 million increase in rental revenues and a $0.2 million increase in
interest and other income earned from the financing arrangements with MEC. The
higher rental revenues are primarily due to foreign exchange, which had a
$4.0 million positive impact as the U.S. dollar continued to weaken against
most foreign currencies in which the Real Estate Business operates. Magna
projects coming on-stream and contractual rent increases also increased
revenues by $0.6 million and $0.3 million, respectively. These positive
contributions to rental revenues were partially offset by the impact of
disposals and vacancies of income-producing properties, resulting primarily
from activities related to Magna's plant rationalization strategy.
FFO in the three months ended December 31, 2007 was $39.4 million
compared to $33.9 million in the prior year period, representing an increase
of 16%. The $5.5 million increase in FFO is due to the $4.8 million increase
in revenues and reductions of $1.1 million in general and administrative
expenses and $0.1 million in current income tax expense, partially offset by a
$0.5 million increase in net interest expense.
General and administrative expenses in the fourth quarter of 2007
decreased by $1.1 million to $4.8 million from $5.9 million in the fourth
quarter of 2006, primarily due to a reduction in professional fees related to
the Company's compliance with Sarbanes-Oxley legislation (first implemented in
2006) and reduced stock-based compensation expense.
Net interest expense was $2.7 million in the three months ended
December 31, 2007 ($4.3 million of interest expense less $1.6 million of
interest income) compared to $2.2 million in the three months ended December
31, 2006 ($3.7 million of interest expense less $1.5 million of interest
income). Foreign exchange increased interest expense by $0.6 million, as the
Company's senior unsecured debentures (the "Debentures") are denominated in
Canadian dollars.
During the three months ended December 31, 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.
In the three months ended December 31, 2007, the Real Estate Business'
income tax expense was $2.3 million, representing an effective tax rate of
5.8%. This amount is net of $3.8 million of future tax recoveries realized
from a reduction in future tax rates (primarily in Canada) and changes in tax
legislation in certain countries in which the Real Estate Business operates.
Excluding these future tax recoveries and the currency translation gains
discussed previously, which are not subject to tax, the Real Estate Business'
income tax expense for the fourth quarter of 2007 was $6.1 million,
representing an effective tax rate of 18.6% compared to 17.8% for the fourth
quarter of 2006. As the jurisdictions in which the Real Estate Business
operates have different rates of taxation, income tax expense is influenced by
the proportion of income earned in each particular country. The 0.8% increase
in the effective tax rate is primarily due to changes in the overall mix of
taxable income earned in the various countries in which the Real Estate
Business operates.
Net income increased 62% to $37.7 million compared to $23.3 million for
the prior year period. Positive contributions of $15.7 million resulted from a
$4.8 million increase in revenues, reductions of $1.1 million in general and
administrative expenses and $2.7 million in income tax expense, and
$7.1 million of currency translation gains. These amounts were partially
offset by a $0.8 million increase in depreciation and amortization (driven
primarily by the weakening of the U.S. dollar) and a $0.5 million increase in
net interest expense.
Year Ended December 31, 2007
For the year ended December 31, 2007, revenues were $189.5 million
compared to $184.8 million in 2006. Rental revenues increased by
$11.5 million, but were offset by a $6.7 million reduction in interest and
other income from MEC. The higher rental revenues include $2.7 million from
completed Magna projects coming on-stream, $1.4 million from contractual rent
increases and a $8.9 million positive impact from foreign exchange. The impact
of Magna plant rationalizations and other items had a $1.5 million negative
impact on rental revenues. The reduction of interest and other income from MEC
is due primarily to the repayment of the bridge loan between a subsidiary of
MID (the "MID Lender") and MEC (the "2005 MEC Bridge Loan") in November 2006.
FFO in the year ended December 31, 2007 of $142.2 million represents a 3%
increase from the prior year's FFO of $138.2 million. The $4.0 million
increase in FFO is due to the $4.8 million increase in revenues and a
$2.3 million reduction in net interest expense, partially offset by increases
of $1.8 million in general and administrative expenses and $1.3 million in
current income tax expense.
General and administrative expenses increased by $1.8 million from
$21.0 million in the prior year to $22.8 million for 2007. General and
administrative expenses for 2006 include (i) $2.5 million of advisory and
other costs incurred in connection with the Company's evaluation of certain
transactions that, ultimately, were not undertaken, and (ii) $0.8 million of
costs incurred in association with the Company's defence against the
oppression application brought by Greenlight Capital, Inc. and certain of its
affiliates (the "Greenlight Litigation" - see "GREENLIGHT CAPITAL LITIGATION"
for further details), which were offset by a $1.3 million recovery of such
costs under the Company's insurance policy. General and administrative
expenses for 2007 include (i) $2.2 million of advisory and other costs
incurred in connection with the Company's evaluation of certain transactions
relating to its continuing assessment of its relationship with MEC that,
ultimately, were not undertaken, (ii) $2.0 million of costs associated with
the Company's contribution of land to a not-for-profit organization to assist
Hurricane Katrina relief 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 decreased from $19.0 million in the
prior year to $18.3 million in 2007, primarily due to reductions in
professional fees related to the Company's compliance with Sarbanes-Oxley
legislation, repairs and maintenance costs and stock-based compensation
expense, partially offset by increased salaries and related benefits.
Net interest expense was $8.0 million in 2007 ($15.4 million of interest
expense less $7.4 million of interest income) compared to $10.4 million in
2006 ($14.4 million of interest expense less $4.0 million of interest income).
The $3.4 million increase in interest income is due primarily to the Real
Estate Business having more cash available for short-term investment as a
result of MEC repaying the 2005 MEC Bridge Loan in November 2006. Foreign
exchange increased interest expense by $0.9 million, as the Company's
Debentures are denominated in Canadian dollars.
During 2007, the Real Estate Business recognized a $1.5 million gain on
the disposal of one property previously held for sale and two income-producing
properties, compared to a $0.2 million gain on the sale of two
income-producing properties in 2006.
The Real Estate Business recognized $7.7 million of net currency
translation gains in 2007 compared to $1.9 million in 2006. 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.
The Real Estate Business' income tax expense for 2007 was $16.0 million,
representing an effective tax rate of 12.7% compared to an effective tax rate
of 15.3% for 2006. The income tax expense for 2007 includes (i) $5.4 million
of future tax recoveries realized from a reduction in future tax rates
(primarily in Canada) and changes in tax legislation in certain countries in
which the Real Estate Business operates, (ii) a $1.1 million current tax
recovery due primarily to a favourable tax reassessment received in 2007 in
relation to land sold in a prior year, and (iii) $0.4 million of income tax
expense related to the gain on disposal of real estate. The income tax expense
for 2006 includes (i) a $2.1 million future tax recovery from a reduction in
the Canadian future tax rate, and (ii) $0.1 million of income tax expense
related to the gain on disposal of real estate. Excluding these items and the
currency translation gains discussed previously, which are not subject to tax,
the Real Estate Business' effective tax rate was 18.9% for 2007 compared to
17.3% for 2006. This 1.6% increase in the effective tax rate is primarily due
to changes in the mix of taxable income earned in the various countries in
which the Real Estate Business operates.
Net income for 2007 of $110.3 million increased by 12% compared to net
income of $98.5 million for 2006. A positive contribution of $15.9 million
arose from increases of $4.8 million in revenues, $1.3 million in the gain on
disposal of real estate and $5.8 million in dilution and other gains, as well
as reductions of $2.3 million in net interest expense and $1.7 million in
income tax expense. These amounts were partially offset by a negative
contribution of $4.1 million from increases of $1.8 million in general and
administrative expenses and $2.3 million in depreciation and amortization
(driven primarily by the weakening of the U.S. dollar).
MAGNA ENTERTAINMENT CORP. DEBT ELIMINATION PLAN AND FINANCING
-------------------------------------------------------------
On September 13, 2007, MID announced that the MID Lender had agreed to
provide a bridge loan of up to $80.0 million to MEC, which matures on May 31,
2008 (the "MEC Bridge Loan"). The MEC Bridge Loan, together with a private
placement of $20.0 million of MEC's Class A Subordinate Voting Stock ("MEC
Class A Stock") to Fair Enterprise Limited ("FEL"), a company that forms part
of an estate planning vehicle for the family of Mr. Frank Stronach (the
Company's Chairman and the Chairman and Interim Chief Executive Officer of
MEC), is intended to provide short-term funding to MEC as it implements its
debt elimination plan announced on September 13, 2007 (the "MEC Debt
Elimination Plan"). The MEC Debt Elimination Plan contemplates MEC raising
approximately $600 to $700 million from the sale of certain real estate,
racetracks and other assets and a possible future equity issuance by MEC, the
proceeds of which are to be used to repay debt, including the MEC Bridge Loan.
MID also announced amendments to its project financing facilities with MEC
including, among other things, requiring repayment of at least $100.0 million
under the Gulfstream Park project financing facility on or prior to May 31,
2008.
The sale of MEC assets under the MEC Debt Elimination Plan has taken
longer than originally contemplated and, accordingly, MID management expects
that MEC will likely be unable at May 31, 2008 to repay the MEC Bridge Loan or
make the required $100.0 million repayment under the Gulfstream Park project
financing facility. Furthermore, it is likely that MEC will need to seek
extensions from existing lenders and additional funds in the short-term from
one or more possible sources, which may include the Company. The availability
of such extensions or additional funds is not assured and, if available, the
terms thereof are not yet determinable.
"It is critical that MEC remains focused on selling assets and
eliminating debt as well as turning around its loss operations," said John
Simonetti. "In addition to being a secured lender, MID also owns a significant
and controlling equity stake in MEC and we maintain our belief that their real
estate holdings and overall asset base retain considerable value despite these
uncertain times. Accordingly, we continue to evaluate the possibility of
providing further assistance to allow MEC more time to implement its debt
elimination plan."
MAGNA ENTERTAINMENT CORP. FINANCIAL RESULTS
-------------------------------------------
At December 31, 2007, the market value of MID's shareholding in MEC was
$60.9 million, based on the Nasdaq closing price of $0.97 per share for MEC
Class A Subordinate Voting Stock (NASDAQ: MECA).
MEC's racetracks operate for prescribed periods each year. As a result,
racing revenues and operating results for any quarter will not be indicative
of MEC's revenues and operating results for the year. MEC's results have been
restated to distinguish between results from continuing operations and results
from discontinued operations. MEC's discontinued operations for the
three-month periods and years ended December 31, 2007 and 2006 include the
operations of Remington Park, Thistledown, Portland Meadows and Great Lakes
Downs. In addition, MEC's discontinued operations for 2006 also include the
operations of a restaurant and related real estate in the United States, the
sale of which was completed on May 26, 2006, the operations of the Magna Golf
Club, the sale of which was completed on August 25, 2006, and the operations
of the Fontana Golf Club, the sale of which was completed on November 1, 2006.
MEC's revenues from continuing operations for the three months ended
December 31, 2007 increased 15% to $117.9 million from $102.6 million in the
prior year period. The increase in revenues in the fourth quarter of 2007 is
primarily due to (i) changes in the racing calendars at Golden Gate Fields and
Santa Anita Park, which resulted in an additional 25 and 5 live race days,
respectively, in the fourth quarter of 2007 compared to the prior year period,
and (ii) increased wagering revenues at Gulfstream Park with the introduction
of year round simulcasting operations in 2007. MEC's revenues from continuing
operations for the year ended December 31, 2007 increased 8% to $627.6 million
from $583.0 million in the prior year, primarily due to (i) the opening of
casino operations at Gulfstream Park in November 2006 and expanded casino
operations in March 2007, and (ii) increased revenues from AmTote
International, Inc. ("AmTote") as MEC completed the acquisition of the
remaining 70% equity interest in AmTote in July 2006 (the "AmTote
Acquisition"), partially offset by reduced revenues from fewer total live race
days in 2007.
Earnings before interest, taxes, depreciation and amortization from MEC's
continuing operations excluding write-downs of long-lived assets, real estate
and business disposal gains, dilution and other gains (losses) and the
minority interest impact ("EBITDA") for the fourth quarter of 2007 was a loss
of $17.2 million compared to an EBITDA loss of $28.6 million in the prior year
period. EBITDA for the year ended December 31, 2007 was a loss of
$16.2 million compared to an EBITDA loss of $27.0 million in the prior year.
The EBITDA loss for the fourth quarter of 2007 decreased by $11.4 million
compared to the fourth quarter of 2006, due to a $15.3 million increase in
revenues and reductions of $0.5 million in operating costs and $0.9 million in
general and administrative expenses, partially offset by a $5.3 million
increase in purses, awards and other costs associated with the increase in
revenues. The EBITDA loss for the year ended December 31, 2007 decreased by
$10.8 million compared to 2006, due to a $44.6 million increase in revenues,
partially offset by increases of $7.4 million in purses, awards and other
costs, $23.2 million in operating costs (driven by the increased operating
costs at Gulfstream Park for the new casino facility) and $3.2 million in
general and administrative expenses. The increase in purses, awards and other
costs is due primarily to the opening of the casino facility at Gulfstream
Park in November 2006 and the expanded casino facility in March 2007,
partially offset by reduced costs from lower wagering at certain tracks due to
fewer live race days and the increased intercompany elimination (as a result
of the AmTote Acquisition) of tote fees paid by MEC's racetracks to AmTote.
The increase in general and administrative expenses is primarily attributable
to MEC's technology operations resulting from the AmTote Acquisition,
partially offset by a reduction in general and administrative expenses at
several of MEC's racetracks as a result of cost reduction initiatives.
MEC recorded a net loss of $26.8 million for the fourth quarter of 2007
compared to net income of $4.6 million in the same period in 2006. For the
year ended December 31, 2007, MEC recorded a net loss of $18.8 million
compared to a net loss of $38.1 million in 2006. MEC's results of operations
for the three months and year ended December 31, 2006 were positively impacted
by a $115.2 million gain on the sale of The Meadows and negatively impacted by
a $77.4 million non-cash write-down of long-lived assets, $76.2 million of
which pertained to Magna Racino(TM). Excluding these items, the $6.3 million
decrease in MEC's net loss in the fourth quarter of 2007 is due primarily to
(i) the $11.4 million reduction in EBITDA loss discussed above, and (ii) a
$15.2 million increase in the minority interest recovery, partially offset by
(i) increases of $1.2 million in depreciation and amortization and
$0.7 million of net interest expense, (ii) a $3.5 million dilution loss
recorded by the Company in association with the equity investment by FEL
discussed previously, (iii) a $4.1 million reduction in the income tax
recovery, and (iv) an $11.1 million reduction in income from discontinued
operations. Excluding the gain on the sale of The Meadows and write-downs of
MEC's long-lived assets, the $58.4 million reduction in MEC's net loss in 2007
is due to (i) the $10.8 million reduction in EBITDA loss discussed above, (ii)
a $6.7 million reduction in net interest expense, (iii) $45.9 million of
increased gains on the sale of real estate, and (iv) a $14.7 million increase
in the minority interest recovery, partially offset by (i) a $2.1 million
reduction in depreciation and amortization, (ii) a $3.7 million increase in
the dilution loss recorded by the Company, (iii) a $2.9 million reduction in
the income tax recovery, and (iv) an $11.0 million reduction in income from
discontinued operations. The lower net interest expense is primarily
attributable to the repayment of the 2005 MEC Bridge Loan in the fourth
quarter of 2006, reduced borrowings under MEC's $40.0 million senior secured
revolving credit facility and the repayment of other debt during 2006 from the
proceeds of various asset sales, partially offset by increased borrowings
under the Gulfstream Park project financing facility and the MEC Bridge Loan
and $2.2 million less of capitalized interest. The increase in the gains on
disposal of real estate is driven by $48.8 million of gains (which are
eliminated from MID's consolidated results) recognized in 2007 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.
