MI Developments announces 2008 third quarter results
AURORA, ON, Nov. 7 /CNW/ - MI Developments Inc. (TSX: MIM.A, MIM.B; NYSE:
MIM) ("MID" or the "Company") today announced its results for the three and
nine months ended September 30, 2008. All figures are in U.S. dollars.
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(in thousands,
except per share
figures) REAL ESTATE BUSINESS(1)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenues $ 55,312 $ 47,316 $ 164,646 $ 138,156
Net income $ 42,821 $ 27,413 $ 100,073 $ 72,576
Funds from operations
("FFO")(2) $ 52,912 $ 37,292 $ 135,769 $ 102,777
Diluted FFO per
share(2) $ 1.13 $ 0.77 $ 2.91 $ 2.12
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(in thousands,
except per share
figures) MID CONSOLIDATED(1)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenues
Real Estate
Business $ 55,312 $ 47,316 $ 164,646 $ 138,156
Magna Entertainment
Corp. ("MEC")(3) 82,323 82,151 480,541 504,399
Eliminations (10,163) (5,392) (26,914) (15,336)
------------ ------------ ------------ ------------
$ 127,472 $ 124,075 $ 618,273 $ 627,219
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss)
Real Estate
Business $ 42,821 $ 27,413 $ 100,073 $ 72,576
MEC - continuing
operations (27,273) (26,149) (34,607) 14,823
Eliminations (763) (1,816) (443) (55,091)
------------ ------------ ------------ ------------
Income (loss) from
continuing
operations 14,785 (552) 65,023 32,308
MEC - discontinued
operations(4) 1,920 (2,266) (13,680) (4,288)
------------ ------------ ------------ ------------
$ 16,705 $ (2,818) $ 51,343 $ 28,020
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings
(loss) per share
from continuing
operations $ 0.32 $ (0.01) $ 1.39 $ 0.67
Diluted earnings
(loss) per share $ 0.36 $ (0.06) $ 1.10 $ 0.58
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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 inves tors in evaluating the operating performance of real estate
companies. However, FFO does not have a standardized meaning under
Canadian generally accepted accounting principles ("GAAP") and
therefore may not be comparable to similar measures presented by
other companies. Please refer to "Reconciliation of Non-GAAP to GAAP
Financial Measures" below.
(3) Excludes revenues from MEC's discontinued operations.
(4) Discontinued operations represent MEC's discontinued operations, net
of certain related consolidation adjustments. MEC's discontinued
operations for the three-month and nine-month periods ended
September 30, 2008 and 2007 include the operations of Remington Park,
Thistledown, Portland Meadows, Great Lakes Downs and Magna Racino
(TM).
DISCUSSIONS WITH MID SHAREHOLDERS AND POTENTIAL REORGANIZATION
--------------------------------------------------------------
TRANSACTION
-----------
Since shortly after the time of the Company's spin-off from Magna
International Inc. ("Magna") in August 2003, certain of the Company's
shareholders have expressed different views as to how the Company should be
structured, managed and operated. These views have been expressed in a variety
of forms, including confidential discussions among the Company and
shareholders, formal shareholder proposals, special meeting requisitions and
litigation (the "Greenlight Litigation" - see note 20(b) to the financial
statements attached below). The Company has had a controlling equity interest
in MEC since the time of the Company's spin-off. As a result of MEC's ability
to continue as a going concern being in substantial doubt (see "MEC LIQUIDITY
AND GOING CONCERN"), the Company's relationship with MEC has been the subject
of particular focus in the Company's interactions with its shareholders.
On March 31, 2008, MID received a reorganization proposal on behalf of
various shareholders of MID, including entities affiliated with the Stronach
Trust, MID's controlling shareholder. The principal components of the
reorganization proposal are set out in MID's press release dated March 31,
2008, which can be found on the Company's website at www.midevelopments.com
and on SEDAR at www.sedar.com. The stated objective of the reorganization was
to (a) effect a substantial cash distribution to MID shareholders and (b)
create a focused real estate investment vehicle, which would distribute 80% of
its available cash flow, in which the interests of all shareholders would be
fully aligned. The reorganization proposal included the separation of MID and
MEC.
Following the announcement of the reorganization proposal, certain of the
Company's shareholders expressed their opposition to the proposal.
Accordingly, in early June 2008, at the direction of a special committee of
independent directors (the "MID Special Committee"), MID management commenced
discussions with a number of MID Class A shareholders, including those
shareholders that had supported the original reorganization proposal, in order
to develop a consensus on how best to amend and structure the proposed
reorganization to achieve the requisite level of shareholder support.
On August 22, 2008, MID announced that it had retained GMP Securities
L.P. ("GMP") as a financial advisor to liaise with shareholders in an attempt
to develop a consensus on how best to reorganize MID. No consensus was reached
with respect to amendments that would have resulted in a revised
reorganization proposal that MID would have been asked to put before its
shareholders for their consideration, and although GMP continues to liaise
with the Company's shareholders, discussions with respect to the
reorganization proposal have effectively terminated.
Dennis Mills, Vice-Chairman & Chief Executive Officer, stated, "I remain
optimistic that, working with GMP, we will be able to develop a transaction
that will attract the necessary shareholder support to proceed."
MID is continuing to explore strategic transactions and alternatives
available in respect of its investment in MEC, including a recapitalization,
restructuring or sales of some or all of MEC's assets, and evaluating whether,
or to what extent, MID might participate in any such transactions or
alternatives. In October 2008, several MID shareholders sent letters to the
MID Special Committee and/or MID's Board of Directors (the "Board") expressing
their views as to the process and as to how best to reorganize MID, including
dealing with MID's investment in MEC, and one other person that is involved in
the U.S. horseracing industry has proposed that MID sell to such person MID's
loans to MEC. Many of these letters have been publicly filed with the United
States Securities and Exchange Commission. Any potential transactions with MEC
would be subject to review by the MID Special Committee and the approval of
the Board. There can be no assurance that any transaction will be completed.
MEC LIQUIDITY AND GOING CONCERN
-------------------------------
In September 2007, following a strategic review, MEC announced a debt
elimination plan (the "MEC Debt Elimination Plan") designed to eliminate MEC's
net debt by December 31, 2008 and provide funding for MEC's operations. To
address MEC's short-term liquidity concerns and provide it with sufficient
time to implement the MEC Debt Elimination Plan, MID made available, through
one of its subsidiaries (the "MID Lender"), a bridge loan to MEC (the "MEC
Bridge Loan") with an initial maximum commitment of $80.0 million and a
maturity date of May 31, 2008 (subsequently increased to $125.0 million and
extended to December 1, 2008 as discussed below). The MEC Debt Elimination
Plan also included a $20.0 million private placement to Fair Enterprise
Limited, a company that forms part of an estate planning vehicle for the
family of Mr. Frank Stronach (the Company's Chairman and the Chairman and
Chief Executive Officer of MEC), of MEC Class A Stock, which closed in October
2007.