NORMAL COURSE ISSUER BID
------------------------
Pursuant to the terms of two successive normal course issuer bid
programs, the Company purchased for cancellation, through the facilities of
the Toronto Stock Exchange ("TSX") and the New York Stock Exchange,
1,660,800 Class A Subordinate Voting Shares in 2007 (1,175,100 shares in the
fourth quarter) for cash consideration of approximately $52.1 million ($36.7
million in the fourth quarter) at a weighted average price per share of Cdn.
$31.13 (Cdn. $30.53 in the fourth quarter). The price that MID pays for shares
purchased pursuant to the bids is the market price at the time of acquisition.
Pursuant to the terms of the Company's current normal course issuer bid
program, for which TSX approval was received on October 2, 2007, the Company
is authorized, during the 12-month period commencing October 8, 2007 and
ending October 7, 2008, to purchase for cancellation up to 2,531,354 Class A
Subordinate Voting Shares, being 10% of the Public Float (as such term is
defined by the TSX). To date, no shares have been purchased for cancellation
in 2008 and the Company remains authorized to purchase for cancellation up to
1,696,654 Class A Subordinate Voting Shares under the current bid program.
Depending upon future price movements and other factors, MID believes that its
Class A Subordinate Voting Shares may from time to time represent an
attractive investment alternative for MID and a desirable use of any available
funds.
DIVIDENDS
---------
MID's Board of Directors has 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, 2007. The dividend is payable on or about April 15,
2008 to shareholders of record at the close of business on March 28, 2008.
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 unless
indicated otherwise. Please contact your tax advisor if you have any questions
with regard to the designation of eligible dividends.
GREENLIGHT CAPITAL LITIGATION
-----------------------------
On August 2, 2005, Greenlight Capital, Inc. and certain of its affiliates
filed an oppression application in the Ontario Superior Court of Justice
against the Company and certain of its current and former directors and
officers. The hearing of the application concluded on March 1, 2006 and on
October 30, 2006, the Ontario Superior Court of Justice dismissed the
oppression application. On November 29, 2006, Greenlight filed a Notice of
Appeal with the Ontario Divisional Court. The Company expects the appeal
hearing to take place in late April 2008. The Company continues to consider
Greenlight's oppression claim to be without merit and, together with the other
respondents, will vigorously defend against the appeal.
CONFERENCE CALL
---------------
A conference call will be held for interested analysts and shareholders
to discuss the fourth quarter's results on March 5, 2008 at 10:30 am EST. The
number to use for this call is 1-800-731-5774. The number for overseas callers
is 416-644-3421. Please call 10 minutes prior to the start of the conference
call. MID will also webcast the conference call at www.midevelopments.com. The
conference call will be chaired by John D. Simonetti, Chief Executive Officer.
For anyone unable to listen to the scheduled call, the rebroadcast
numbers will be: North America - 1-877-289-8525 and Overseas - 416-640-1917
(reservation number is 21263516 followed by the number sign) and the
rebroadcast will be available until March 12, 2008.
ABOUT MID
---------
MID is a real estate operating company focusing primarily on the
ownership, leasing, management, acquisition and development of a predominantly
industrial rental portfolio for Magna and its subsidiaries in North America
and Europe. MID also acquires land that it intends to develop for mixed-use
and residential projects. MID holds a controlling interest in MEC, North
America's number one owner and operator of horse racetracks, based on revenue,
and one of the world's leading suppliers, via simulcasting, of live horse
racing content to the growing intertrack, off-track and account wagering
markets.
RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES
REAL ESTATE BUSINESS
RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS
(U.S. dollars in thousands, except per share figures)
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
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Net income $ 37,735 $ 23,303 $ 110,311 $ 98,510
Add back (deduct):
Depreciation and
amortization 10,960 10,200 41,541 39,225
Future income tax
expense (recovery) (2,225) 431 (864) 2,439
Gain on disposal of
real estate, net of
income tax - - (1,089) (95)
Dilution and other
gains (7,067) - (7,719) (1,921)
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Funds from operations $ 39,403 $ 33,934 $ 142,180 $ 138,158
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Basic and diluted
funds from operations
per share $ 0.84 $ 0.70 $ 2.96 $ 2.86
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Average number of
shares outstanding
(thousands)
Basic 47,249 48,329 48,073 48,301
Diluted 47,249 48,386 48,083 48,355
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FORWARD-LOOKING STATEMENTS
--------------------------
The contents of this press release contain statements that, to the extent
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation, including
the United States Securities Act of 1933 and the United States Securities
Exchange Act of 1934. Forward-looking statements may include, among others,
statements regarding the Company's future plans, goals, strategies,
intentions, beliefs, estimates, costs, objectives, economic performance or
expectations, or the assumptions underlying any of the foregoing. Words such
as "may", "would", "could", "will", "likely", "expect", "anticipate",
"believe", "intend", "plan", "forecast", "project", "estimate" and similar
expressions are used to identify forward-looking statements. Forward-looking
statements should not be read as guarantees of future performance or results
and will not necessarily be accurate indications of whether or the times at or
by which such future performance will be achieved. Undue reliance should not
be placed on such statements. Forward-looking statements are based on
information available at the time and/or management's good faith assumptions
and analyses made in light of our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate in the circumstances, and are subject to known and
unknown risks, uncertainties and other unpredictable factors, many of which
are beyond the Company's control, that could cause actual events or results to
differ materially from such forward-looking statements. Important factors that
could cause such differences include, but are not limited to, the risks set
forth in the "Risk Factors" section in MID's Annual Information Form for 2006,
filed on SEDAR at www.sedar.com and attached as Exhibit 1 to MID's Annual
Report on Form 40-F for the year ended December 31, 2006. The "Risk Factors"
section also contains information about the material factors or assumptions
underlying such forward-looking statements. In addition, while it was expected
that the MEC Bridge Loan would be repaid through the sale of MEC assets as
part of the MEC Debt Elimination Plan, the sale of such assets has taken
longer than originally contemplated and, accordingly, MEC may be unable to
repay the MEC Bridge Loan, which could have a material adverse effect on MID's
financial condition. 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, 16) Real Estate Business
-------------------------- ------------------------
(restated
Three Months Ended - note 3)
December 31, 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenues
Rental revenue $ 44,188 $ 39,558 $ 44,188 $ 39,558
Racing and other
revenue 117,846 102,557 - -
Interest and other
income from MEC
(note 16) - - 7,203 7,033
-------------------------------------------------------------------------
162,034 142,115 51,391 46,591
-------------------------------------------------------------------------
Operating costs
and expenses
Purses, awards
and other 49,422 44,085 - -
Operating costs 67,411 67,838 - -
General and
administrative
(note 16) 23,427 25,222 4,780 5,891
Depreciation and
amortization 23,497 21,542 10,960 10,200
Interest expense, net 11,299 10,669 2,660 2,142
Write-down of MEC's
long-lived assets
(note 5) (136) 77,445 - -
-------------------------------------------------------------------------
Operating income (loss) (12,886) (104,686) 32,991 28,358
Gain on disposal of
business - 115,193 - -
Gain on disposal of
real estate (note 16) - - - -
Dilution and other
gains (losses), net
(notes 11, 16) 3,600 10 7,067 -
-------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest (9,286) 10,517 40,058 28,358
Income tax expense
(recovery) (note 12) (2,361) (3,733) 2,323 5,055
Minority interest (18,929) (3,692) - -
-------------------------------------------------------------------------
Income (loss) from
continuing operations 12,004 17,942 37,735 23,303
Income (loss) from
discontinued
operations (note 3) (515) 10,574 - -
-------------------------------------------------------------------------
Net income (loss) $ 11,489 $ 28,516 $ 37,735 $ 23,303
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
Class A Subordinate
Voting or Class B
Share (note 6)
- Continuing
operations $ 0.25 $ 0.37
- Discontinued
operations
(note 3) (0.01) 0.22
-----------------------------------------------
Total $ 0.24 $ 0.59
-----------------------------------------------
-----------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in thousands)
(note 6)
- Basic 47,249 48,329
- Diluted 47,249 48,386
-----------------------------------------------
-----------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
Three Months Ended - note 3)
December 31, 2007 2006
-----------------------------------------------
Revenues
Rental revenue $ - $ -
Racing and other
revenue 117,846 102,557
Interest and other
income from MEC
(note 16) - -
-----------------------------------------------
117,846 102,557
-----------------------------------------------
Operating costs
and expenses
Purses, awards
and other 49,422 44,085
Operating costs 67,411 67,938
General and
administrative
(note 16) 18,199 19,154
Depreciation and
amortization 12,580 11,373
Interest expense, net 16,091 15,428
Write-down of MEC's
long-lived assets
(note 5) (136) 77,445
-----------------------------------------------
Operating income (loss) (45,721) (132,866)
Gain on disposal of
business - 115,193
Gain on disposal of
real estate (note 16) 22 -
Dilution and other
gains (losses), net
(notes 11, 16) (3,467) 10
-----------------------------------------------
Income (loss) before
income taxes and
minority interest (49,166) (17,663)
Income tax expense
(recovery) (note 12) (4,684) (8,788)
Minority interest (18,929) (3,692)
-----------------------------------------------
Income (loss) from
continuing operations (25,553) (5,183)
Income (loss) from
discontinued
operations (note 3) (1,273) 9,798
-----------------------------------------------
Net income (loss) $ (26,826) $ 4,615
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Statements of Income (Loss)
(U.S. dollars in thousands, except per share figures)
(Unaudited)
Consolidated (notes 1, 16) Real Estate Business
-------------------------- ------------------------
(restated
Year Ended - note 3)
December 31, 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenues
Rental revenue $ 167,008 $ 155,533 $ 167,008 $ 155,533
Racing and other
revenue 627,584 582,982 - -
Interest and other
income from MEC
(note 16) - - 22,539 29,249
-------------------------------------------------------------------------
794,592 738,515 189,547 184,782
-------------------------------------------------------------------------
Operating costs
and expenses
Purses, awards
and other 290,495 283,100 - -
Operating costs 282,896 259,608 - -
General and
administrative
(note 16) 97,001 90,456 22,797 20,996
Depreciation and
amortization 83,178 78,807 41,541 39,225
Interest expense, net 40,356 42,734 8,065 10,407
Write-down of MEC's
long-lived assets
(note 5) 1,308 77,445 - -
-------------------------------------------------------------------------
Operating income (loss) (642) (93,635) 117,144 114,154
Gain on disposal of
business - 115,193 - -
Gain on disposal of
real estate (note 16) 1,478 3,092 1,478 209
Dilution and other gains
(losses), net
(notes 11, 16) 4,256 2,116 7,719 1,921
-------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest 5,092 26,766 126,341 116,284
Income tax expense
(recovery) (note 12) 12,978 10,471 16,030 17,774
Minority interest (47,496) (32,768) - -
-------------------------------------------------------------------------
Income (loss) from
continuing operations 39,610 49,063 110,311 98,510
Income (loss) from
discontinued
operations (note 3) (101) 10,807 - -
-------------------------------------------------------------------------
Net income (loss) $ 39,509 $ 59,870 $ 110,311 $ 98,510
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings per Class A
Subordinate Voting or
Class B Share (note 6)
- Continuing
operations $ 0.82 $ 1.02
- Discontinued
operations
(note 6) - 0.22
-----------------------------------------------
Total $ 0.82 $ 1.24
-----------------------------------------------
-----------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in thousands)
(note 6)
- Basic 48,073 48,301
- Diluted 48,083 48,355
-----------------------------------------------
-----------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
Year Ended - note 3)
December 31, 2007 2006
-----------------------------------------------
Revenues
Rental revenue $ - $ -
Racing and other
revenue 627,584 582,982
Interest and other
income from MEC
(note 16) - -
-----------------------------------------------
627,584 582,982
-----------------------------------------------
Operating costs
and expenses
Purses, awards
and other 290,495 283,100
Operating costs 282,896 259,708
General and
administrative
(note 16) 70,419 67,171
Depreciation and
amortization 41,809 39,694
Interest expense, net 53,281 60,027
Write-down of MEC's
long-lived assets
(note 5) 1,308 77,445
-----------------------------------------------
Operating income (loss) (112,624) (204,163)
Gain on disposal of
business - 115,193
Gain on disposal of
real estate (note 16) 48,776 2,883
Dilution and other gains
(losses), net
(notes 11, 16) (3,463) 195
-----------------------------------------------
Income (loss) before
income taxes and
minority interest (67,311) (85,892)
Income tax expense
(recovery) (note 12) (4,383) (7,303)
Minority interest (47,496) (32,768)
-----------------------------------------------
Income (loss) from
continuing operations (15,432) (45,821)
Income (loss) from
discontinued
operations (note 3) (3,330) 7,686
-----------------------------------------------
Net income (loss) $ (18,762) $ (38,135)
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Statements of Comprehensive Income
(Refer to note 2 - Accounting Changes)
(U.S. dollars in thousands)
(Unaudited)
Three months ended Year ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net income $ 11,489 $ 28,516 $ 39,509 $ 59,870
Other comprehensive
income (loss):
Change in fair value
of interest rate
swaps, net of
taxes and minority
interest (note 11) (337) - (584) -
Foreign currency
translation
adjustment, net of
minority interest
(note 11) 25,326 11,018 106,043 61,360
Recognition of
foreign currency
translation gain in
net income (note 11) (7,067) - (7,719) (1,921)
Reversal of foreign
currency translation
gain related to
shares purchased
for cancellation
(note 9) (16,576) - (22,354) -
-------------------------------------------------------------------------
Comprehensive income $ 12,835 $ 39,534 $ 114,895 $ 119,309
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Consolidated Statements of Changes in Deficit
(U.S. dollars in thousands)
(Unaudited)
Three months ended Year ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Deficit, beginning of
period $ (62,858) $ (89,904) $ (69,112) $ (99,527)
Net income 11,489 28,516 39,509 59,870
Costs associated with
capital transactions
of subsidiaries - (475) - (475)
Dividends (7,067) (7,249) (28,833) (28,980)
-------------------------------------------------------------------------
Deficit, end of
period $ (58,436) $ (69,112) $ (58,436) $ (69,112)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
Consolidated (notes 1, 16) Real Estate Business
-------------------------- ------------------------
(restated
Three Months Ended - note 3)
December 31, 2007 2006 2007 2006
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ 12,004 $ 17,942 $ 37,735 $ 23,303
Items not involving
current cash flows
(note 14) (7,248) (28,728) 969 6,838
Changes in non-cash
balances (note 14) 13,093 17,545 (3,882) (1,729)
-------------------------------------------------------------------------
Cash provided by
(used in) operating
activities 17,849 6,759 34,822 28,412
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Real estate and fixed
asset additions (35,610) (22,622) (9,883) (3,004)
Proceeds on disposal
of business, net - 171,777 - -
Proceeds on disposal
of real estate and
fixed assets, net 2,439 2,950 - -
Decrease in other
assets 934 2,462 45 33
Loan advances to MEC,
net - - (27,147) (23,963)
Loan repayments from
MEC - - 1,139 113,400
-------------------------------------------------------------------------
Cash provided by
(used in) investment
activities (32,237) 154,567 (35,846) 86,466
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 32,891 1,015 - -
Repayment of bank
indebtedness (19,617) (34,429) - -
Issuance of long-term
debt, net 15,409 448 - -
Repayment of long-term
debt (22,374) (3,416) (115) (92)
Loan advances from MID,
net - - - -
Loan repayments to MID - - - -
Issuance of shares - 316 - 316
Shares purchased for
cancellation (40,236) - (40,236) -
Minority investment in
subsidiary 19,581 - - -
Costs associated with
capital transactions
of subsidiaries - (475) - (475)
Dividends paid (7,067) (7,249) (7,067) (7,249)
-------------------------------------------------------------------------
Cash provided by
(used in) financing
activities (21,413) (43,790) (47,418) (7,500)
-------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents 1,183 957 1,140 557
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
continuing operations (34,618) 118,493 (47,302) 107,935
-------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities (1,924) 1,180 - -
Cash provided by
(used in) investing
activities (970) 15,506 - -
Cash provided by
(used in) financing
activities 1 6 - -
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations (2,893) 16,692 - -
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period (37,511) 135,185 (47,302) 107,935
Cash and cash
equivalents,
beginning of period 192,371 115,070 158,247 83,931
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period 154,860 250,255 110,945 191,866
Less: cash and cash
equivalents of
discontinued
operations, end of
period (9,078) (10,636) - -
-------------------------------------------------------------------------
Cash and cash
equivalents, of
continuing operations
end of period $ 145,782 $ 239,619 $ 110,945 $ 191,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
Three Months Ended - note 3)
December 31, 2007 2006
-----------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ (25,553) $ (5,183)
Items not involving
current cash flows
(note 14) (6,960) (34,713)
Changes in non-cash
balances (note 14) 17,497 19,436
-----------------------------------------------
Cash provided by
(used in) operating
activities (15,016) (20,460)
-----------------------------------------------
INVESTMENT ACTIVITIES
Real estate and fixed
asset additions (25,727) (19,618)
Proceeds on disposal
of business, net - 171,777
Proceeds on disposal
of real estate and
fixed assets, net 2,460 2,950
Decrease in other
assets 889 2,429
Loan advances to MEC,
net - -
Loan repayments from
MEC - -
-----------------------------------------------
Cash provided by
(used in) investment
activities (22,378) 157,538
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 32,891 1,015
Repayment of bank
indebtedness (19,617) (34,429)
Issuance of long-term
debt, net 15,409 448
Repayment of long-term
debt (22,259) (3,324)
Loan advances from MID,
net 25,884 22,664
Loan repayments to MID (434) (111,800)
Issuance of shares - -
Shares purchased for
cancellation - -
Minority investment in
subsidiary 19,581 -
Costs associated with
capital transactions
of subsidiaries - -
Dividends paid - -
-----------------------------------------------
Cash provided by
(used in) financing
activities 51,455 (125,426)
-----------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents 43 400
-----------------------------------------------
Net cash flows
provided by (used in)
continuing operations 14,104 12,052
-----------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities (2,639) 1,286
Cash provided by
(used in) investing
activities (970) 15,506
Cash provided by
(used in) financing
activities (704) (1,594)
-----------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations (4,313) 15,198
-----------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period 9,791 27,250
Cash and cash
equivalents,
beginning of period 34,124 31,139
-----------------------------------------------
Cash and cash
equivalents, end of
period 43,915 58,389
Less: cash and cash
equivalents of
discontinued
operations, end of
period (9,078) (10,636)
-----------------------------------------------
Cash and cash
equivalents, of
continuing operations
end of period $ 34,837 $ 47,753
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Statements of Cash Flows
(U.S. dollars in thousands) -
(Unaudited)
Consolidated (notes 1, 16) Real Estate Business
-------------------------- ------------------------
(restated
Year Ended - note 3)
December 31, 2007 2006 2007 2006
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ 39,610 $ 49,063 $ 110,311 $ 98,510
Items not involving
current cash flows
(note 14) 24,208 93 31,873 24,971
Changes in non-cash
balances (note 14) 12,893 593 6,681 (7,385)
-------------------------------------------------------------------------
Cash provided by
(used in) operating
activities 76,711 49,749 148,865 116,096
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Real estate and fixed
asset additions (108,218) (117,464) (115,839) (35,898)
Acquisition of
business, net of
cash acquired - (9,347) - -
Proceeds on disposal
of business, net - 171,777 - -
Proceeds on disposal
of real estate and
fixed assets, net 14,298 20,927 6,321 8,921
Decrease (increase)
in other assets (797) 220 99 (834)
Loan advances to MEC,
net - - (54,610) (93,771)
Loan repayments from
MEC - - 5,564 116,800
-------------------------------------------------------------------------
Cash provided by
(used in) investment
activities (94,717) 66,113 (158,465) (4,782)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 73,831 19,144 - -
Repayment of bank
indebtedness (41,132) (39,929) - -
Issuance of long-term
debt, net 19,754 12,582 - -
Repayment of long-term
debt (73,991) (16,159) (413) (359)
Loan advances from MID,
net - - - -
Loan repayments to MID - - - -
Issuance of shares 1,058 1,171 1,058 1,171
Shares purchased for
cancellation (52,072) - (52,072) -
Minority investment in
subsidiary 19,581 - - -
Costs associated with
capital transactions
of subsidiaries - (475) - (475)
Dividends paid (28,833) (28,980) (28,833) (28,980)
-------------------------------------------------------------------------
Cash provided by
(used in) financing
activities (81,804) (52,646) (80,260) (28,643)
-------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents 9,102 3,709 8,939 3,713
-------------------------------------------------------------------------
Net cash flows
provided by (used) in
continuing operations (90,708) 66,925 (80,921) 86,384
-------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities (241) 3,350 - -
Cash provided by
(used in) investing
activities (4,417) 54,963 - -
Cash used in financing
activities (29) (32,443) - -
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations (4,687) 25,870 - -
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the year (95,395) 92,795 (80,921) 86,384
Cash and cash
equivalents,
beginning of year 250,255 157,460 191,866 105,482
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
year 154,860 250,225 110,945 191,866
Less: cash and cash
equivalents of
discontinued
operations, end of
year (9,078) (10,636) - -
-------------------------------------------------------------------------
Cash and cash
equivalents of
continuing
operations, end of
year $ 145,782 $ 239,619 $ 110,945 $ 191,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
Year Ended - note 3)
December 31, 2007 2006
-----------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ (15,432) $ (45,821)
Items not involving
current cash flows
(note 14) (55,861) (22,929)
Changes in non-cash
balances (note 14) 6,190 6,439
-----------------------------------------------
Cash provided by
(used in) operating
activities (65,103) (62,311)
-----------------------------------------------
INVESTMENT ACTIVITIES
Real estate and fixed
asset additions (81,860) (81,566)
Acquisition of
business, net of
cash acquired - (9,347)
Proceeds on disposal
of business, net - 171,777
Proceeds on disposal
of real estate and
fixed assets, net 95,712 12,006
Decrease (increase)
in other assets (896) 1,054
Loan advances to MEC,
net - -
Loan repayments from
MEC - -
-----------------------------------------------
Cash provided by
(used in) investment
activities 12,956 93,924
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 73,831 19,144
Repayment of bank
indebtedness (41,132) (39,929)
Issuance of long-term
debt, net 19,754 12,582
Repayment of long-term
debt (73,578) (15,800)
Loan advances from MID,
net 52,361 77,294
Loan repayments to MID (1,564) (111,800)
Issuance of shares - -
Shares purchased for
cancellation - -
Minority investment in
subsidiary 19,581 -
Costs associated with
capital transactions
of subsidiaries - -
Dividends paid - -
-----------------------------------------------
Cash provided by
(used in) financing
activities 49,253 (58,509)
-----------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents 163 (4)
-----------------------------------------------
Net cash flows
provided by (used) in
continuing operations (2,731) (26,900)
-----------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities (3,297) 3,572
Cash provided by
(used in) investing
activities (4,417) 54,963
Cash used in financing
activities (4,029) (25,224)
-----------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations (11,743) 33,311
-----------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the year (14,474) 6,411
Cash and cash
equivalents,
beginning of year 58,389 51,978
-----------------------------------------------
Cash and cash
equivalents, end of
year 43,915 58,389
Less: cash and cash
equivalents of
discontinued
operations, end of
year (9,078) (10,636)
-----------------------------------------------
Cash and cash
equivalents of
continuing
operations, end of
year $ 34,837 $ 47,753
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Balance Sheets
(Refer to note 1 - Basis of Presentation)
(U.S. dollars in thousands)
(Unaudited)
Consolidated (notes 1, 16) Real Estate Business
-------------------------- ------------------------
(restated
- notes 3, 4)
December December December December
As at 31, 2007 31, 2006 31, 2007 31, 2006
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 145,782 $ 239,619 $ 110,945 $ 191,866
Restricted cash
(note 16) 32,722 35,575 4,458 6,514
Accounts receivable 43,136 39,801 7,425 7,749
Loans receivable
from MEC, net
(note 16) - - 139,168 3,108
Due from MID
(note 16) - - - -
Income taxes
receivable 402 1,934 402 1,354
Prepaid expenses and
other 17,317 15,486 1,206 966
Assets held for sale
(note 4) 1,493 - - -
Discontinued
operations (note 3) 21,239 20,266 - -
-------------------------------------------------------------------------
262,091 352,681 263,604 211,557
Real estate properties,
net (note 7) 2,271,577 2,114,760 1,561,921 1,348,621
Fixed assets, net 90,960 80,998 445 554
Racing licences 109,868 109,868 - -
Other assets 6,229 11,637 879 3,061
Loans receivable from
MEC (note 16) - - 97,589 182,876
Deferred rent
receivable 14,898 13,818 14,898 13,818
Future tax assets 58,665 49,665 5,497 7,277
Assets held for sale
(note 4) 34,165 36,063 - -
Discontinued operations
(note 3) 50,659 50,433 - -
-------------------------------------------------------------------------
$ 2,899,112 $ 2,819,923 $ 1,944,833 $ 1,767,764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness
(note 8) $ 39,214 $ 6,515 $ - $ -
Accounts payable and
accrued liabilities 147,067 143,760 16,678 13,317
Income taxes payable 14,993 7,083 13,040 7,083
Loan payable to MID,
net (note 16) - - - -
Due to MEC (note 16) - - 4,464 6,648
Long-term debt due
within one year
(note 8) 33,215 86,125 488 378
Deferred revenue 6,189 6,424 2,078 2,451
Liabilities related
to assets held for
sale (note 4) 171 - - -
Discontinued
operations (note 3) 16,132 15,431 - -
-------------------------------------------------------------------------
256,981 265,338 36,748 29,877
Long-term debt (note 8) 96,326 99,712 6,646 5,991
Senior unsecured
debentures, net 267,578 226,596 267,578 226,596
Note obligations, net 216,050 215,830 - -
Loan payable to MID,
net (note 16) - - - -
Other long-term
liabilities 24,175 15,079 - -
Future tax liabilities 144,432 138,071 48,257 46,090
Minority interest 156,359 180,108 - -
Liabilities related to
assets held for sale
(note 4) 876 1,047 - -
Discontinued operations
(note 3) 875 846 - -
-------------------------------------------------------------------------
1,163,652 1,142,627 359,229 308,554
-------------------------------------------------------------------------
Shareholders' equity:
Share capital (note 9) 1,524,440 1,577,342
Contributed surplus
(note 10) 27,517 2,667
Deficit (58,436) (69,112)
Accumulated
comprehensive income
(note 11) 241,939 166,399
-------------------------------------------------------------------------
1,735,460 1,677,296 1,585,604 1,459,210
-------------------------------------------------------------------------
$ 2,899,112 $ 2,819,923 $ 1,944,833 $ 1,767,764
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
- notes 3, 4)
December December
As at 31, 2007 31, 2006
-----------------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 34,837 $ 47,753
Restricted cash
(note 16) 28,264 29,061
Accounts receivable 35,711 32,052
Loans receivable
from MEC, net
(note 16) - -
Due from MID
(note 16) 4,464 6,648
Income taxes
receivable - 580
Prepaid expenses and
other 16,479 14,746
Assets held for sale
(note 4) 1,493 -
Discontinued
operations (note 3) 21,239 20,266
-----------------------------------------------
142,487 151,106
Real estate properties,
net (note 7) 765,043 771,080
Fixed assets, net 90,515 80,444
Racing licences 109,868 109,868
Other assets 5,350 12,881
Loans receivable from
MEC (note 16) - -
Deferred rent
receivable - -
Future tax assets 53,168 42,388
Assets held for sale
(note 4) 34,165 36,063
Discontinued operations
(note 3) 50,731 51,851
-----------------------------------------------
$ 1,251,327 $ 1,255,681
-----------------------------------------------
-----------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness
(note 8) $ 39,214 $ 6,515
Accounts payable and
accrued liabilities 130,734 130,443
Income taxes payable 1,953 -
Loan payable to MID,
net (note 16) 137,002 2,823
Due to MEC (note 16) - -
Long-term debt due
within one year
(note 8) 32,727 85,747
Deferred revenue 4,339 4,211
Liabilities related
to assets held for
sale (note 4) 171 -
Discontinued
operations (note 3) 16,529 15,716
-----------------------------------------------
362,669 245,455
Long-term debt (note 8) 89,680 93,721
Senior unsecured
debentures, net - -
Note obligations, net 216,050 215,830
Loan payable to MID,
net (note 16) 67,107 151,449
Other long-term
liabilities 24,175 15,079
Future tax liabilities 94,844 91,981
Minority interest 156,359 180,108
Liabilities related to
assets held for sale
(note 4) 876 1,047
Discontinued operations
(note 3) 27,018 32,273
-----------------------------------------------
1,038,778 1,026,943
-----------------------------------------------
Shareholders' equity:
Share capital (note 9)
Contributed surplus
(note 10)
Deficit
Accumulated
comprehensive income
(note 11)
-----------------------------------------------
212,549 228,738
-----------------------------------------------
$ 1,251,327 $ 1,255,681
-----------------------------------------------
-----------------------------------------------
Commitments and contingencies (note 17)
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, 2007 and 2006 and for the three-month
periods and years ended December 31, 2007 and 2006 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, 2007, the Company owned approximately 54% of MEC's total
equity, representing approximately 96% of the total voting power of its
outstanding stock (note 16). MEC's results are consolidated with the
Company's results, with outside ownership accounted for as a minority
interest.
(a) Magna Entertainment Corp.