To date, MEC has generated aggregate asset sale proceeds under the MEC
Debt Elimination Plan of $37.7 million, of which $26.0 million has been used
to make repayments under the MEC Bridge Loan. Although MEC continues to take
steps to implement its plan, MEC does not expect to be able to complete asset
sales as quickly as originally planned nor does MEC expect to achieve proceeds
of disposition as high as originally contemplated.
On November 5, 2008, MEC announced that it had engaged Miller Buckfire &
Co., LLC ("Miller Buckfire") as its financial advisor and investment banker to
review and evaluate various strategic alternatives, including additional asset
sales, financing and balance sheet restructuring opportunities. MEC also
announced that, as a result of the negative impact the weak real estate and
credit markets have had on its ability to sell non-core assets, MEC intends to
work with Miller Buckfire to develop and execute a plan to sell, or enter into
joint ventures with respect to, one or more of its core racetracks in order to
strengthen its balance sheet and liquidity position.
MID management expects that MEC will be unable at December 1, 2008 to
repay the MEC Bridge Loan or make the required $100.0 million repayment under
the Gulfstream Park project financing facility (see "CHANGES TO MEC LOANS").
Furthermore, MID management expects that MEC will again need to seek
extensions from existing lenders, including MID, and additional funds in the
short-term from one or more possible sources, which may include MID. If MEC is
unable to repay its obligations when due or satisfy required covenants in its
debt agreements, substantially all of its current and long-term debt will also
become due on demand as a result of cross-default provisions within loan
agreements, unless MEC is able to obtain waivers, modifications or extensions.
The availability of any required waivers, modifications, extensions or
additional funds is not assured and, if available, the terms thereof are not
yet determinable. If MEC is unsuccessful in its efforts, it could be required
to liquidate assets in the fastest manner possible to raise funds, seek
protection from its creditors in one or more ways, or be unable to continue as
a going concern. Accordingly, MEC's ability to continue as a going concern is
in substantial doubt.
Mr. Mills added, "I believe that MEC has tremendous assets and potential
upside. I am also encouraged by MEC's announcement earlier this week that it
has engaged a financial advisor to help develop and execute a plan to sell, or
enter into joint ventures with respect to, certain core assets and enhance
MEC's capital structure. Although I have no doubt that it will be a challenge,
I still believe there is an opportunity to turn things around at MEC."
CHANGES TO MEC LOANS
--------------------
Given that the sale of MEC assets under the MEC Debt Elimination Plan
continues to take longer than originally contemplated, in May 2008, the
maximum commitment available to MEC under the MEC Bridge Loan was increased to
$110.0 million and the maturity date was extended to August 31, 2008. MEC was
also permitted to redraw certain amounts that it had previously repaid under
the MEC Bridge Loan.
On August 13, 2008, the maturity date of the MEC Bridge Loan was extended
to September 30, 2008. On September 15, 2008, the maturity date of the MEC
Bridge Loan was extended to October 31, 2008. On October 15, 2008, the maximum
commitment available to MEC under the MEC Bridge Loan was increased to $125.0
million, MEC was permitted to redraw certain amounts that it had previously
repaid under the MEC Bridge Loan and the maturity date was extended to
December 1, 2008.
MEC is also obligated to repay $100 million of indebtedness under the
Gulfstream Park project financing facility (see note 19(a)(ii) of the
financial statements attached below) with the MID Lender by December 1, 2008.
The maturity date for this repayment has been extended concurrently with the
extensions to the maturity date of the MEC Bridge Loan described above.
At the same time that the MID Lender made the changes to the MEC Bridge
Loan and Gulfstream Park project financing facility discussed above, changes
were made to MEC's $40.0 million senior secured revolving credit facility with
a Canadian financial institution (the "MEC Credit Facility" - see note 9(a) to
the financial statements attached below), which currently matures on November
17, 2008. MEC is in discussions with the Canadian financial institution about
possible further extensions to the MEC Credit Facility.
OUR RELATIONSHIP WITH MAGNA AND PRESSURES IN THE AUTOMOTIVE INDUSTRY
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The Magna group contributes approximately 98% of the rental revenues of
our Real Estate Business and Magna continues to be our principal tenant.
However, the level of business MID has received from Magna has declined
significantly over the past three years. This decline is primarily due to:
pressures in the automotive industry (primarily in North America, although now
spreading globally) and Magna's plant rationalization strategy, which have
resulted in the closing of a number of manufacturing facilities in high cost
countries; and uncertainty over MID's ownership structure and strategic
direction due largely to the Greenlight Litigation. Although MID continues to
explore alternatives to re-establish a strong and active relationship with
Magna, and although Greenlight's appeal has now been dismissed, these factors
may translate into a more permanent reduction in the quantum of business that
MID receives from Magna. Our income-producing property portfolio decreased
from 109 properties, representing 27.5 million square feet of leaseable area,
at the end of 2006 to 105 properties at September 30, 2008, representing 27.3
million square feet of leaseable area.
Given the concentration of our rental portfolio with the Magna group, a
number of trends that have had a significant impact on the global automotive
industry in recent years have also had an impact on the Real Estate Business.
These trends, certain of which have significantly intensified in recent months
as a result of negative economic developments, the global financial crisis,
falling consumer confidence and other related factors, include: lower than
anticipated global consumer demand for automobiles, declining North American
vehicle production volumes, the deteriorating financial condition of certain
of Magna's largest customers and their potential consolidation, pricing
pressures and the growth of the automotive industry in low cost countries.
These trends and the competitive and difficult environment existing in the
automotive industry have resulted in Magna seeking to take advantage of lower
operating cost countries and consolidating, moving, closing and/or selling
operating facilities to align its capacity utilization and manufacturing
footprint with vehicle production and consumer demand. Magna has disclosed
that it anticipates North American and Western European vehicle production to
continue to decline in the fourth quarter of 2008 and that it expects to close
additional facilities in North America and Western Europe in 2008 and beyond,
while growing its manufacturing presence in new markets, including Asia and
Eastern Europe (where MID to date has not had a significant presence). Magna's
rationalization strategy currently includes six facilities under lease from
the Company in North America with an aggregate net book value of $24.1
million. These six facilities represent 908 thousand square feet of leaseable
area with annualized lease payments of approximately $3.4 million, or 1.9%, of
MID's annualized lease payments at September 30, 2008. MID management expects
that the global automotive industry downturn and challenging economic
conditions may result in a broadening of Magna's plant rationalization
strategy to include additional MID facilities.
REAL ESTATE BUSINESS FINANCIAL RESULTS
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Operating Highlights
In respect of our core rental portfolio, during the third quarter of 2008
we brought on-stream two expansion projects (one in each of Mexico and
Germany) for Magna, representing approximately 59 thousand square feet of
leaseable area, at a cost of $6.5 million.
At September 30, 2008, the Real Estate Business had four minor projects
under development: three in Canada and one in Austria. These projects
commenced in the first nine months of 2008 and will add an aggregate of 20
thousand square feet of leaseable area to the Real Estate Business' income-
producing portfolio. The total anticipated cost of these projects is
approximately $7.3 million, of which $0.5 million had been incurred at
September 30, 2008.