The results of operations and the financial position of MEC have been
included in the unaudited interim consolidated financial statements
on a going concern basis, which contemplates the realization of MEC's
assets and the discharge of MEC's liabilities in the normal course of
business for the foreseeable future. MEC has incurred net losses
before minority interest recovery of $68.8 million, $65.4 million and
$107.4 million for the years ended December 31, 2007, 2006 and 2005,
respectively. At December 31, 2007, MEC had a working capital
deficiency of $220.2 million and $209.4 million of debt scheduled to
mature in 2008, including amounts owing under (i) MEC's $40.0 million
senior secured revolving credit facility with a Canadian financial
institution (the "MEC Credit Facility"), which is scheduled to mature
on March 31, 2008 (note 8), (ii) a bridge loan (the "MEC Bridge
Loan") of up to $80.0 million from a wholly-owned subsidiary of MID
(the "MID Lender"), which is scheduled to mature on May 31, 2008
(note 16), and (iii) MEC's obligation to repay $100.0 million of
indebtedness under the Gulfstream Park project financing facility
with the MID Lender by May 31, 2008 (note 16). Accordingly, MEC's
ability to continue as a going concern is in substantial doubt and is
dependent on MEC generating cash flows that are adequate to sustain
the operations of the business, renewing or extending current
financing arrangements and meeting its obligations with respect to
secured and unsecured creditors, none of which is assured. If MEC is
unable to repay its obligations when due, other current and long-term
debt will also become due on demand as a result of cross-default
provisions within loan agreements, unless MEC is able to obtain
waivers or extensions. On September 12, 2007, MEC's Board of
Directors approved a debt elimination plan (the "MEC Debt Elimination
Plan") designed to eliminate MEC's net debt by December 31, 2008 by
generating funds from the sale of assets (notes 3 and 4), entering
into strategic transactions involving certain of MEC's racing, gaming
and technology operations, and a possible future equity issuance. The
success of the MEC Debt Elimination Plan is not assured. To address
short-term liquidity concerns and provide sufficient time to
implement the MEC Debt Elimination Plan, MEC arranged $100.0 million
of funding, comprised of (i) a $20.0 million private placement of
MEC's Class A Subordinate Voting Stock ("MEC Class A Stock") to Fair
Enterprise Limited ("FEL"), a company that forms part of an estate
planning vehicle for the family of Mr. Frank Stronach, the Company's
Chairman and the Chairman and Interim Chief Executive Officer of MEC
(note 16); and (ii) the MEC Bridge Loan. Although MEC continues to
implement the MEC Debt Elimination Plan, the sale of assets under the
MEC Debt Elimination Plan is taking longer than originally
contemplated. As a result, MEC will likely need to seek additional
funds in the short-term from one or more possible sources, which may
include the Company. The availability of such additional funds is not
assured and, if available, the terms thereof are not yet
determinable. These consolidated financial statements do not give
effect to any adjustments to recorded amounts and their
classification which would be necessary should MEC be unable to
continue as a going concern and, therefore, be required to realize
its assets and discharge its liabilities in other than the normal
course of business and at amounts different from those reflected in
the unaudited interim consolidated financial statements.
The uncertainty regarding MEC's ability to continue as a going
concern does not impact the realization of the Company's assets and
discharge of its liabilities in the normal course of its real estate
business. MID's real estate business has not guaranteed any of MEC's
indebtedness.
MEC's racing business is seasonal in nature and racing revenues and
operating results for any quarter will not be indicative of the
racing revenues and operating results for the year. MEC's racing
operations have historically operated at a loss in the second half of
the year, with the third quarter typically generating the largest
operating loss. This seasonality has resulted in large quarterly
fluctuations in MEC's revenues and operating results.
(b) Consolidated Financial Statements
The unaudited interim consolidated financial statements have been
prepared in U.S. dollars following Canadian generally accepted
accounting principles ("GAAP") and the accounting policies as set out
in the annual consolidated financial statements for the year ended
December 31, 2006, 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, 2006.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments necessary to present
fairly the financial position at December 31, 2007 and 2006, and the
results of operations and cash flows for the three-month periods and
years ended December 31, 2007 and 2006.
Financial data and related measurements are presented on the
unaudited interim consolidated statements of income (loss), unaudited
interim consolidated statements of cash flows, and unaudited interim
consolidated balance sheets in two categories, "Real Estate Business"
and "Magna Entertainment Corp.", which correspond to the Company's
reporting segments as described in note 15 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 16, are eliminated in the consolidated results of operations
and financial position of the Company.
The Company has reclassified certain prior period amounts to reflect
the restatement for MEC's discontinued operations (note 3) and MEC's
assets held for sale (note 4).
2. ACCOUNTING CHANGES
The Canadian Institute of Chartered Accountants ("CICA") issued four new
standards in January 2005 (which have since been further amended) in
Handbook Sections 1530, "Comprehensive Income", 3855, "Financial
Instruments - Recognition and Measurement", 3861, "Financial Instruments
- Disclosure and Presentation", and 3865, "Hedges". These standards
provide guidance for the recognition, classification and measurement of
financial instruments in financial statements as follows:
- All financial instruments, including derivatives, are to be included
on a company's balance sheet and measured either at their fair values
or, under certain circumstances, at cost or amortized cost. The
standards also specify when unrealized gains and losses as a result
of changes in fair values are to be recognized in the consolidated
statement of income (loss).
- Existing requirements for hedge accounting are extended to provide
comprehensive guidance on how hedge accounting should be performed.
- Certain unrealized gains and losses arising from changes in fair
value of financial instruments will be temporarily recorded outside
the consolidated statement of income (loss) in "other comprehensive
income (loss)".
The CICA requires these new standards be adopted on a prospective basis
for annual and interim periods in the first fiscal year beginning on or
after October 1, 2006. In accordance with the prescribed transitional
provisions, the Company adopted these standards effective January 1, 2007
without restatement of prior periods, except to classify the "currency
translation adjustment" component of shareholders' equity as a component
of "accumulated other comprehensive income".
Under the new standards, all of the Company's consolidated financial
assets must be classified as "held for trading", "held to maturity",
"loans and receivables" or "available for sale" and all of the Company's
consolidated financial liabilities must be classified as "held for
trading" or "other financial liabilities". All of the Company's
consolidated financial instruments are initially measured at fair value,
with subsequent measurements dependent on the classification of each
financial instrument.
"Held for trading" financial assets, which include "cash and cash
equivalents" and "restricted cash", are measured at fair value and all
gains and losses are included in net income in the period in which they
arise. "Loans and receivables", which include "accounts receivable" and
certain "other assets", are recorded at amortized cost. The Company does
not currently have any consolidated financial assets classified as "held
to maturity" or "available for sale".
"Other financial liabilities", which include "bank indebtedness",
"accounts payable and accrued liabilities", "dividends payable", current
and non-current portions of "long-term debt", "senior unsecured
debentures, net", "note obligations, net" and certain "other long-term
liabilities", are recorded at amortized cost. The Company does not have
any consolidated financial liabilities classified as "held for trading".
These standards had the following impact on the Company's unaudited
interim consolidated financial statements upon adoption:
Increase
As at January 1, 2007 (Decrease)
-------------------------------------------------------------------------
Assets
Real Estate Business - other assets -
deferred financing costs(i) $ (2,216)
MEC - other assets - deferred financing costs -
continuing operations(i) (7,871)
MEC - other assets - deferred financing costs -
discontinued operations(i) (1,320)
MEC - other assets - interest rate swaps(iii) 439
Eliminations - other assets 5,626
-------------------------------------------------------------------------
Consolidated assets $ (5,342)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Real Estate Business - senior unsecured debentures(i) $ (2,216)
MEC - long-term debt due within one year(i) (23)
MEC - note obligations(i) (3,542)
MEC - loans payable to MID - continuing operations(i) (4,306)
MEC - loans payable to MID - discontinued operations(i) (1,320)
MEC - future tax liabilities(iii) 176
MEC - minority interest(iii) 109
Eliminations - loans payable to MID - continuing operations 4,306
Eliminations - loans payable to MID -
discontinued operations 1,320
-------------------------------------------------------------------------
Consolidated liabilities (5,496)
-------------------------------------------------------------------------
Shareholders' equity
MEC - accumulated other comprehensive income(ii),(iii) 154
-------------------------------------------------------------------------
Consolidated shareholders' equity 154
-------------------------------------------------------------------------
Consolidated liabilities and shareholders' equity $ (5,342)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Deferred Financing Costs
As permitted by the new standards, the Company's policy for the
treatment of financing costs related to the issuance of debt is to
present debt instruments on the consolidated balance sheet net of
the related financing costs, with the net balance accreting to the
face value of the debt over its term. Prior to January 1, 2007,
the Company included deferred financing costs on the consolidated
balance sheet in "other assets".
(ii) Other Comprehensive Income (Loss) and Accumulated Other
Comprehensive Income
The new standards require the presentation of a new statement of
comprehensive income, which is comprised of net income, the net
unrealized foreign exchange gain or loss for the period related to
the Company's net investment in foreign operations and changes in
unrealized gains or losses related to cash flow hedges, with any
such changes required to be accumulated on the consolidated
balance sheet in "accumulated other comprehensive income" as a
separate component of shareholders' equity.
(iii) Hedging Derivative Financial Instruments
The new standards require all hedging derivative financial
instruments to be recognized on the consolidated balance sheet at
fair value.
The types of hedging relationships that qualify for hedge
accounting have been specified under the new standards but do not
have an impact on the Company's policies or criteria for the use
of financial instruments and hedge accounting. A description of
the Company's policies for the use of derivative financial
instruments is included in notes 1 and 20 to the Company's
consolidated financial statements for the year ended December 31,
2006. The new standards did not impact the accounting for the
Company's use of derivative financial instruments at January 1,
2007, except as discussed below for interest rate swaps.
Interest Rate Swaps
MEC occasionally utilizes interest rate swap contracts as hedging
instruments to hedge exposure to interest rate fluctuations on its
variable rate debt. These swap contracts are accounted for using
hedge accounting, with the fair value of the hedging instrument
being recognized on the consolidated balance sheet. To the extent
that changes in the fair value of the hedging instrument offset
changes in the fair value of the hedged item, they are recorded in
"other comprehensive income (loss)" and "accumulated other
comprehensive income". Any portion of the change in fair value of
the hedging instrument that does not offset changes in the fair
value of the hedged item (the ineffectiveness of the hedge) is
recorded directly in the consolidated statement of income (loss).
For hedges that are discontinued before the end of the original
hedge term, the unrealized gain or loss in "accumulated other
comprehensive income" is amortized in the consolidated statement
of income (loss) over the remaining term of the original hedge. If
the hedged item is sold or settled, the entire unrealized gain or
loss is recognized in the consolidated statement of income (loss).
On January 1, 2007, MEC's interest rate swaps were measured and
recognized as an asset with a fair value of $439 thousand with a
related future tax liability of $176 thousand and minority
interest liability of $109 thousand, resulting in a net amount of
$154 thousand being recorded in opening "accumulated other
comprehensive income". This amount was reclassified to the
consolidated statement of income (loss) during the year ended
December 31, 2007.
3. BUSINESS ACQUISITION AND DISPOSALS
(a) Acquisition of AmTote
On August 22, 2003, MEC Maryland Investments Inc. ("MEC Maryland"), a
wholly owned subsidiary of MEC, acquired a 30% interest in AmTote
International, Inc. ("AmTote") for a total cash purchase price,
including transaction costs, of $4.3 million. At the same time, MEC
Maryland was also granted options to acquire the remaining 70% of
AmTote.
On July 26, 2006, MEC Maryland acquired the remaining 70% equity
interest of AmTote for a total cash purchase price of $9.3 million,
including transaction costs of $0.1 million, net of cash acquired of
$5.5 million.
AmTote is a provider of totalisator services to the North American
pari- mutuel industry with service contracts with over 70 North
American racetracks and other wagering entities.
The purchase price has been allocated to the assets and liabilities
acquired as follows:
---------------------------------------------------------------------
Non-cash working capital $ 1,203
Fixed assets 12,691
Other assets 127
Long-term debt (1,470)
Other long-term liabilities (980)
Future tax liabilities (2,224)
---------------------------------------------------------------------
Net assets acquired and total purchase price,
net of cash acquired $ 9,347
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Divestiture of The Meadows
On November 14, 2006, MEC completed the sale of all of the
outstanding shares of Washington Trotting Association, Inc., Mountain
Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc., each an MEC
wholly-owned subsidiary through which MEC owned and operated The
Meadows, MEC's standardbred racetrack in Pennsylvania, to PA Meadows,
LLC, a company jointly owned by William Paulos and William Wortman,
controlling shareholders of Millennium Gaming, Inc., and a fund
managed by Oaktree Capital Management, LLC (together, "Millennium-
Oaktree"). On closing, MEC received cash consideration of
$171.8 million, net of transaction costs of $3.2 million, and a
$25.0 million holdback note payable to MEC over a five-year period,
subject to offset for certain indemnification obligations (the
"Meadows Holdback Note"). Under the terms of the Meadows Holdback
Note, MEC agreed to release the security requirement for the holdback
amount, defer subordinate payments under the Meadows Holdback Note,
defer receipt of holdback payments until the opening of the permanent
casino at The Meadows and defer receipt of holdback payments to the
extent of available cash flows (as defined in the terms of the
Meadows Holdback Note), in exchange for Millennium-Oaktree providing
an additional $25.0 million of equity support for PA Meadows, LLC.
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.
MEC recognized a $115.2 million gain on this sale transaction in the
fourth quarter of 2006. 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.
MEC was required to use the proceeds from the sale of The Meadows to
fully repay the bridge loan between the MID Lender and MEC (the "2005
MEC Bridge Loan" - note 16), to permanently pay down $39.0 million of
the principal amount outstanding under the MEC Credit Facility
(note 8), to repay $2.0 million of the BE&K Loan (as defined in
note 16) and to place $15.0 million into escrow with the MID Lender
(note 16).
(c) Discontinued Operations
(i) In connection with the MEC Debt Elimination Plan, MEC announced
that it intends to sell Great Lakes Downs in Michigan,
Thistledown in Ohio and its interest in Portland Meadows in
Oregon. MEC also announced that it intends to explore the sale
of Remington Park, a horseracing and gaming facility in
Oklahoma City.
In September 2007, MEC engaged a U.S. investment bank to assist
in soliciting potential purchasers and managing the sale
process for certain assets covered by the MEC Debt Elimination
Plan. In October 2007, the U.S. investment bank began marketing
Thistledown and Remington Park for sale and initiated an active
program to locate potential buyers.
In October 2007, the Great Lakes Downs property was listed for
sale with a real estate broker. The race meet at that facility
concluded on November 4, 2007 and the facility was then closed.
In order to facilitate the sale of this property, MEC re-
acquired Great Lakes Downs from Richmond Racing Co., LLC in
December 2007 pursuant to a prior existing option right.
In November 2007, MEC began marketing its interest in Portland
Meadows for sale and an active program to locate a potential
buyer was initiated.
(ii) On November 1, 2006, a wholly-owned subsidiary of MEC completed
the sale of the Fontana Golf Club located in Oberwaltersdorf,
Austria to a subsidiary of Magna, a related party, for a sale
value of 30.0 million euros ($38.3 million), which included
cash consideration of 13.2 million euros ($16.9 million), net
of transaction costs, and 16.8 million euros ($21.4 million) of
debt assumed by Magna. Based on the exchange amount, MEC
recognized a gain on disposition of $20.9 million at the date
of disposition.
(iii) On August 25, 2006, a wholly-owned subsidiary of MEC completed
the sale of the Magna Golf Club located in Aurora, Ontario to
Magna, a related party, for cash consideration of Cdn.
$51.8 million ($46.4 million), net of transaction costs. MEC
recognized an impairment loss of $1.2 million at the date of
disposition equal to the excess of MEC's carrying value of the
assets disposed over their fair values and exchange amount at
the date of disposition. Of the sale proceeds, Cdn.
$32.6 million ($29.3 million) was used to pay all amounts owing
under certain loan agreements with Bank Austria Creditanstalt
AG related to the Magna Golf Club.
(iv) On May 26, 2006, MEC completed the sale of a restaurant and
related real estate in the United States and received cash
consideration of $2.0 million, net of transaction costs, and
recognized a gain at the date of disposition of $1.5 million.
MEC was required to use the net proceeds from this transaction
to repay principal amounts outstanding under the MEC Credit
Facility (note 8).
MEC's results of operations related to discontinued operations
for the three-month periods and years ended December 31, 2007 and
2006, and MEC's assets and liabilities related to discontinued
operations as at December 31, 2007 and 2006, are shown in the
following table:
Three Months Ended Year Ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenues $ 28,860 $ 31,002 $ 122,200 $ 142,534
Costs and expenses 30,056 33,028 121,320 136,860
-------------------------------------------------------------------------
(1,196) (2,026) 880 5,674
Depreciation and
amortization 515 1,388 3,976 7,069
Interest expense, net 652 872 2,794 4,984
Impairment loss recorded
on disposition - - - 1,202
-------------------------------------------------------------------------
Loss before undernoted (2,363) (4,286) (5,890) (7,581)
Gain on disposition - 20,892 - 22,387
-------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest (2,363) 16,606 (5,890) 14,806
Income tax expense
(recovery) - (160) - 1,653
Minority interest (1,090) 6,968 (2,560) 5,467
-------------------------------------------------------------------------
MEC's income (loss) from
discontinued operations (1,273) 9,798 (3,330) 7,686
-------------------------------------------------------------------------
Eliminations (note 16) 758 776 3,229 3,121
-------------------------------------------------------------------------
Consolidated income
(loss) from dis-
continued operations $ (515) $ 10,574 $ (101) $ 10,807
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, December 31,
As at 2007 2006
---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,078 $ 10,636
Restricted cash 7,069 5,133
Accounts receivable 3,424 3,939
Prepaid expenses and other 1,668 558
---------------------------------------------------------------------
21,239 20,266
---------------------------------------------------------------------
Real estate properties, net 39,094 38,048
Fixed assets, net 11,531 12,408
Other assets 106 1,395
---------------------------------------------------------------------
50,731 51,851
---------------------------------------------------------------------
MEC's assets related to
discontinued operations 71,970 72,117
---------------------------------------------------------------------
Eliminations (note 16) (72) (1,418)
---------------------------------------------------------------------
Consolidated assets related to
discontinued operations $ 71,898 $ 70,699
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 14,852 $ 13,514
Long-term debt due within one year 23 30
Loan payable to MID 397 285
Deferred revenue 1,257 1,887
---------------------------------------------------------------------
16,529 15,716
---------------------------------------------------------------------
Long-term-debt 115 138
Loan payable to MID, net 26,143 31,427
Other long-term liabilities 760 708
---------------------------------------------------------------------
27,018 32,273
---------------------------------------------------------------------
MEC's liabilities related to
discontinued operations 43,547 47,989
---------------------------------------------------------------------
Eliminations (note 16) (26,540) (31,712)
---------------------------------------------------------------------
Consolidated liabilities related
to discontinued operations $ 17,007 $ 16,277
---------------------------------------------------------------------
---------------------------------------------------------------------
4. ASSETS HELD FOR SALE
(a) In November and December 2007, MEC entered into sale agreements for
three parcels of excess real estate comprising approximately
825 acres in Porter, New York, subject to the completion of due
diligence by the purchasers and customary closing conditions. These
sale transactions were completed on December 28, 2007, January 7,
2008 and January 10, 2008, for total cash consideration of
$1.8 million, net of transaction costs. At December 31, 2007, the two
parcels of real estate for which the sale had not been completed are
included in MEC's "assets held for sale" on the Company's
consolidated balance sheets. The net proceeds received on closing
were used to repay a portion of the MEC Bridge Loan (note 16)
subsequent to year-end.
(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 ($29.4 million), subject to customary closing
adjustments. The closing of the transaction is expected to occur by
the end of the first quarter of 2008 following the satisfaction of
customary closing conditions, including the receipt of all necessary
regulatory approvals. MEC is required to use 7.5 million euros of the
net proceeds to be received on closing to repay a portion of a
15.0 million euro term loan facility (note 8) and to use the
remaining portion of the net proceeds to repay a portion of the MEC
Bridge Loan (note 16).
(c) On August 9, 2007, MEC announced its intention to sell real estate
properties located in Dixon, California and Ocala, Florida. MEC has
initiated an active program to locate potential buyers for these
properties and has listed the properties for sale.
Under the terms of the MEC Bridge Loan, MEC is required to use the
net proceeds from the sale of these properties to pay down principal
amounts outstanding under the MEC Bridge Loan and the amount of such
net proceeds will permanently reduce the committed amount of the MEC
Bridge Loan.
(d) The MEC Debt Elimination Plan also contemplates the sale of real
estate properties located in Aventura and Hallandale, Florida, both
adjacent to Gulfstream Park, and Anne Arundel County, Maryland,
adjacent to Laurel Park. MEC has also announced that it intends to
explore selling its membership interests in the mixed-use
developments at Gulfstream Park racetrack in Florida and Santa Anita
Park racetrack in California that it is pursuing under joint venture
arrangements with Forest City Enterprises, Inc. ("Forest City") and
Caruso Affiliated ("Caruso"), respectively. MEC has also announced
that it intends to explore other strategic transactions involving
other racing, gaming and technology operations. These potential
transactions may include: partnerships or joint ventures in respect
of the existing gaming facility at Gulfstream Park; partnerships or
joint ventures in respect of potential alternative gaming operations
at other MEC racetracks that currently do not have gaming operations;
and transactions involving MEC's technology operations, which may
include one or more of the assets that comprise MEC's PariMax
business.
At December 31, 2007, all of the criteria required to classify an
asset as held for sale, or operations as discontinued operations
(note 3), in accordance with GAAP were not met in relation to the
assets and operations described in the preceding paragraph and,
accordingly, these assets and operations continue to be classified as
held and in use.
MEC's assets classified as held for sale and corresponding
liabilities, related to the transactions described in sections (a),
(b) and (c) above, at December 31, 2007 and 2006, are shown in the
table below.
December 31, December 31,
As at 2007 2006
---------------------------------------------------------------------
ASSETS
Current assets:
Real estate properties, net
Porter, New York $ 1,493 $ -
---------------------------------------------------------------------
Real estate properties, net
Dixon, California 19,139 18,711
Ocala, Florida 8,407 8,427
Ebreichsdorf, Austria 6,619 5,935
Porter, New York - 2,990
---------------------------------------------------------------------
34,165 36,063
---------------------------------------------------------------------
$ 35,658 $ 36,063
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES
Current liabilities:
Future tax liabilities $ 171 $ -
---------------------------------------------------------------------
Future tax liabilities 876 1,047
---------------------------------------------------------------------
$ 1,047 $ 1,047
---------------------------------------------------------------------
---------------------------------------------------------------------
5. WRITE-DOWN OF MEC'S LONG-LIVED ASSETS
MEC's long-lived assets, which consist of fixed assets and real estate
properties, are tested for recoverability whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. If
such events or changes in circumstances are present, the recoverability
of the long-lived assets is assessed 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 appraisals, is charged to operations in the period in which
such impairment is determined.
Write-downs and impairment losses relating to long-lived assets have been
recognized as follows:
Three Months Ended Year Ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Porter, New York(i) $ (136) $ - $ 1,308 $ -
Magna Racino(TM)(ii) - 76,166 - 76,166
Development
property(iii) - 1,279 - 1,279
-------------------------------------------------------------------------
$ (136) $ 77,445 $ 1,308 $ 77,445
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) In connection with entering into sale agreements for three parcels
of real estate in Porter, New York (note 4), MEC recognized a non-
cash impairment loss of $1.3 million, which represents the excess
of the carrying value over the fair value of this real estate,
less selling costs.
(ii) Magna Racino(TM)'s long-lived assets were tested for impairment
upon completion of its 2007 business plan. An expected present
value approach of estimated future cash flows, including a
probability-weighted approach in considering the likelihood of
possible outcomes, and external valuation reports were used to
determine the fair value of the long-lived assets. Based on this
analysis, a non-cash impairment charge of $76.2 million was
required of the long-lived assets in the three months and year
ended December 31, 2006.
(iii) On February 7, 2007, MID acquired all of MEC's interests and
rights in a 34 acre parcel of residential development land in
Aurora, Ontario for cash consideration of Cdn. $12.0 million
($10.1 million) (note 16). MEC recognized a non-cash impairment
loss of $1.3 million related to this parcel of residential
development land in the three months and year ended December 31,
2006.
6. EARNINGS (LOSS) PER SHARE
Diluted earnings (loss) per share for the three-month periods and years
ended December 31, 2007 and 2006 are computed as follows:
Three Months Ended Year Ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Income from continuing
operations $ 12,004 $ 17,942 $ 39,610 $ 49,063
Income (loss) from
discontinued operations (515) 10,574 (101) 10,807
-------------------------------------------------------------------------
Net income $ 11,489 $ 28,516 $ 39,509 $ 59,870
-------------------------------------------------------------------------
Weighted average
number of Class A
Subordinate Voting
and Class B Shares
outstanding during
the period (thousands) 47,249 48,329 48,073 48,301
Stock options (thousands) - 57 10 54
-------------------------------------------------------------------------
47,249 48,386 48,083 48,355
-------------------------------------------------------------------------
Diluted earnings (loss)
per Class A
Subordinate Voting
or Class B Share
- from continuing
operations $ 0.25 $ 0.37 $ 0.82 $ 1.02
- from discontinued
operations (0.01) 0.22 - 0.22
-------------------------------------------------------------------------
$ 0.24 $ 0.59 $ 0.82 $ 1.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The computation of diluted earnings per share for the three-month period
and year ended December 31, 2007 excludes the effect of the potential
exercise of 516,544 (2006 - 155,000) and 361,544 (2006 - 155,000)
options, respectively, to acquire Class A Subordinate Voting Shares of
the Company because the effect would be anti-dilutive.
7. REAL ESTATE PROPERTIES
(restated -
notes 3, 4)
December 31, December 31,
As at 2007 2006
-------------------------------------------------------------------------
Real Estate Business
Revenue-producing properties
Land $ 226,269 $ 206,990
Buildings, parking lots and roadways - cost 1,444,241 1,298,073
Buildings, parking lots and roadways
- accumulated depreciation (345,825) (274,931)
-------------------------------------------------------------------------
1,324,685 1,230,132
-------------------------------------------------------------------------
Development properties
Land and improvements 226,248 115,910
Properties under development 9,541 648
-------------------------------------------------------------------------
235,789 116,558
-------------------------------------------------------------------------
Properties held for sale 1,447 1,931
-------------------------------------------------------------------------
1,561,921 1,348,621
-------------------------------------------------------------------------
MEC
Revenue-producing racetrack properties
Land and improvements 178,843 197,838
Buildings - cost 640,451 592,351
Buildings - accumulated depreciation (193,046) (165,891)
Construction in progress 43,140 25,202
-------------------------------------------------------------------------
669,388 649,500
-------------------------------------------------------------------------
Under-utilized racetrack real estate 87,128 91,016
-------------------------------------------------------------------------
Development land and improvements - 20,705
-------------------------------------------------------------------------
Revenue-producing non-racetrack properties
Land and improvements 6,498 6,521
Buildings - cost 2,122 3,410
Buildings - accumulated depreciation (93) (72)
-------------------------------------------------------------------------
8,527 9,859
-------------------------------------------------------------------------
765,043 771,080
-------------------------------------------------------------------------
Eliminations (note 16) (55,387) (4,941)
-------------------------------------------------------------------------
Consolidated $ 2,271,577 $ 2,114,760
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in the Real Estate Business' revenue-producing properties above
at December 31, 2006 was a property which has been reclassified into
development properties during the year ended December 31, 2007. The net
book value of the property at December 31, 2007 is $7.2 million
(December 31, 2006 - $5.2 million). During the year ended December 31,
2007, the Real Estate Business and Magna entered into discussions to
terminate the lease on this property, retroactive to May 31, 2007, as the
Real Estate Business is seeking to redevelop the property for residential
purposes. The Real Estate Business anticipates paying Magna approximately
$2.0 million to terminate the lease and the anticipated termination
payment has been included in the Real Estate Business' "real estate
properties, net" and "accounts payable and accrued liabilities" at
December 31, 2007 on the Company's unaudited interim consolidated balance
sheet.
Included in the Real Estate Business' properties under development above
at December 31, 2007 are $8.2 million of costs paid to Magna as
reimbursement for expenditures incurred by Magna in relation to
expansions on two of the Real Estate Business' revenue-producing
properties.
8. 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 credit facility
expires on December 21, 2008, unless 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 ("EBITDA"). Currently, the Company is subject to the lowest
applicable margin available, with drawn amounts incurring interest at the
London Interbank Offered Rate ("LIBOR") or bankers' acceptance rates, in
each case plus 1.0%, or the U.S. base or Canadian prime rate. The credit
facility contains negative and affirmative financial and operating
covenants. At December 31, 2007, the Company was in compliance with all
of these covenants. At December 31, 2007, the Company had no borrowings
under the facility, but had issued letters of credit totalling
$0.3 million.
MEC
MEC's bank indebtedness consists of the following short-term bank loans:
December 31, December 31,
As at 2007 2006
-------------------------------------------------------------------------
MEC Credit Facility(a) $ 34,891 $ -
SAC Credit Facility(b) 3,499 6,515
AmTote Credit Facility(c) 824 -
-------------------------------------------------------------------------
$ 39,214 $ 6,515
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) During the year ended December 31, 2007, MEC extended the maturity
date of the $40.0 million MEC Credit Facility from March 30, 2007 to
January 31, 2008 and modified a financial performance maintenance
covenant relating to EBITDA. The maturity date was further extended
to March 31, 2008 subsequent to year-end. Borrowings under the MEC
Credit Facility are available by way of U.S. dollar loans and letters
of credit, with borrowings 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, 2007,
MEC had borrowed $34.9 million (December 31, 2006 - nil) under the
MEC Credit Facility and had issued letters of credit totalling
$4.3 million (December 31, 2006 - $24.7 million), such that
$0.8 million (December 31, 2006 - $15.3 million) was unused and
available. The weighted average interest rate on the borrowings
outstanding under the MEC Credit Facility at December 31, 2007 was
11.0%.
(b) On October 2, 2007, MEC's wholly-owned subsidiary, The Santa Anita
Companies, Inc. ("SAC"), which owns and operates Santa Anita Park,
amended and extended its term and revolving loan agreements with a
U.S. financial institution. The amendments included reducing the
amount available under the revolving loan (the "SAC Credit Facility")
from $10.0 million to $7.5 million, requiring the aggregate
outstanding principal under the SAC Credit Facility to be fully
repaid for a period of 60 consecutive days during each year,
increasing the amount available under the term loan from
$60.0 million to $67.5 million, reducing the monthly principal
repayments under the term loan to $375 thousand, extending the
maturity date for both facilities from October 8, 2007 to October 31,
2012 and modifying certain financial covenants.