At September 30, 2008, the Real Estate Business had 27.3 million square
feet of leaseable area, with annualized lease payments of $179.9 million,
representing a return of 10.9% on the gross carrying value of our income-
producing portfolio.
Three Months Ended September 30, 2008
Revenues were $55.3 million in the third quarter of 2008, a 17% increase
from revenues of $47.3 million in the third quarter of 2007. The higher
revenues are due to a $3.2 million increase in rental revenues and a $4.8
million increase in interest and other income earned from MEC due to increased
interest and fees earned under the MEC Bridge Loan. The higher rental revenues
are partially due to foreign exchange, which had a $1.6 million positive
impact as the U.S. dollar weakened, compared to the prior year period, against
most foreign currencies (primarily the euro) in which the Real Estate Business
operates. Contractual rent adjustments and Magna projects coming on-stream
also had a higher than normal impact, increasing revenues by $1.8 million and
$0.6 million, respectively. These positive contributions to rental revenues
were partially offset by a $0.8 million reduction from property vacancies and
renewals of leases, resulting partially from activities related to Magna's
plant rationalization strategy.
FFO for the third quarter of 2008 was $52.9 million ($1.13 per share)
compared to $37.3 million ($0.77 per share) in the prior year period,
representing an increase of 42% (47% on a per share basis). FFO for the third
quarter of 2008 includes (i) an $8.7 million current tax recovery from
revisions to estimates of certain tax exposures and the ability to benefit
from certain income tax loss carryforwards previously not recognized, both
driven by the results of tax audits in certain tax jurisdictions (see note 13
to the financial statements attached below), and (ii) a $0.8 million current
tax recovery (offset by an equal future tax expense) resulting from the
internal restructuring of one of the Real Estate Business' U.S. operating
entities. FFO for the third quarter of 2007 includes a net $1.1 million
current tax recovery, primarily due to a favourable tax reassessment received
in the third quarter of 2007 in relation to land sold in a prior year.
Excluding these items, FFO for the third quarter of 2008 was $43.4 million
($0.93 per share), representing a 20% increase from FFO for the third quarter
of 2007 of $36.2 million ($0.75 per share). This $7.2 million increase is due
to an $8.0 million increase in revenues and a $1.7 million reduction in
current income tax expense (excluding current income taxes associated with
disposal gains in the third quarter of 2007), partially offset by increases of
$1.9 million in general and administrative expenses and $0.6 million in net
interest expense.
General and administrative expenses in the third quarter of 2008
increased by $1.9 million to $6.3 million from $4.4 million in the third
quarter of 2007. General and administrative expenses for the third quarter of
2008 include (i) $1.2 million of advisory and other costs incurred in
connection with the reorganization proposal and the exploration of
alternatives in respect of MID's investment in MEC (see "DISCUSSIONS WITH MID
SHAREHOLDERS AND POTENTIAL REORGANIZATION TRANSACTION") and (ii) a $1.0
million bonus payment paid to MID's former Chief Executive Officer following
the Company's announcement of his departure in August 2008 (the "CEO Bonus
Payment"). Excluding these items, general and administrative expenses of $4.1
million for the third quarter of 2008 decreased slightly compared to $4.4
million in the third quarter of 2007.
Net interest expense was $2.4 million in the third quarter of 2008 ($3.7
million of interest expense less $1.3 million of interest income) compared to
$1.9 million in the third quarter of 2007 ($3.9 million of interest expense
less $2.0 million of interest income). The $0.7 million reduction in interest
income is due primarily to a decline in interest rates the Real Estate
Business earns on its excess cash balances. Interest expense decreased by $0.2
million, primarily due to an increase in the amount of capitalized interest in
the third quarter of 2008 compared to the prior year period.
The Real Estate Business had an income tax recovery for the third quarter
of 2008 of $7.2 million, compared to an income tax expense for the third
quarter of 2007 of $3.3 million. Excluding net unusual tax recoveries in the
three months ended September 30, 2008 and 2007 of $12.5 million and $2.6
million, respectively (see note 13 to the financial statements attached
below), the income tax expense for the third quarter of 2008 was $5.3 million,
representing an effective tax rate of 14.8%, compared to $6.0 million for the
third quarter of 2007, representing an effective tax rate of 19.5%. This 4.7%
decrease in the adjusted effective tax rate is primarily due to (i) reductions
in the statutory tax rates from 2007 to 2008 in Canada and Germany and (ii)
changes in the proportion of income earned in the various tax jurisdictions in
which the Real Estate Business operates.
The Real Estate Business reported net income of $42.8 million for the
third quarter of 2008 compared to $27.4 million in the prior year period. The
$15.4 million increase is due to an $8.0 million increase in revenues and a
$10.5 million reduction in income tax expense, partially offset by increases
of $1.9 million in general and administrative expenses, $0.5 million in
depreciation and amortization (due primarily to the impact of foreign
exchange) and $0.6 million in net interest expense, and the $0.1 million gain
on disposal of real estate in the third quarter of 2007.
Nine Months Ended September 30, 2008
Revenues were $164.6 million in the first nine months of 2008, a 19%
increase from revenues of $138.2 million in the first nine months of 2007. The
higher revenues are due to a $14.9 million increase in rental revenues and an
$11.6 million increase in interest and other income earned from increased
borrowings under the financing arrangements with MEC. The higher rental
revenues are primarily due to foreign exchange, which had a $9.8 million
positive impact as the U.S. dollar weakened, compared to the prior year
period, against most foreign currencies (primarily the euro and Canadian
dollar) in which the Real Estate Business operates. Contractual rent
adjustments and Magna projects coming on-stream also had a higher than normal
impact, increasing revenues by $5.0 million and $1.9 million, respectively.
These positive contributions to rental revenues were partially offset by a
$2.0 million reduction from property disposals and vacancies and renewals of
leases, resulting partially from activities related to Magna's plant
rationalization strategy.
FFO for the first nine months of 2008 was $135.8 million ($2.91 per
share) compared to $102.8 million ($2.12 per share) in the prior year period.
FFO for the first nine months of 2008 includes (i) a $7.0 million current tax
recovery from revisions to estimates of certain tax exposures and (ii) a $0.8
million current tax recovery (offset by an equal future tax expense) resulting
from the internal restructuring of one of the Real Estate Business' U.S.
operating entities. FFO for the first nine months of 2007 includes a net $1.1
million current tax recovery, primarily due to a favourable tax reassessment
received in the third quarter of 2007 in relation to land sold in a prior
year. Excluding these items and a $3.9 million lease termination fee paid by
Magna in conjunction with a lease termination at the end of the first quarter
of 2008 and its related income tax effect, FFO for the first nine months of
2008 was $125.4 million ($2.69 per share), representing a 23% increase from
FFO for the first nine months of 2007 of $101.7 million ($2.10 per share).
This $23.7 million increase is due to a $26.5 million increase in revenue and
a $2.3 million reduction in current income tax expense (excluding current
income taxes associated with disposal gains in 2007), partially offset by
increases of $2.7 million in general and administrative expenses and $2.4
million in net interest expense.