The SAC Credit Facility 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. The term loan contains cross-default provisions with
the MEC Credit Facility. Borrowings under the SAC Credit Facility and
term loan bear interest at the U.S. prime rate and LIBOR plus 2.0%,
respectively. At December 31, 2007, MEC had borrowed $66.4 million
(December 31, 2006 - $64.2 million) under the fully drawn term loan
and $3.5 million (December 31, 2006 - $6.5 million) under the SAC
Credit Facility such that $4.0 million (December 31, 2006 -
$3.5 million) was unused and available. The weighted average interest
rate on the borrowings outstanding under the SAC Credit Facility at
December 31, 2007 was 7.3% (December 31, 2006 - 8.3%).
(c) On May 11, 2007, MEC's wholly-owned subsidiary, AmTote (note 3),
completed a refinancing of its existing credit facilities with a new
lender (the "AmTote Lender"). The refinancing included (i) a
$3.0 million revolving credit facility to finance working capital
requirements (the "AmTote Credit Facility"), (ii) a $4.2 million term
loan for the repayment of AmTote's debt outstanding under its
existing term loan facilities, 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 matures on May 1, 2008 and borrowings under
the facility are available by way of U.S. dollar loans and letters of
credit, each bearing interest at LIBOR plus 2.8%. The $4.2 million
term loan matures on May 11, 2011 and the AmTote Equipment Term Loan
matures on May 11, 2012, with both facilities bearing interest at
LIBOR plus 3.0%. The AmTote Credit Facility and the two term loan
facilities are collateralized by a first charge on AmTote's assets
and a pledge of the stock of AmTote.
At December 31, 2007, AmTote had borrowed $0.8 million under the
AmTote Credit Facility, which is included in MEC's "bank
indebtedness" on the Company's unaudited interim consolidated balance
sheet, such that $2.2 million was unused and available. At
December 31, 2007, $3.3 million and $2.0 million was outstanding
under the $4.2 million term loan facility and the AmTote Equipment
Term Loan, respectively, which is included in MEC's "long-term debt"
on the Company's unaudited interim consolidated balance sheet. At
December 31, 2007, the weighted average interest rates on the
borrowings under the AmTote Credit Facility, the term loan and the
AmTote Equipment Term Loan were 7.7%, 7.2% and 7.2%, respectively.
(d) On July 24, 2007, one of MEC's European subsidiaries amended and
extended its bank term loan of up to 3.9 million euros by increasing
the amount available under the bank term loan to 4.0 million euros
($5.7 million), bearing interest at the Euro Overnight Index Average
("EURONIA") rate plus 3.0% per annum (6.6% at December 31, 2007). See
note 18 for details of certain amendments that were made subsequent
to year-end. At December 31, 2007 and 2006, MEC had borrowings of
2.4 million euros ($3.1 million) and 4.5 million euros
($5.9 million), respectively, under this bank term loan.
(e) On December 16, 2007, another one of MEC's European subsidiaries
amended its 15.0 million euro ($22.1 million) term loan facility
which was due to mature on December 31, 2007 by extending the
maturity to December 31, 2008 with repayments of 7.5 million euros,
due on each of February 29, 2008 and December 31, 2008. See note 18
for details of certain amendments that were made subsequent to year-
end. Borrowings under the term loan bear interest at the three-month
Euro Interbank Offered Rate plus 2.0% (6.8% at December 31, 2007) and
are collateralized by a first and second mortgage on land in Austria
owned by the European subsidiary.
At December 31, 2007, MEC is in compliance with all of the above noted
loan agreements and related covenants.
9. 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, 2005,
March 31, 2006
and June 30, 2006 47,742,083 $ 1,558,016 548,238 $ 17,893
Issued on exercise of
stock options 30,000 1,043 - -
-------------------------------------------------------------------------
Shares issued and
outstanding,
December 31, 2006 47,772,083 1,559,059 548,238 17,893
Issued on exercise of
stock options 10,000 390 - -
Shareholder conversion
of Class B Shares to
Class A Subordinate
Voting Shares 825 27 (825) (27)
-------------------------------------------------------------------------
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 46,160,564 $ 1,506,574 547,413 $ 17,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
-------------------------
Stated
Number Value
-----------------------------------------------
Shares issued and
outstanding,
December 31, 2005,
March 31, 2006
and June 30, 2006 48,290,321 $ 1,575,909
Issued on exercise of
stock options 30,000 1,043
-----------------------------------------------
Shares issued and
outstanding,
December 31, 2006 48,320,321 1,576,952
Issued on exercise of
stock options 10,000 390
Shareholder conversion
of Class B Shares to
Class A Subordinate
Voting Shares - -
-----------------------------------------------
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 46,707,977 $ 1,524,440
-----------------------------------------------
-----------------------------------------------
Pursuant to the terms of a normal course issuer bid program for which the
Company received approval from the Toronto Stock Exchange ("TSX") on
September 29, 2006, the Company was authorized, from October 4, 2006 to
October 3, 2007, to purchase for cancellation, through the facilities of
the TSX and the New York Stock Exchange ("NYSE"), up to 3,257,895 Class A
Subordinate Voting Shares, being 10% of the Public Float, as such term is
defined by the TSX. The Company purchased 340,400 and 826,100 Class A
Subordinate Voting Shares for cancellation for cash consideration of
$11.7 million and $27.1 million (Cdn. $33.41 and Cdn. $32.92 per share on
a weighted average basis) during the three months and year ended
December 31, 2007, respectively, under this program. The Company's
historical Canadian carrying value of the shares purchased for
cancellation in excess of the purchase price was $4.3 million and
$10.6 million, for the three months and year ended December 31, 2007,
respectively, which has been credited to "contributed surplus" (note 10).
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 the shares purchased for cancellation, was
$4.9 million and $10.7 million for the three months and year ended
December 31, 2007, respectively, and has been charged to "accumulated
other comprehensive income" (note 11).
Pursuant to the terms of a normal course issuer bid program for which the
Company received approval from the TSX on October 2, 2007, the Company is
authorized, during the 12-month period commencing October 8, 2007 and
ending October 7, 2008, to purchase for cancellation, through the
facilities of the TSX and the NYSE, up to 2,531,354 Class A Subordinate
Voting Shares, being 10% of the Public Float. During the three months and
year ended December 31, 2007, the Company purchased 834,700 Class A
Subordinate Voting Shares for cancellation for cash consideration of
$25.0 million (Cdn. $29.92 per share on a weighted average basis) under
this program. The Company's historical Canadian carrying value of the
shares purchased for cancellation in excess of the purchase price was
$13.9 million, which has been credited to "contributed surplus"
(note 10). 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 the shares purchased for
cancellation, was $11.7 million and has been charged to "accumulated
other comprehensive income" (note 11).
The price that MID pays for shares purchased pursuant to the bids is the
market price at the time of acquisition.
10. CONTRIBUTED SURPLUS
Changes in the Company's contributed surplus are shown in the following
table:
Three Months Ended Year Ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Contributed surplus,
beginning of period $ 9,119 $ 2,212 $ 2,667 $ 2,112
Carrying value of
shares purchased for
cancellation in
excess of purchase
price (note 9) 18,265 - 24,487 -
Stock-based comp-
ensation 133 529 608 817
Transfer to share
capital on exercise
of stock options - (74) (245) (262)
-------------------------------------------------------------------------
Contributed surplus,
end of period $ 27,517 $ 2,667 $ 27,517 $ 2,667
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. 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,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Accumulated other
comprehensive income,
beginning of period $ 240,593 $ 155,381 $ 166,399 $ 106,960
Adjustment for change
in accounting policy
related to the fair
value of interest
rate swaps (note 2) - - 154 -
Change in fair value
of interest rate swaps,
net of taxes and
minority interest (337) - (584) -
Foreign currency
translation adjustment,
net of minority
interest(i) 25,326 11,018 106,043 61,360
Reversal of foreign
currency translation
gain related to shares
purchased for
cancellation (note 9) (16,576) - (22,354) -
Recognition of foreign
currency translation
gain in net income(ii) (7,067) - (7,719) (1,921)
-------------------------------------------------------------------------
Accumulated other
comprehensive income,
end of period(iii) $ 241,939 $ 166,399 $ 241,939 $ 166,399
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the three-month periods and years ended December 31, 2007
and 2006, the Company recorded unrealized foreign currency
translation gains related to its net investments in currencies
other than the U.S. dollar, primarily due to the strengthening
against the U.S. dollar of the euro during the three-month periods
and years ended December 31, 2007 and 2006 and the Canadian dollar
during the three months and year ended December 31, 2007.
(ii) Included in the Real Estate Business' "dilution and other gains"
is a $7.1 million (2006 - nil) and $7.7 million (2006 - $1.9
million) currency translation gain for the three months and year
ended December 31, 2007, respectively, realized from capital
transactions that gave rise to a reduction in the net investment
in certain foreign operations.
(iii) Accumulated other comprehensive income consists of:
December 31, December 31,
As at 2007 2006
------------------------------------------------------------------
Foreign currency translation adjustment,
net of minority interest $ 242,369 $ 166,399
Fair value of interest rate swaps,
net of taxes and minority interest (430) -
------------------------------------------------------------------
$ 241,939 $ 166,399
------------------------------------------------------------------
12. INCOME TAXES
The Real Estate Business' income tax expense for the three months and
year ended December 31, 2007 includes future tax recoveries of
$3.8 million (2006 - nil) and $5.4 million (2006 - $2.1 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.
13. STOCK-BASED COMPENSATION
(a) On August 29, 2003, MID's Board of Directors approved the Incentive
Stock Option Plan (the "MID Plan"), which allows for the grant of
stock options or stock appreciation rights to directors, officers,
employees and consultants. Amendments to the MID Plan were approved
by the Company's shareholders at the May 11, 2007 Annual and Special
Meeting, and became effective on June 6, 2007. At December 31, 2007,
a maximum of 2.61 million MID Class A Subordinate Voting Shares are
available to be issued under the MID Plan.
MID has granted stock options to certain directors and officers to
purchase MID's Class A Subordinate Voting Shares. Such options have
generally been granted with 1/5th of the options vesting on the date
of grant and the remaining options vesting over a period of four
years at a rate of 1/5th on each anniversary of the date of grant.
Options expire on the tenth anniversary of the date of grant, subject
to earlier cancellation in the events specified in the stock option
agreement entered into by MID with each recipient of options. A
reconciliation of the changes in stock options outstanding is
presented below:
2007 2006
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Price Price
Number (Cdn. $) Number (Cdn. $)
-------------------------------------------------------------------------
Stock options
outstanding, January 1 465,000 36.08 390,000 33.49
Granted - - 20,000 39.12
Exercised (38,456) 32.19 - -
-------------------------------------------------------------------------
Stock options
outstanding, March 31
and June 30 426,544 36.43 410,000 33.77
Granted 125,000 32.21 - -
Exercised - - (30,000) 31.85
Cancelled or forfeited (35,000) 41.17 (60,000) 35.62
-------------------------------------------------------------------------
Stock options
outstanding,
September 30 516,544 35.09 320,000 33.60
Granted - - 155,000 41.17
Exercised - - (10,000) 35.62
-------------------------------------------------------------------------
Stock options
outstanding,
December 31 516,544 35.09 465,000 36.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options
exercisable,
December 31 322,544 34.60 243,000 34.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 weighted average 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,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Risk-free interest rate - 3.8% 4.3% 3.8%
Expected dividend yield - 1.64% 1.92% 1.65%
Expected volatility
of MID's Class A
Subordinate Voting Shares - 19.4% 18.9% 19.6%
Weighted average expected
life (years) - 4.0 4.0 3.9
Weighted average fair
value per option granted - $6.50 $5.51 $6.41
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. During the
year ended December 31, 2006, 11,715 DSUs were redeemed by a former
director for $0.4 million.
A reconciliation of the changes in DSUs outstanding is presented
below:
2007 2006
-------------------------------------------------------------------------
DSUs outstanding, January 1 27,319 23,092
Granted 4,241 3,984
-------------------------------------------------------------------------
DSUs outstanding, March 31 31,560 27,076
Granted 3,025 3,882
Redeemed - (11,715)
-------------------------------------------------------------------------
DSUs outstanding, June 30 34,585 19,243
Granted 3,568 4,350
-------------------------------------------------------------------------
DSUs outstanding, September 30 38,153 23,593
Granted 3,299 3,726
-------------------------------------------------------------------------
DSUs outstanding, December 31 41,452 27,319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months and year ended December 31, 2007, the Real
Estate Business recognized stock-based compensation expense of
$35 thousand (2006 - $0.6 million) and $0.8 million (2006 -
$1.4 million), respectively, which includes a $0.1 million recovery
(2006 - $0.1 million expense) and $0.2 million expense (2006 -
$0.6 million expense), respectively, pertaining to DSUs.
(b) 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 9.2 million shares of MEC Class A Stock are
available to be issued under the MEC Plan, of which 7.8 million are
available for issuance pursuant to stock options and tandem stock
appreciation rights and 1.4 million are available for issuance
pursuant to any other type of award under the MEC Plan.
During 2005, MEC introduced an incentive compensation program (the
"MEC Program") for certain officers and key employees, which awarded
performance shares of MEC Class A Stock (the "2005 Performance Share
Awards") as contemplated under the MEC Plan. The number of shares of
MEC Class A Stock underlying the 2005 Performance Share Awards was
based either on a percentage of a guaranteed bonus or a percentage of
total 2005 compensation divided by the market value of the stock on
the date the MEC Program was approved by the Compensation Committee
of MEC's Board of Directors. The 2005 Performance Share Awards vested
over a six or eight month period to December 31, 2005 and were
distributed, subject to certain conditions, in two equal instalments.
The first distribution date occurred in March 2006 and the second
distribution date occurred in March 2007. At December 31, 2005, there
were 199,471 vested 2005 Performance Share Awards outstanding with a
grant-date market value of either $6.26 or Cdn. $7.61 per share.
During the year ended December 31, 2006, 131,751 2005 Performance
Share Awards were issued with a stated value of $0.8 million, and
4,812 2005 Performance Share Awards were forfeited. At December 31,
2006, there were 62,908 vested 2005 Performance Share Awards
outstanding, all of which were issued during the year ended
December 31, 2007, with a stated value of $0.2 million. Accordingly,
there are no 2005 Performance Share Awards remaining to be issued at
December 31, 2007.
In 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 (the "2006 Performance Share
Awards"). During the year ended December 31, 2006, 162,556 2006
Performance Share Awards were granted under the MEC Program with a
weighted average grant-date market value of either $6.80 or Cdn.
$7.63 per share, 1,616 2006 Performance Share Awards were issued with
a nominal stated value, and 42,622 2006 Performance Share Awards were
forfeited. At December 31, 2006, there were 118,318 vested 2006
Performance Share Awards outstanding, of which 111,841 2006
Performance Share Awards were issued during the year ended
December 31, 2007 with a stated value of $0.4 million, and 6,477 2006
Performance Share Awards were forfeited. Accordingly, there are no
2006 Performance Share Awards remaining to be issued at December 31,
2007. MEC did not continue its performance share award program in
2007.