General and administrative expenses increased to $20.7 million for the
nine months ended September 30, 2008 from $18.0 million in the prior year
period. General and administrative expenses for the first nine months of 2008
include (i) $5.8 million of advisory and other costs incurred in connection
with the reorganization proposal and the exploration of alternatives in
respect of MID's investment in MEC, (ii) the $1.0 million CEO Bonus Payment
and (iii) a net $0.3 million recovery (primarily under the Company's insurance
policy) of costs incurred in connection with the Greenlight Litigation.
General and administrative expenses for the first nine months of 2007 include
(i) $2.1 million of advisory and other costs in connection with the
exploration of alternatives in respect of MID's investment in MEC, (ii) $2.0
million of costs associated with the Company's contribution of land to a not-
for-profit organization to assist Hurricane Katrina redevelopment efforts and
(iii) $0.3 million of costs associated with the Company's defence against the
Greenlight Litigation. Excluding these items, general and administrative
expenses for the first nine months of 2008 were $14.2 million compared to
$13.6 million for the first nine months of 2007. The increase from the prior
period was primarily due to the impact of foreign exchange.
Net interest expense was $7.8 million in the nine months ended September
30, 2008 ($11.8 million of interest expense less $4.0 million of interest
income) compared to $5.4 million for the nine months ended September 30, 2007
($11.1 million of interest expense less $5.7 million of interest income). The
$1.7 million reduction in interest income is due primarily to a decline in
interest rates the Real Estate Business earns on its excess cash balances and
there being less cash available for short-term investment. Interest expense
increased by $0.7 million, primarily due to foreign exchange as the Company's
senior unsecured debentures are denominated in Canadian dollars, partially
offset by a $0.3 million increase in the amount of capitalized interest in the
nine months ended September 30, 2008 compared to the prior year period.
In the nine months ended September 30, 2008, the Real Estate Business'
income tax expense was $6.0 million compared to $13.7 million in the prior
year period. Excluding net unusual tax recoveries in the nine months ended
September 30, 2008 and 2007 of $12.1 million and $2.6 million, respectively
(see note 13 to the financial statements attached below), and a $1.5 million
gain on disposal of real estate and related tax expense in 2007, the income
tax expense for the first nine months of 2008 was $18.1 million, representing
an effective tax rate of 17.1%, compared to $15.9 million for the first nine
months of 2007, representing an effective tax rate of 18.8%. This 1.7%
decrease in the adjusted effective tax rate is primarily due to (i) reductions
in the statutory tax rates from 2007 to 2008 in Canada and Germany and (ii)
changes in the proportion of income earned in the various tax jurisdictions in
which the Real Estate Business operates.
Net income of $100.1 million for the first nine months of 2008 increased
by 38% compared to net income of $72.6 million for the first nine months of
2007. The $27.5 million increase is due to increases of $26.5 million in
revenues and $3.1 million in other net gains (due primarily to the $3.9
million lease termination fee discussed above) and a $7.7 million reduction in
income tax expense, partially offset by increases of $2.7 million in general
and administrative expenses, $2.8 million in depreciation and amortization
(due primarily to the impact of foreign exchange) and $2.4 million in net
interest expense. Net income was also negatively impacted by a write-down of
long-lived assets of $0.5 million recognized in the second quarter of 2008 as
well as the $1.5 million gain on disposal of real estate recognized in the
first nine months of 2007 (nil in 2008).
MAGNA ENTERTAINMENT CORP. FINANCIAL RESULTS
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Most of MEC's racetracks operate for prescribed periods each year. As a
result, MEC's racing revenues and operating results for any quarter will not
be indicative of racing revenues and operating results for any other quarter
or for the year as a whole. Because four of MEC's largest racetracks (Santa
Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie and Pimlico Race
Course) run live race meets principally during the first half of the year,
MEC's racing operations have historically operated at a loss in the second
half of the year, with MEC's third quarter typically generating the largest
operating loss. This seasonality has resulted in large quarterly fluctuations
in revenue and operating results.
MEC's results have been restated to distinguish between results from
continuing and discontinued operations. MEC's discontinued operations for the
three-month and nine-month periods ended September 30, 2008 and 2007 include
the operations of Remington Park, Thistledown, Portland Meadows, Great Lakes
Downs and Magna Racino(TM).
MEC's revenues from continuing operations for the third quarter of 2008
were relatively stable at $82.3 million compared to $82.1 million in the prior
year period. MEC's revenues for the third quarter of 2008 compared to the
third quarter of 2007 were impacted by positive factors including (i) 10
additional live race days at Golden Gate Fields with a change in the racing
calendar and additional awarded live race days and (ii) increased revenues in
MEC's Florida operations, primarily due increased slot revenues at Gulfstream
Park and the offering of simulcasting after the live race meet ended, which
was not available in the prior year period. However, these positive factors
were offset primarily by lower average daily attendance and handle at both
Laurel Park and Pimlico (collectively "MJC"), Lone Star Park and The Meadows.
MEC's revenues from continuing operations for the nine months ended
September 30, 2008 decreased 5% to $480.5 million from $504.4 million in the
prior year period, primarily due to (i) the net loss of eight live race days
at Santa Anita Park due to heavy rain and track drainage issues with the new
synthetic racing surface that was installed in the fall of 2007, (ii) 13 fewer
live race days at Laurel Park, (iii) lower handle and wagering on the 2008
Preakness(R) and (iv) the same factors impacting revenues for the third
quarter of 2008.
Earnings before interest, taxes, depreciation and amortization from MEC's
continuing operations excluding write-downs of long-lived assets, real estate
disposal gains, other net gains and the minority interest impact ("EBITDA")
for the three months ended September 30, 2008 was a loss of $20.3 million
compared to a loss of $22.0 million in the prior year period. This $1.7
million improvement is due to a $0.2 million increase in revenues and
reductions of $0.3 million in operating costs and $4.0 million in general and
administrative expenses, partially offset by a $2.8 million increase in
purses, awards and other costs. The reduction in general and administrative
expenses is primarily attributable to several of MEC's racetracks, as well as
its corporate office, incurring lower general and administrative expenses as a
result of cost reduction initiatives and reduced severance costs in the
current year period compared to the prior year period. The increase in purses,
awards and other expenses is primarily due to increased wagering at Gulfstream
Park, Golden Gate Fields and XpressBet(R), partially offset by decreased
wagering at MJC, Lone Star Park and The Meadows.