In the year ended December 31, 2007, MEC issued 40,942 (2006 -
25,896) shares of MEC Class A Stock with a stated value of
$0.2 million (2006 - $0.2 million) to MEC's directors in payment of
services rendered.
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:
2007 2006
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price $ Number Price $
-------------------------------------------------------------------------
MEC Stock Options
outstanding,
January 1 4,905,000 6.08 4,827,500 6.14
Forfeited or expired (166,000) 6.74 - -
-------------------------------------------------------------------------
MEC Stock Options
outstanding, March 31 4,739,000 6.06 4,827,500 6.14
Forfeited or expired (25,000) 5.71 (64,000) 6.80
-------------------------------------------------------------------------
MEC Stock Options
outstanding, June 30 4,714,000 6.07 4,763,500 6.13
Granted 390,000 3.20 - -
Forfeited or expired (14,000) 5.20 - -
-------------------------------------------------------------------------
MEC Stock Options
outstanding,
September 30 5,090,000 5.85 4,763,500 6.13
Granted - - 200,000 5.25
Forfeited or expired (140,000) 6.92 (58,500) 7.13
-------------------------------------------------------------------------
MEC Stock Options
outstanding,
December 31 4,950,000 5.82 4,905,000 6.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MEC Stock Options
exercisable,
December 31 4,406,334 5.99 4,412,968 6.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of MEC Stock Options granted is estimated at the date
of grant using the Black-Scholes option valuation model, which
requires the use of subjective assumptions and may not necessarily
provide the only measure of the fair value of MEC Stock Options (as
described further in note 13(a)). 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,
------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Risk-free interest rate - 4.4% 4.2% 4.4%
Expected dividend yield - - - -
Expected volatility of
MEC Class A Stock - 51.0% 55.9% 51.0%
Weighted average
expected life (years) - 4.0 5.0 4.0
Weighted average fair
value per option granted - $2.26 $1.36 $2.26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months and year ended December 31, 2007, MEC
recognized total stock-based compensation expense of $1.4 million
(2006 - $0.3 million) and $0.7 million (2006 - $2.4 million),
respectively, relating to performance share awards, director
compensation and stock options under the MEC Plan.
14. 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 3) - note 3)
2007 2006 2007 2006
-------------------------------------------------------------------------
Real Estate Business
Straight-line rent
adjustment $ 10 $ 115 $ 397 $ 224
Stock-based
compensation
expense 35 644 798 1,407
Depreciation and
amortization 10,960 10,200 41,541 39,225
Interest and other
income from MEC (833) (4,629) (1,132) (16,505)
Gain on disposal
of real estate - - (1,478) (209)
Future income taxes (2,225) 431 (864) 2,439
Dilution and
other gains (7,067) - (7,719) (1,921)
Other 89 77 330 311
-------------------------------------------------------------------------
969 6,838 31,873 24,971
-------------------------------------------------------------------------
MEC
Stock-based
compensation
expense 653 324 1,388 2,393
Depreciation and
amortization 12,580 11,373 41,809 39,694
Interest expense
with MID - 3,678 75 12,167
Amortization of debt
issuance costs 2,341 1,956 3,907 7,193
Write-down of MEC's
long-lived assets (136) 77,445 1,308 77,445
Gain on disposal
of business - (115,193) - (115,193)
Gain on disposal of
real estate (22) - (48,776) (2,883)
Dilution and other
losses (gains), net 3,467 (10) 3,463 (195)
Future income taxes (5,804) (11,852) (7,496) (12,426)
Minority interest (18,929) (3,692) (47,496) (32,768)
Other (1,110) 1,258 (4,043) 1,644
-------------------------------------------------------------------------
(6,960) (34,713) (55,861) (22,929)
-------------------------------------------------------------------------
Eliminations (note 16) (1,257) (853) 48,196 (1,949)
-------------------------------------------------------------------------
Consolidated $ (7,248) $ (28,728) $ 24,208 $ 93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Changes in non-cash balances:
Three Months Ended Year Ended
December 31, December 31,
------------------------- -------------------------
(restated (restated
- note 3) - note 3)
2007 2006 2007 2006
-------------------------------------------------------------------------
Real Estate Business
Accounts receivable $ (1,143) $ 3,562 $ 1,076 $ 1,265
Loans receivable
from MEC, net (252) 368 (380) 619
Prepaid expenses
and other 618 1,290 (126) (656)
Accounts payable and
accrued liabilities (4,525) (7,092) 861 (4,652)
Income taxes 1,258 697 5,834 (294)
Deferred revenue 162 (554) (584) (3,667)
-------------------------------------------------------------------------
(3,882) (1,729) 6,681 (7,385)
-------------------------------------------------------------------------
MEC
Restricted cash (14,148) (8,249) 797 (7,632)
Accounts receivable (5,942) 2,278 (807) 12,736
Prepaid expenses
and other 458 4,921 (1,823) (564)
Accounts payable and
accrued liabilities 32,186 17,323 4,589 2,295
Income taxes 2,342 2,333 2,926 1,246
Loans payable
to MID, net 252 (368) 380 (619)
Deferred revenue 2,349 1,198 128 (1,023)
-------------------------------------------------------------------------
17,497 19,436 6,190 6,439
-------------------------------------------------------------------------
Eliminations (note 16) (522) (162) 22 1,539
-------------------------------------------------------------------------
Consolidated $ 13,093 $ 17,545 $ 12,893 $ 593
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. SEGMENTED INFORMATION
The Company's reportable segments reflect how the Company is organized
and managed by senior management. The Company's operations are segmented
in the Company's internal financial reports between wholly-owned
operations (Real Estate Business) and publicly-traded operations (MEC).
The segregation of operations between wholly-owned and publicly-traded
operations recognizes the fact that, in the case of the Real Estate
Business, the Company's Board of Directors and executive management have
direct responsibility for the key operating, financing and resource
allocation decisions, whereas, in the case of MEC, such responsibility
resides with MEC's separate Board of Directors and executive management.
The Company's reporting segments are as follows:
Real Estate Business
At December 31, 2007, the Real Estate Business owns real estate assets in
Canada, Austria, the United States, Germany, Mexico, the United Kingdom,
the Czech Republic, 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 quarterhorse
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 now expects that a local operator will manage future
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
horseracing content (note 17). A separate joint venture with CDI also
involves the ownership by MEC and CDI of equal (50%) shares in
HorseRacing TV(TM) ("HRTV(TM)"), 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 (note 16), operates an additional
thoroughbred training centre situated near San Diego, California. MEC
also owns and operates production facilities in Austria and in North
Carolina for StreuFex(TM), a straw-based horse bedding product. In
addition to racetracks, MEC's real estate portfolio includes a
residential development in Austria.
As described in note 1, the Company's unaudited interim 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.
16. 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. The Stronach Trust, together with
Open Joint Stock Company Russian Machines ("Russian Machines") and
certain members of Magna's executive management, indirectly holds Magna
Class B Shares representing approximately 71% of the total voting power
of all the outstanding shares of Magna. Furthermore, the Stronach Trust
and Russian Machines each, indirectly, has the right to designate an
equal number of nominees to the Magna board of directors. As a result,
Magna may be considered to be effectively controlled, indirectly, by the
Stronach Trust and Russian Machines. As the Company and Magna may be
considered to be under the common control of the Stronach Trust, they are
considered to be related parties for accounting purposes.
(a) Bridge Loans and Project Financings
On September 13, 2007, MID announced that the MID Lender had agreed
to provide MEC with the MEC Bridge Loan of up to $80.0 million. The
MEC Bridge Loan, together with a $20.0 million private placement of
MEC Class A Stock to FEL (the "FEL Equity Investment") is intended to
provide short-term funding to MEC as it implements the MEC Debt
Elimination Plan. The MID Lender also agreed to amend the MEC Project
Financing Facilities (as defined below) by, among other things,
requiring repayment of at least $100.0 million under the Gulfstream
Park project financing facility on or prior to May 31, 2008 and
waiving the make-whole payment, if applicable, for any repayments
made under either of the MEC Project Financing Facilities prior to
that date. Pursuant to a consulting agreement between MID and MEC,
which requires MEC to reimburse MID for its expenses, MID management
is assisting MEC in implementing the MEC Debt Elimination Plan
(note 1).
(i) MEC Bridge Loan
The MEC Bridge Loan of up to $80.0 million has been made
available through a non-revolving facility provided by the MID
Lender. The MEC Bridge Loan proceeds may only be used by MEC in
accordance with the MEC Debt Elimination Plan and are available
solely to fund: (i) operations; (ii) payments of principal,
interest and costs, fees and expenses due under the MEC Bridge
Loan and the MEC Project Financing Facilities; (iii) mandatory
payments of interest in connection with permitted debt under
the MEC Bridge Loan; (iv) mandatory capital expenditures; and
(v) capital expenditures required pursuant to the terms of the
joint venture arrangements (note 17) between MEC and Forest
City and Caruso.
The MEC Bridge Loan has 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% (16.2% at December 31, 2007). On February 29, 2008, the
interest rate on outstanding and subsequent advances under the
MEC Bridge Loan was increased by a further 1.0%.
The MEC Bridge Loan is secured by certain assets of MEC,
including first ranking security over the Dixon and Thistledown
lands, second ranking security over Golden Gate Fields and the
Ocala lands and third ranking security over Santa Anita Park.
In addition, the MEC Bridge Loan is guaranteed by certain MEC
subsidiaries and MEC has pledged the shares and all other
interests MEC has in each of the guarantor subsidiaries (or
provided negative pledges where a pledge was not possible due
to regulatory constraints or due to a pledge to an existing
third party lender). The MEC Bridge Loan is cross-defaulted to
all other obligations of MEC and its subsidiaries to the MID
Lender, including the MEC Project Financing Facilities.
The MEC Bridge Loan must be repaid with, and the commitment
will be reduced by, amounts equal to all net proceeds realized
by MEC from asset sales and issuances of equity (other than the
FEL Equity Investment) or debt, subject to amounts required to
be paid to MEC's existing lenders. Amounts repaid cannot be re-
borrowed.
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). The MID Lender also receives an
annual commitment fee equal to 1% of the undrawn facility. All
fees, expenses and closing costs incurred by the MID Lender in
connection with the MEC Bridge Loan were paid by MEC.
Pursuant to the terms of the MEC Bridge Loan, advances after
January 15, 2008 are subject to the MID Lender being satisfied
that the MEC Credit Facility will be further extended to at
least April 30, 2008 or that a satisfactory refinancing of that
facility has been arranged. As the MEC Credit Facility was
extended to March 31, 2008 (note 8), the MID Lender waived this
condition for advances between January 15, 2008 and March 31,
2008.
At December 31, 2007, $36.9 million under the MEC Bridge Loan
was included in the Real Estate Business' current portion of
"loans receivable from MEC, net" on the Company's unaudited
interim consolidated balance sheet, net of $1.4 million of
unamortized deferred arrangement fees. MEC's current portion of
"loans payable to MID, net" on the Company's unaudited interim
consolidated balance sheet includes $35.9 million, net of
$2.4 million unamortized deferred financing costs. This net
balance is being accreted to its face value over the term to
maturity of the MEC Bridge Loan.
(ii) MEC Project Financings
The MID Lender has made available separate project financing
facilities to Gulfstream Park Racing Association, Inc. ("GPRA")
and Remington Park, Inc. ("Remington Park"), 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, Palm Meadows and Remington
Park and over all other assets of Gulfstream Park, Palm Meadows
and Remington Park, excluding licences and permits (which
cannot be subject to security under applicable legislation).
Prior to the relevant completion date, amounts outstanding
under each of the MEC Project Financing Facilities (other than
the new tranches of the Gulfstream Park project financing
facility described below) bore interest at a floating rate
equal to 2.55% above MID's per annum notional cost of borrowing
under its floating rate credit facility, compounded monthly.
Since the relevant completion date (or since inception for the
new tranches of the Gulfstream Park project financing facility
described below), 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 described below, for which the interest
capitalization period was extended). However, since the
completion date for Remington Park, there has been in place a
mandatory annual cash flow sweep of not less than 75% of
Remington Park's total excess cash flow, after permitted
capital expenditures and debt service, which is used to pay
capitalized interest on the Remington Park project financing
facility plus a portion of the principal under the facility
equal to the capitalized interest on the Gulfstream Park
project financing facility. During the three months and year
ended December 31, 2007, $0.7 million ($2006 - $1.6 million)
and $4.0 million (2006 - $5.0 million), respectively, of such
payments were made. Commencing January 1, 2007, the MID Lender
is entitled to receive monthly blended payments of principal
and interest based on a 25-year amortization period under each
of the MEC Project Financing Facilities (except in relation to
the December 2006 tranche of the Gulfstream Park project
financing facility described below, for which the interest
capitalization period was extended to May 1, 2007, at which
time monthly payments commenced).
In June 2006, the MID Lender consented to the release and
transfer to MEC of up to an aggregate of $10.0 million of funds
from the subsidiaries that operate the racetracks at Gulfstream
Park and Remington Park, subject to approval by MID management
over the amount and timing of such releases. Such funds, which
would ordinarily be "trapped" at the applicable subsidiaries
pursuant to the terms of the MEC Project Financing Facilities,
were in excess of the existing cash requirements of the
applicable subsidiaries and were used by MEC solely to fund
payments that were necessary in connection with the operation
of the business of MEC and that could not be deferred on a
commercially reasonable basis. The MID Lender received waiver
fees of $0.1 million (1% of the full amount released), which
fees were capitalized under the applicable project financing
facility.
In July 2006 and December 2006, the Gulfstream Park project
financing facility was amended to increase the amount available
from $115.0 million (plus costs and capitalized interest) by
adding new tranches of up to $25.8 million (plus costs and
capitalized interest) and $21.5 million (plus costs and
capitalized interest), respectively. Both tranches were
established to fund MEC's design and construction of slot
machine facilities located in the existing Gulfstream Park
clubhouse building, as well as related capital expenditures and
start-up costs, including the acquisition and installation of
slot machines. The new tranches of the Gulfstream Park project
financing facility both mature on December 31, 2011. Interest
under the December 2006 tranche was capitalized until May 1,
2007, at which time monthly blended payments of principal and
interest became payable to the MID Lender based on a 25-year
amortization period commencing on such date. Advances relating
to the slot machine tranches are made available by way of
progress draws and there is no make-whole payment associated
with the new tranches. Also in July 2006, the Gulfstream Park
project financing facility was further amended to introduce a
mandatory annual cash flow sweep of not less than 75% of
Gulfstream Park's total excess cash flow, after permitted
capital expenditures and debt service, which will be used to
repay the additional principal amounts being made available
under the new tranches. The July 2006 and December 2006
amendments did not affect the fact that the Gulfstream Park
project financing facility continues to be cross-guaranteed,
cross-defaulted and cross-collateralized with the Remington
Park project financing facility. The consideration for the July
2006 and December 2006 amendments was an arrangement fee of 1%
of the amount of each new tranche, which amounts are
capitalized under the Gulfstream Park project financing
facility.