EBITDA for the first nine months of 2008 decreased by $2.8 million to
$3.7 million from $6.5 million for the first nine months of 2007, due to a
$23.9 million reduction in revenues, partially offset by reductions of $10.9
million in purses, awards and other costs, $3.6 million in operating costs and
$6.6 million in general and administrative expenses for reasons discussed
above. The reduction in purses, awards and other costs is due primarily to
lower revenues at Santa Anita Park, Lone Star Park, MJC, Golden Gate Fields
and The Meadows for the reasons discussed previously. The reduction in
operating costs is due primarily to (i) fewer live race days at Santa Anita
Park, (ii) cost reduction initiatives in MEC's Florida operations and (iii) a
decrease in the proportion of PariMax operating costs included in MEC's
results of operations, primarily due to the formation of the HRTV LLC joint
venture in April 2007, partially offset by an increase in predevelopment costs
driven primarily by higher legal costs to protect MEC's distribution rights
and higher costs incurred in the pursuit of alternative gaming opportunities,
including the November 4, 2008 gaming referendum in Maryland. In that
referendum, voters approved the proposed state constitutional amendment
authorizing the State to issue up to five video lottery licenses, one of which
MEC has announced MJC expects to pursue for Laurel Park as soon as practicable
after the administrative aspects of the license application process are
finalized by the applicable regulators. The reduction in general and
administrative expenses is primarily attributable to several of MEC's
racetracks, as well as its corporate office, incurring lower general and
administrative expenses as a result of cost reduction initiatives and reduced
severance costs in the current year period compared to the prior year period.
MEC recorded a net loss of $26.1 million for the third quarter of 2008
compared to $29.2 million in the third quarter of 2007. MEC's results of
operations for the third quarter of 2007 include a $1.4 million write-down of
long-lived assets. Excluding this item, the $1.7 million reduction in net loss
in the third quarter of 2008 is due primarily to the $1.7 million improvement
in EBITDA discussed above, a $4.9 million increase in the minority interest
recovery and a $4.3 million increase in income from MEC's discontinued
operations (see note 4 to the financial statements attached below), partially
offset by increases of $1.3 million in depreciation and amortization, $6.5
million in net interest expense and $1.4 million in income tax expense. The
increase in depreciation and amortization is due primarily to increased
depreciation (i) at Santa Anita Park and Golden Gate Fields with the
installation of new synthetic racing surfaces in the fall of 2007 and (ii) on
phase two of the slots facility at Gulfstream Park. The increase in net
interest expense is primarily attributable to (i) increased amounts
outstanding under the MEC Bridge Loan and (ii) increased fees related to
changes to the MEC Bridge Loan and extensions of the MEC Credit Facility.
For the nine months ended September 30, 2008, MEC recorded a net loss of
$50.5 million compared to net income of $8.1 million in the prior year period.
MEC's results of operations for the first nine months of 2008 include (i)
$24.5 million of disposal gains, primarily related to the disposal of 225
acres of excess real estate located in Ebreichsdorf, Austria to a subsidiary
of Magna for a purchase price of 20.0 million euros ($31.5 million), net of
transaction costs and (ii) a $5.0 million write-down of long-lived assets in
the first quarter of 2008 related to real estate held for sale in Dixon,
California. MEC's results of operations in the first nine months of 2007
include (i) $48.8 million of gains on the disposal of real estate (which have
no related minority interest impact and are eliminated from MID's consolidated
results) related to the sale of MEC's interests and rights in three real
estate properties to MID in return for cash consideration of approximately
$79.0 million and (ii) a $1.4 million write-down of long-lived assets.
Excluding these items, the $30.7 million increase in net loss is due primarily
to the $2.8 million reduction in EBITDA discussed above, increases of $5.8
million in depreciation and amortization and $16.5 million in net interest
expense for the reasons discussed previously and a $9.2 million increase in
the loss from discontinued operations (see note 4 to the financial statements
attached below), partially offset by a $4.4 million increase in the minority
interest recovery.
DIVIDENDS
---------
MID's Board of Directors declared a dividend of $0.15 per share on MID's
Class A Subordinate Voting Shares and Class B Shares for the third quarter
ended September 30, 2008. The dividend is payable on or about December 15,
2008 to shareholders of record at the close of business on November 28, 2008.
Unless indicated otherwise, MID has designated the entire amount of all
past and future taxable dividends paid in 2006, 2007 and 2008 to be an
"eligible dividend" for purposes of the Income Tax Act (Canada), as amended
from time to time. Please contact your tax advisor if you have any questions
with regard to the designation of eligible dividends.
CONFERENCE CALL
---------------
A conference call will be held for interested analysts and shareholders
to discuss the third quarter's results on November 7, 2008 at 10:30 am EST.
The number to use for this call is 1-800-731-5319. The number for overseas
callers is 416-644-3421. Please call 10 minutes prior to the start of the
conference call. MID will also webcast the conference call at
www.midevelopments.com. The conference call will be chaired by Dennis Mills,
Vice-Chairman and Chief Executive Officer.
For anyone unable to listen to the scheduled call, the rebroadcast
numbers will be: North America - 1-877-289-8525 and Overseas - 416-640-1917
(reservation number is 21285767, followed by the number sign) and the
rebroadcast will be available until November 14, 2008.
ABOUT MID
---------
MID is a real estate operating company focusing primarily on the
ownership, leasing, management, acquisition and development of a predominantly
industrial rental portfolio for Magna and its subsidiaries in North America
and Europe. MID also acquires land that it intends to develop for mixed-use
and residential projects. MID holds a controlling interest in MEC, North
America's number one owner and operator of horse racetracks, based on revenue,
and one of the world's leading suppliers, via simulcasting, of live
horseracing content to the growing inter-track, off-track and account wagering
markets.
RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES
REAL ESTATE BUSINESS
RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS
(U.S. dollars in thousands, except per share figures)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net income $ 42,821 $ 27,413 $ 100,073 $ 72,576
Add back (deduct):
Depreciation and
amortization 10,956 10,434 33,359 30,581
Future income tax
expense (recovery) (865) (494) 1,782 1,361
Write-down of
long-lived assets - - 450 -
Gain on disposal of
real estate, net of
income tax - (61) - (1,089)
Currency translation
loss (gain) - - 105 (652)
-------------------------------------------------------------------------
Funds from operations $ 52,912 $ 37,292 $ 135,769 $ 102,777
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
funds from operations
per share $ 1.13 $ 0.77 $ 2.91 $ 2.12
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
shares outstanding
(thousands)
Basic 46,708 48,324 46,708 48,348
Diluted 46,708 48,332 46,708 48,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------
The contents of this press release contain statements that, to the extent
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation, including
the United States Securities Act of 1933 and the United States Securities
Exchange Act of 1934. Forward-looking statements may include, among others,
statements regarding the Company's future plans, goals, strategies,
intentions, beliefs, estimates, costs, objectives, economic performance or
expectations, or the assumptions underlying any of the foregoing. Words such
as "may", "would", "could", "will", "likely", "expect", "anticipate",
"believe", "intend", "plan", "forecast", "project", "estimate" and similar
expressions are used to identify forward-looking statements. Forward-looking
statements should not be read as guarantees of future performance or results
and will not necessarily be accurate indications of whether or the times at or
by which such future performance will be achieved. Undue reliance should not
be placed on such statements. Forward-looking statements are based on
information available at the time and/or management's good faith assumptions
and analyses made in light of our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate in the circumstances, and are subject to known and
unknown risks, uncertainties and other unpredictable factors, many of which
are beyond the Company's control, that could cause actual events or results to
differ materially from such forward-looking statements. Important factors that
could cause such differences include, but are not limited to, the risks set
forth in the "Risk Factors" section in MID's Annual Information Form for 2007,
filed on SEDAR at www.sedar.com and attached as Exhibit 1 to MID's Annual
Report on Form 40-F for the year ended December 31, 2007, which investors are
strongly advised to review. The "Risk Factors" section also contains
information about the material factors or assumptions underlying such forward-
looking statements. Forward-looking statements speak only as of the date the
statement was made and unless otherwise required by applicable securities
laws, MID expressly disclaims any intention and undertakes no obligation to
update or revise any forward-looking statements contained in this press
release to reflect subsequent information, events or circumstances or
otherwise.
Consolidated Statements of Income (Loss)
(U.S. dollars in thousands, except per share figures)
(Unaudited)
Consolidated (notes 1, 19) Real Estate Business
-------------------------- -------------------------
(restated
- note 4)
Three Months Ended
September 30, 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues
Rental revenue $ 45,149 $ 41,924 $ 45,149 $ 41,924
Racing and other
revenue 82,323 82,151 - -
Interest and other
income from MEC
(note 19) - - 10,163 5,392
-------------------------------------------------------------------------
127,472 124,075 55,312 47,316
-------------------------------------------------------------------------
Operating costs and
expenses
Purses, awards and
other 33,582 30,769 - -
Operating costs 55,351 55,595 - -
General and
administrative
(notes 3, 19) 20,246 23,369 6,282 4,362
Depreciation and
amortization 22,158 20,340 10,956 10,434
Interest expense, net 11,560 9,380 2,445 1,857
Write-down of
long-lived assets
(note 6) - 1,444 - -
-------------------------------------------------------------------------
Operating income
(loss) (15,425) (16,822) 35,629 30,663
Gain on disposal of
real estate (note 19) - 96 - 96
Other gains (note 20) 19 - - -
-------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest (15,406) (16,726) 35,629 30,759
Income tax expense
(recovery) (note 13) (6,531) 2,585 (7,192) 3,346
Minority interest (23,660) (18,759) - -
-------------------------------------------------------------------------
Income (loss) from
continuing operations 14,785 (552) 42,821 27,413
Income (loss) from
discontinued
operations (note 4) 1,920 (2,266) - -
-------------------------------------------------------------------------
Net income (loss) $ 16,705 $ (2,818) $ 42,821 $ 27,413
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
Class A Subordinate
Voting or Class B
Share (note 7)
- Continuing
operations $ 0.32 $ (0.01)
- Discontinued
operations
(note 4) 0.04 (0.05)
-----------------------------------------------
Total $ 0.36 $ (0.06)
-----------------------------------------------
-----------------------------------------------
Basic and diluted
average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in thousands)
(note 7) 46,708 48,324
-----------------------------------------------
-----------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
- note 4)
Three Months Ended
September 30, 2008 2007
-----------------------------------------------
Revenues
Rental revenue $ - $ -
Racing and other
revenue 82,323 82,151
Interest and other
income from MEC
(note 19) - -
-----------------------------------------------
82,323 82,151
-----------------------------------------------
Operating costs and
expenses
Purses, awards and
other 33,582 30,769
Operating costs 55,351 55,595
General and
administrative
(notes 3, 19) 13,714 17,755
Depreciation and
amortization 11,244 9,974
Interest expense, net 18,845 12,383
Write-down of
long-lived assets
(note 6) - 1,444
-----------------------------------------------
Operating income
(loss) (50,413) (45,769)
Gain on disposal of
real estate (note 19) 122 100
Other gains (note 20) 19 -
-----------------------------------------------
Income (loss) before
income taxes and
minority interest (50,272) (45,669)
Income tax expense
(recovery) (note 13) 661 (761)
Minority interest (23,660) (18,759)
-----------------------------------------------
Income (loss) from
continuing operations (27,273) (26,149)
Income (loss) from
discontinued
operations (note 4) 1,193 (3,054)
-----------------------------------------------
Net income (loss) $ (26,080) $ (29,203)
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Statements of Income (Loss)
(U.S. dollars in thousands, except per share figures)
(Unaudited)
Consolidated (notes 1, 19) Real Estate Business
-------------------------- -------------------------
(restated
- note 4)
Nine Months Ended
September 30, 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues
Rental revenue $ 137,732 $ 122,820 $ 137,732 $ 122,820
Racing and other
revenue 480,541 504,399 - -
Interest and other
income from MEC
(note 19) - - 26,914 15,336
-------------------------------------------------------------------------
618,273 627,219 164,646 138,156
-------------------------------------------------------------------------
Operating costs and
expenses
Purses, awards and
other 228,915 239,775 - -
Operating costs 204,126 207,700 - -
General and
administrative
(notes 3, 19) 64,754 71,743 20,696 18,017
Depreciation and
amortization 66,513 57,890 33,359 30,581
Interest expense, net 33,849 28,070 7,852 5,405
Write-down of
long-lived assets
(notes 6, 8) 5,450 1,444 450 -
-------------------------------------------------------------------------
Operating income
(loss) 14,666 20,597 102,289 84,153
Gain on disposal of
real estate (note 19) 24,340 1,478 - 1,478
Other gains, net
(notes 12, 14, 19, 20) 5,376 656 3,787 652
-------------------------------------------------------------------------
Income (loss) before
income taxes and
minority interest 44,382 22,731 106,076 86,283
Income tax expense
(note 13) 8,969 15,634 6,003 13,707
Minority interest (29,610) (25,211) - -
-------------------------------------------------------------------------
Income (loss) from
continuing operations 65,023 32,308 100,073 72,576
Loss from discontinued
operations (note 4) (13,680) (4,288) - -
-------------------------------------------------------------------------
Net income (loss) $ 51,343 $ 28,020 $ 100,073 $ 72,576
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
Class A Subordinate
Voting or Class B
Share (note 7)
- Continuing
operations $ 1.39 $ 0.67
- Discontinued
operations
(note 4) (0.29) (0.09)
-----------------------------------------------
Total $ 1.10 $ 0.58
-----------------------------------------------
-----------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in thousands)
(note 7)
- Basic 46,708 48,348
- Diluted 46,708 48,369
-----------------------------------------------
-----------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
- note 4)
Nine Months Ended
September 30, 2008 2007
-----------------------------------------------
Revenues
Rental revenue $ - $ -
Racing and other
revenue 480,541 504,399
Interest and other
income from MEC
(note 19) - -
-----------------------------------------------
480,541 504,399
-----------------------------------------------
Operating costs and
expenses
Purses, awards and
other 228,915 239,775
Operating costs 204,126 207,700
General and
administrative
(notes 3, 19) 43,774 50,389
Depreciation and
amortization 33,283 27,438
Interest expense, net 52,745 36,203
Write-down of
long-lived assets
(notes 6, 8) 5,000 1,444
-----------------------------------------------
Operating income
(loss) (87,302) (58,550)
Gain on disposal of
real estate (note 19) 24,462 48,754
Other gains, net
(notes 12, 14, 19, 20) 1,589 4
-----------------------------------------------
Income (loss) before
income taxes and
minority interest (61,251) (9,792)
Income tax expense
(note 13) 2,966 596
Minority interest (29,610) (25,211)
-----------------------------------------------
Income (loss) from
continuing operations (34,607) 14,823
Loss from discontinued
operations (note 4) (15,916) (6,759)
-----------------------------------------------
Net income (loss) $ (50,523) $ 8,064
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Statements of Comprehensive Income (Loss)