In September 2007, the terms of the Gulfstream Park project
financing facility were amended such that: (i) MEC was added as
a guarantor under that facility; (ii) the borrower and all of
the guarantors agreed to use commercially reasonable efforts to
implement the MEC Debt Elimination Plan (including the sale of
specific assets by the time periods listed in the MEC Debt
Elimination Plan); and (iii) the borrower became obligated to
repay at least $100.0 million under the Gulfstream Park project
financing facility on or prior to May 31, 2008. In
consideration of these amendments and subject to certain
conditions, the MID Lender agreed to waive the make-whole
payment for any repayments made under the MEC Project Financing
Facilities on or prior to May 31, 2008 and adjust the
amortization schedule for the Gulfstream Park project financing
facility following receipt of the $100.0 million repayment,
provided that (i) repayments under the Gulfstream Park project
financing facility are first applied to the July 2006 slots
tranche, then to the December 2006 slots tranche (for each of
which there is no make-whole payment), and then to the original
tranche and (ii) no event of default exists under the MEC
Project Financing Facilities.
At December 31, 2007, there were balances of $133.5 million
(December 31, 2006 - $134.8 million), $24.7 million
(December 31, 2006 - 19.4 million) and $13.9 million
(December 31, 2006 - nil) due under the initial tranche, the
July 2006 slots tranche and the December 2006 slots tranche,
respectively, of the Gulfstream Park project financing
facility. A balance of $27.7 million (December 31, 2006 -
$31.7 million) was due under the Remington Park project
financing facility. The current portion of the MEC Project
Financing Facilities included in the Real Estate Business'
"loans receivable from MEC, net" at December 31, 2007 was
$102.2 million (December 31, 2006 - $3.1 million), including
the required $100.0 million repayment discussed above. The
current and non-current portions of the MEC Project Financing
Facilities of $137.4 million (including $0.4 million in MEC's
"discontinued operations" (note 3)) and $93.2 million
(including $26.1 million in MEC's "discontinued operations"
(note 3)), respectively, as reflected in MEC's "loans payable
to MID, net" on the Company's unaudited interim consolidated
balance sheet, are net of $0.7 million and $4.3 million,
respectively, of unamortized deferred financing costs. These
net balances are being accreted to their face values over the
terms to maturity of the MEC Project Financing Facilities.
Subsequent to year-end, 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 subsequent to year-end.
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. In addition, in November
2006, MEC deposited into the Gulfstream Escrow sufficient
proceeds from the sale of The Meadows to repay all remaining
indebtedness under a loan from BE&K, Inc. ("BE&K"), the parent
company of Suitt Construction Co. Inc., the general contractor
for the Gulfstream Park redevelopment project (the "BE&K
Loan"). At December 31, 2007, the amount held under the
Gulfstream Escrow (including accrued interest) was $4.5 million
(December 31, 2006 - $6.5 million). All funds in the Gulfstream
Escrow are reflected as the Real Estate Business' "restricted
cash" and "due to MEC" on the Company's unaudited interim
consolidated balance sheet.
(iii) 2005 MEC Bridge Loan
In July 2005, the MID Lender provided MEC with the 2005 MEC
Bridge Loan of up to $100.0 million, expiring August 31, 2006.
The amount of available funding under the 2005 MEC Bridge Loan
was subsequently increased to $119.0 million and the term was
extended to December 5, 2006. On November 14, 2006, MEC used
part of the proceeds received in connection with the sale of
The Meadows to repay in full the 2005 MEC Bridge Loan.
Accordingly, the 2005 MEC Bridge Loan was terminated.
Approximately $12.7 million of external third party costs have been
incurred, including $1.3 million and $2.4 million in the three months
and year ended December 31, 2007, respectively, in association with
the MEC Bridge Loan, the MEC Project Financing Facilities and the
2005 MEC Bridge Loan. At the MEC segment level, these costs are
recognized as deferred financing costs and are being amortized into
interest expense (of which a portion has been capitalized in the case
of the MEC Project Financing Facilities) over the respective term of
the MEC Bridge Loan, each of the MEC Project Financing Facilities
and the 2005 MEC Bridge Loan. At a consolidated level, such costs are
charged to "general and administrative" expenses in the periods in
which they are incurred.
All interest and fees charged by the Real Estate Business relating to
the MEC Bridge Loan, the MEC Project Financing Facilities and the
2005 MEC Bridge Loan, 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) FEL Equity Investment
The closing of the FEL Equity Investment occurred on October 29,
2007. FEL purchased 8,888,888 shares of MEC Class A Stock at a price
per share of $2.25, 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) U.S. $1.91, 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 months and year
ended December 31, 2007, which is included in "dilution and other
gains (losses), net" in the Company's unaudited interim consolidated
statement of income (loss).
(c) MEC Real Estate Acquired by MID
During the first quarter of 2007, MID acquired all of MEC's interests
and rights in three real estate properties to be held for future
development: a 34 acre parcel in Aurora, Ontario; a 64 acre parcel of
excess land adjacent to MEC's racetrack at Laurel Park in Howard
County, Maryland; and a 157 acre parcel (together with certain
development rights) in Palm Beach County, Florida adjacent to MEC's
Palm Meadows Training Center. MID paid cash consideration of
approximately Cdn. $12.0 million ($10.1 million), $20.0 million and
$35.0 million, respectively, for these interests and rights. In
addition, MID granted MEC a profit participation right in respect of
each property, which entitles MEC to receive additional cash proceeds
equal to 15% of the net proceeds from any sale or development of the
applicable property after MID achieves a 15% internal rate of return.
During the second quarter of 2007, MID acquired all of MEC's interest
and rights in a 205 acre parcel of land located in Bonsall,
California for cash consideration of approximately $24.0 million. The
property currently houses the San Luis Rey Downs Thoroughbred
Training Facility operated by MEC. This property is being held by MID
for future development and MID has agreed to lease the property to
MEC on a triple-net basis for nominal rent while MID pursues the
necessary development entitlements and other approvals. The lease
terminates on June 6, 2010, 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, 2007 of
$48.8 million. 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.
(d) 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, for the year ended
December 31, 2007, $2.0 million of costs, based on the carrying value
of the land donated, have been included in the Real Estate Business'
"general and administrative" expenses. The founding members and
officers of the not-for-profit organization are officers and
employees of MID and Magna.
(e) MEC's Sales to Magna
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 for a purchase price of 20.0 million euros
($29.4 million), subject to customary adjustments. The closing of the
transaction is expected to occur during the first quarter of 2008
(note 4(b)). The sale of this property has not been recognized in the
unaudited interim consolidated financial statements and the property
is included in MEC's "assets held for sale" on the Company's
unaudited interim consolidated balance sheet at December 31, 2007.
On March 31, 2006, MEC sold a real estate property held for sale and
located in the United States to Magna. A gain on sale of $2.9 million
was recognized based on the cash consideration received, net of
transaction costs, of $5.6 million. MEC used the net proceeds from
this transaction to repay principal amounts outstanding under the MEC
Credit Facility (note 8).
(f) MEC's Option to Acquire The Maryland Jockey Club
On September 24, 2007, MEC exercised its option to acquire the
remaining voting and equity interests in MJC, pursuant to an
agreement with certain companies controlled by Joseph De Francis, a
member of MEC's Board of Directors, and Karin De Francis. Under the
terms of the option agreement, MEC paid $18.3 million plus interest
on October 5, 2007. At December 31, 2006, this obligation was
reflected in MEC's "long-term debt due within one year" on the
Company's unaudited interim consolidated balance sheet and was
secured by letters of credit under the MEC Credit Facility (note 8).
17. 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 August 2, 2005, Greenlight Capital, Inc. and certain of its
affiliates ("Greenlight") filed an oppression application in the
Ontario Superior Court of Justice against the Company and certain of
its current and former directors and officers. The hearing of the
application concluded on March 1, 2006 and on October 30, 2006, the
Ontario Superior Court of Justice dismissed the oppression
application. On November 29, 2006, Greenlight filed a Notice of
Appeal with the Ontario Divisional Court and on January 30, 2007,
Greenlight filed its Appellants' factum. The Company and the other
respondents filed their responding facta in July 2007 and the Company
expects the appeal hearing to take place in late April 2008. The
Company continues to consider Greenlight's oppression claim to be
without merit and, together with the other respondents, will
vigorously defend against the appeal.
(c) MEC generates a substantial amount of its revenues from wagering
activities and is subject to the risks inherent in the ownership and
operation of 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.
(d) On May 18, 2007, ODS Technologies, L.P., doing business as TVG
Network, filed a summons against MEC, HRTV, LLC and XpressBet, Inc.
seeking an order that the defendants be enjoined from infringing
certain patents relating to interactive wagering systems and an award
of damages to compensate for the infringement. An Answer to
Complaint, Affirmative Defences and Counterclaims have been filed on
behalf of the defendants. At the present time, the final outcome
related to this summons is uncertain.
(e) In addition to the letters of credit issued under the Company's
credit facilities (note 8), the Company had $4.7 million (Real Estate
Business - $3.6 million; MEC - $1.1 million) of letters of credit
issued with various financial institutions at December 31, 2007 to
guarantee various of its construction projects. These letters of
credit are secured by cash deposits of the Company.
(f) MEC has provided indemnities related to surety bonds and letters of
credit issued in the process of obtaining licences and permits at
certain racetracks and to guarantee various construction projects
related to activities of its subsidiaries. At December 31, 2007,
these indemnities amounted to $6.3 million, with expiration dates
through 2009.
(g) At December 31, 2007, the Company's contractual commitments related
to construction and development projects outstanding amounted to
approximately $7.8 million (Real Estate Business - $3.6 million;
MEC - $4.2 million).
(h) At December 31, 2007, MEC had outstanding interest rate swap
contracts in connection with SAC's term loan facility (note 8),
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 contact, 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.
(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(TM), 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(TM).
TrackNet Media is the vehicle through which MEC and CDI horseracing
content is made available to third parties, including racetracks, OTB
facilities, casinos and advance deposit wagering ("ADW") companies.
TrackNet Media purchases horseracing content from third parties and
makes it available through the respective MEC and CDI outlets. Under
the reciprocal content swap agreement, MEC and CDI exchange their
respective horseracing signals. On March 4, 2007, HRTV, LLC was
created, with an effective date of April 27, 2007, in order to
facilitate the sale of 50% of HRTV(TM) 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. MEC's share of the required capital
contributions to HRTV, LLC is expected to be approximately
$7.0 million, of which $2.0 million was contributed to December 31,
2007.
(j) On November 15, 2006, MEC's wholly-owned subsidiary, GPRA, opened the
slots facility at Gulfstream Park despite an August 2006 decision
rendered by the Florida First District Court of Appeals that reversed
a lower court decision that granted summary judgment in favour of
"Floridians for a Level Playing Field" ("FLPF"), a group in which
GPRA is a member. The Appeal Court ruled that a trial is necessary to
determine whether the constitutional amendment adopting the slots
initiative, approved by Floridians in the November 2004 election, was
invalid because the petitions bringing the initiative forward did not
contain the minimum number of valid signatures. FLPF filed an
application for a rehearing, a rehearing en banc before the full
panel of the Florida First District Court of Appeals and
Certification by the Florida Supreme Court. On November 30, 2006, in
a split decision, the en banc court affirmed the August 2006 panel
decision and certified the matter to the Florida Supreme Court, which
stayed the appellate court ruling pending its jurisdictional review
of the matter. On September 27, 2007, the Florida Supreme Court ruled
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 over a year 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, 2007, the carrying value of MEC's fixed assets related
to the slots facility is approximately $29.6 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. However, to
December 31, 2007, MEC has not made any such contributions. At
December 31, 2007, approximately $42.3 million of 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 Forest City. Included in MEC's "accounts
payable and accrued liabilities" is an obligation of approximately
$5.8 million reflecting MEC's 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. 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. If either
Westfield or Arcadia First! is ultimately successful in its
challenge, development efforts could potentially be delayed or
suspended. The first hearings on the merits of the petitioners'
claims are scheduled for April 2008. Under an April 2004 Letter of
Intent, MEC is also exploring the possibility of a joint venture with
Caruso to develop excess lands surrounding Golden Gate Fields. To
December 31, 2007, MEC has expended $9.9 million on these development
initiatives, of which $3.6 million was paid in the year ended
December 31, 2007. These amounts have been included in MEC's "real
estate properties, net" on the Company's unaudited interim
consolidated balance sheets. Under the terms of these arrangements,
MEC may be responsible to fund additional costs. However, to
December 31, 2007, no such payments have been made.
(m) The Maryland Jockey Club ("MJC") was party to agreements with the
Maryland Thoroughbred Horsemen's Association and the Maryland
Breeders' Association, which expired on December 31, 2007, under
which the horsemen and the breeders each contributed 4.75% of the
costs of simulcasting to MJC. Without similar arrangements in effect,
there would be an increase in costs to MJC of approximately
$2.0 million. At this time, it is uncertain whether these agreements
will be renewed on comparable terms.
(n) The Meadows (note 3) used to participate in a multi-employer defined
benefit pension plan for which the pension plan's total vested
liabilities exceeded the plan's assets. An updated actuarial
valuation is in the process of being obtained, however, based on
allocation information currently provided by the plan, the portion of
the estimated unfunded liability for vested benefits attributable to
The Meadows is approximately $3.7 million. Effective November 1,
2007, the New Jersey Sports & Exposition Authority withdrew from this
plan and, effective December 25, 2007, The Meadows also withdrew from
the plan. As part of the indemnification obligations provided for in
the Meadows Holdback Note (note 3), the 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.
18. SUBSEQUENT EVENTS
(a) Effective January 1, 2008, MEC amended its bank term loan of up to
4.0 million euros (note 8) to reduce the amount available to
3.5 million euros and increase the interest rate to EURONIA plus 3.8%
per annum.
(b) On February 12, 2008, MEC amended its 15.0 million euro term loan
facility (note 8) such that the first instalment of 7.5 million euros
previously due on February 29, 2008 was extended until March 15,
2008.
(c) On February 12, 2008, MEC received notice from The Nasdaq Stock
Market advising that, in accordance with Nasdaq Marketplace Rule
4450(e)(2), MEC has 180 calendar days, or until August 11, 2008, to
regain compliance with the minimum bid price for MEC Class A Stock
required for continued listing on the Nasdaq Global Market, as set
forth in Nasdaq Marketplace Rule 4450(a)(5). MEC received this notice
because the bid price of the MEC Class A Stock closed below the $1.00
per share minimum for 30 consecutive business days prior to
February 12, 2008.
The notice also states that if, at any time before August 11, 2008,
the bid price of MEC Class A Stock on the Nasdaq Global Market closes
at $1.00 per share or more for a minimum of 10 consecutive trading
days, the Nasdaq staff will provide MEC with written notification
that it has achieved compliance with its listing requirements.
However, the notice states that if MEC cannot demonstrate compliance
with such rule by August 11, 2008 (or such later date as may be
permitted by Nasdaq), the Nasdaq staff will provide MEC with written
notification that the MEC Class A Stock will be delisted. During this
180 calendar day period, MEC Class A Stock will continue to trade on
the Nasdaq Global Market. This notification has no effect on the
listing of the MEC Class A Stock on the TSX.
For further information: Richard Smith, Executive Vice-President and
Chief Financial Officer, at (905) 726-7507; For teleconferencing questions,
please contact Angie Palmer at (905) 726-7508
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