(U.S. dollars in thousands)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net income (loss) $ 16,705 $ (2,818) $ 51,343 $ 28,020
Other comprehensive
income (loss):
Change in fair value
of interest rate
swaps, net of taxes
and minority
interest (note 12) (24) (191) 5 (247)
Foreign currency
translation
adjustment, net of
minority interest
(note 12) (55,513) 45,869 (19,790) 80,717
Reversal of foreign
currency translation
gain related to
shares purchased
for cancellation
(note 10) - (5,778) - (5,778)
Recognition of
foreign currency
translation loss
(gain) in net
income (note 12) - - 105 (652)
-------------------------------------------------------------------------
Comprehensive income
(loss) $ (38,832) $ 37,082 $ 31,663 $ 102,060
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Consolidated Statements of Changes in Deficit
(U.S. dollars in thousands)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Deficit, beginning of
period $ (37,810) $ (52,785) $ (58,436) $ (69,112)
Net income (loss) 16,705 (2,818) 51,343 28,020
Dividends (7,007) (7,255) (21,019) (21,766)
-------------------------------------------------------------------------
Deficit, end of
period $ (28,112) $ (62,858) $ (28,112) $ (62,858)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
Consolidated (notes 1, 19) Real Estate Business
-------------------------- -------------------------
(restated
- note 4)
Three Months Ended
September 30, 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ 14,785 $ (552) $ 42,821 $ 27,413
Items not involving
current cash flows
(note 16) (1,362) 1,556 8,233 10,149
Changes in non-cash
balances (note 16) 7,118 6,288 (7,562) 2,476
-------------------------------------------------------------------------
Cash provided by
(used in) operating
activities 20,541 7,292 43,492 40,038
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Real estate and fixed
asset additions (20,611) (26,435) (2,939) (7,082)
Proceeds on disposal
of real estate and
fixed assets, net 1,171 3,529 - 927
Increase in other
assets (311) (696) (95) (4)
Loan advances to MEC,
net - - (21,889) (10,780)
Loan repayments from
MEC - - 5,023 2,065
-------------------------------------------------------------------------
Cash used in
investment activities (19,751) (23,602) (19,900) (14,874)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 10,237 25,199 - -
Repayment of bank
indebtedness (4,201) - - -
Issuance of long-term
debt, net 7,343 205 - -
Repayment of long-term
debt (1,941) (2,316) (116) (109)
Loan advances from
MID, net - - - -
Loan repayments to MID - - - -
Shares purchased for
cancellation (10) (11,836) - (11,836)
Dividends paid (7,007) (7,255) (7,007) (7,255)
-------------------------------------------------------------------------
Cash provided by
(used in) financing
activities 4,421 3,997 (7,123) (19,200)
-------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents (7,598) 4,495 (7,381) 4,300
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
continuing operations (2,387) (7,818) 9,088 10,264
-------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities 1,612 (2,504) - -
Cash provided by
(used in) investing
activities 2,699 (714) - -
Cash provided by
(used in) financing
activities 66 - - -
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations 4,377 (3,218) - -
-------------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents
during the period 1,990 (11,036) 9,088 10,264
Cash and cash
equivalents,
beginning of period 185,752 203,407 147,244 147,983
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period 187,742 192,371 156,332 158,247
Less: cash and cash
equivalents of
discontinued
operations, end of
period (9,346) (10,463) - -
-------------------------------------------------------------------------
Cash and cash
equivalents, of
continuing operations
end of period $ 178,396 $ 181,908 $ 156,332 $ 158,247
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
- note 4)
Three Months Ended
September 30, 2008 2007
-----------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ (27,273) $ (26,149)
Items not involving
current cash flows
(note 16) (9,346) (8,338)
Changes in non-cash
balances (note 16) 14,581 3,097
-----------------------------------------------
Cash provided by
(used in) operating
activities (22,038) (31,390)
-----------------------------------------------
INVESTING ACTIVITIES
Real estate and fixed
asset additions (17,794) (19,433)
Proceeds on disposal
of real estate and
fixed assets, net 1,293 2,702
Increase in other
assets (216) (692)
Loan advances to MEC,
net - -
Loan repayments from
MEC - -
-----------------------------------------------
Cash used in
investment activities (16,717) (17,423)
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 10,237 25,199
Repayment of bank
indebtedness (4,201) -
Issuance of long-term
debt, net 7,343 205
Repayment of long-term
debt (1,825) (2,207)
Loan advances from
MID, net 21,659 10,148
Loan repayments to MID (4,979) (414)
Shares purchased for
cancellation (10) -
Dividends paid - -
-----------------------------------------------
Cash provided by
(used in) financing
activities 28,224 32,931
-----------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents (217) 195
-----------------------------------------------
Net cash flows
provided by (used in)
continuing operations (10,748) (15,687)
-----------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities 929 (3,248)
Cash provided by
(used in) investing
activities 2,699 (714)
Cash provided by
(used in) financing
activities 22 (1,651)
-----------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations 3,650 (5,613)
-----------------------------------------------
Net increase
(decrease) in cash
and cash equivalents
during the period (7,098) (21,300)
Cash and cash
equivalents,
beginning of period 38,508 55,424
-----------------------------------------------
Cash and cash
equivalents, end of
period 31,410 34,124
Less: cash and cash
equivalents of
discontinued
operations, end of
period (9,346) (10,463)
-----------------------------------------------
Cash and cash
equivalents, of
continuing operations
end of period $ 22,064 $ 23,661
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
Consolidated (notes 1, 19) Real Estate Business
-------------------------- -------------------------
(restated
- note 4)
Nine Months Ended
September 30, 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ 65,023 $ 32,308 $ 100,073 $ 72,576
Items not involving
current cash flows
(note 16) 24,458 33,016 31,737 30,904
Changes in non-cash
balances (note 16) (4,606) (2,242) 748 10,563
-------------------------------------------------------------------------
Cash provided by
(used in) operating
activities 84,875 63,082 132,558 114,043
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and fixed
asset additions (57,763) (72,114) (15,997) (105,956)
Proceeds on disposal
of real estate
properties and fixed
assets, net 34,123 11,859 - 6,321
Decrease (increase)
in other assets (1,591) (1,731) (244) 54
Loan advances to MEC,
net - - (73,889) (27,463)
Loan repayments from
MEC - - 29,286 4,425
-------------------------------------------------------------------------
Cash provided by
(used in) investment
activities (25,231) (61,986) (60,844) (122,619)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 48,705 40,940 - -
Repayment of bank
indebtedness (44,670) (21,515) - -
Issuance of long-term
debt 15,759 4,345 - -
Repayment of long-term
debt (11,051) (31,965) (348) (298)
Loan advances from
MID, net - - - -
Loan repayments to MID - - - -
Issuance of shares - 1,058 - 1,058
Shares purchased for
cancellation (10) (11,836) - (11,836)
Dividends paid (21,019) (21,766) (21,019) (21,766)
-------------------------------------------------------------------------
Cash provided by
(used in) financing
activities (12,286) (40,739) (21,367) (32,842)
-------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents (5,099) 7,901 (4,960) 7,799
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
continuing operations 42,259 (31,742) 45,387 (33,619)
-------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities 4,635 (2,519) - -
Cash used in investing
activities (2,284) (3,941) - -
Cash used in financing
activities (11,728) (19,682) - -
-------------------------------------------------------------------------
Net cash flows used in
discontinued
operations (9,377) (26,142) - -
-------------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents
during the period 32,882 (57,884) 45,387 (33,619)
Cash and cash
equivalents,
beginning of period 154,860 250,255 110,945 191,866
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period 187,742 192,371 156,332 158,247
Less: cash and cash
equivalents of
discontinued
operations, end of
period (9,346) (10,463) - -
-------------------------------------------------------------------------
Cash and cash
equivalents, of
continuing operations
end of period $ 1 78,396 $ 181,908 $ 156,332 $ 158,247
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
- note 4)
Nine Months Ended
September 30, 2008 2007
-----------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ (34,607) $ 14,823
Items not involving
current cash flows
(note 16) (4,866) (47,341)
Changes in non-cash
balances (note 16) (5,735) (13,349)
-----------------------------------------------
Cash provided by
(used in) operating
activities (45,208) (45,867)
-----------------------------------------------
INVESTING ACTIVITIES
Property and fixed
asset additions (41,888) (55,639)
Proceeds on disposal
of real estate
properties and fixed
assets, net 34,245 93,252
Decrease (increase)
in other assets (1,347) (1,785)
Loan advances to MEC,
net - -
Loan repayments from
MEC - -
-----------------------------------------------
Cash provided by
(used in) investment
activities (8,990) 35,828
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 48,705 40,940
Repayment of bank
indebtedness (44,670) (21,515)
Issuance of long-term
debt 15,759 4,345
Repayment of long-term
debt (10,703) (31,667)
Loan advances from
MID, net 72,560 26,477
Loan repayments to MID (27,413) (1,130)
Issuance of shares - -
Shares purchased for
cancellation (10) -
Dividends paid - -
-----------------------------------------------
Cash provided by
(used in) financing
activities 54,228 17,450
-----------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents (139) 102
-----------------------------------------------
Net cash flows
provided by (used in)
continuing operations (109) 7,513
-----------------------------------------------
DISCONTINUED OPERATIONS
Cash provided by
(used in) operating
activities 2,529 (4,860)
Cash used in investing
activities (2,284) (3,941)
Cash used in financing
activities (12,641) (22,977)
-----------------------------------------------
Net cash flows used in
discontinued
operations (12,396) (31,778)
-----------------------------------------------
Net increase
(decrease) in cash
and cash equivalents
during the period (12,505) (24,265)
Cash and cash
equivalents,
beginning of period 43,915 58,389
-----------------------------------------------
Cash and cash
equivalents, end of
period 31,410 34,124
Less: cash and cash
equivalents of
discontinued
operations, end of
period (9,346) (10,463)
-----------------------------------------------
Cash and cash
equivalents, of
continuing operations
end of period $ 22,064 $ 23,661
-----------------------------------------------
-----------------------------------------------
See accompanying notes
Consolidated Balance Sheets
(Refer to note 1 - Basis of Presentation)
(U.S. dollars in thousands)
(Unaudited)
Consolidated (notes 1, 19) Real Estate Business
-------------------------- -------------------------
(restated -
notes 4, 5)
September December September December
As at 30, 2008 31, 2007 30, 2008 31, 2007
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 178,396 $ 145,619 $ 156,332 $ 110,945
Restricted cash
(note 19) 14,303 32,722 945 4,458
Accounts receivable 30,428 39,958 3,350 7,425
Loans receivable
from MEC, net
(note 19) - - 190,566 139,168
Due from MID
(note 19) - - - -
Income taxes
receivable 2,038 1,631 2,038 402
Prepaid expenses and
other 22,424 17,173 1,039 1,206
Assets held for sale
(note 5) - 1,493 - -
Discontinued
operations (note 4) 31,459 24,724 - -
-------------------------------------------------------------------------
279,048 263,320 354,270 263,604
Real estate
properties, net
(note 8) 2,183,926 2,225,154 1,508,062 1,561,921
Fixed assets, net 74,097 86,196 302 445
Racing licences 109,868 109,868 - -
Other assets 7,205 6,213 1,070 879
Loans receivable from
MEC (note 19) - - 96,271 97,589
Deferred rent
receivable 14,426 14,898 14,426 14,898
Future tax assets 48,680 45,118 9,055 5,497
Assets held for sale
(note 5) 26,984 38,647 - -
Discontinued
operations (note 4) 82,550 110,927 - -
-------------------------------------------------------------------------
$ 2,826,784 $ 2,900,341 $ 1,983,456 $ 1,944,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness
(note 9) $ 43,249 $ 39,214 $ - $ -
Accounts payable and
accrued liabilities 111,605 140,473 19,091 16,678
Income taxes payable 6,602 13,040 5,442 13,040
Loan payable to MID,
net (note 19) - - - -
Due to MEC (note 19) - - 945 4,464
Long-term debt due
within one year
(note 9) 14,538 11,142 3,867 488
Deferred revenue 4,371 6,189 1,488 2,078
Liabilities related
to assets held for
sale (note 5) - 171 - -
Discontinued
operations (note 4) 42,469 47,981 - -
-------------------------------------------------------------------------
222,834 258,210 30,833 36,748
Long-term debt
(note 9) 86,033 96,326 2,536 6,646
Senior unsecured
debentures, net 253,251 267,578 253,251 267,578
Note obligations, net 218,279 216,050 - -
Loan payable to MID,
net (note 19) - - - -
Other long-term
liabilities 32,286 24,105 - -
Future tax liabilities 137,571 130,885 52,017 48,257
Minority interest 114,436 156,359 - -
Liabilities related to
assets held for sale
(note 5) 876 876 - -
Discontinued
operations (note 4) 14,540 14,492 - -
-------------------------------------------------------------------------
1,080,106 1,164,881 338,637 359,229
-------------------------------------------------------------------------
Shareholders' equity:
Share capital
(note 10) 1,524,440 1,524,440
Contributed surplus
(note 11) 28,091 27,517
Deficit (28,112) (58,436)
Accumulated other
comprehensive income
(note 12) 222,259 241,939
-------------------------------------------------------------------------
1,746,678 1,735,460 1,644,819 1,585,604
-------------------------------------------------------------------------
$ 2,826,784 $ 2,900,341 $ 1,983,456 $ 1,944,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated -
notes 4, 5)
September December
As at 30, 2008 31, 2007
-----------------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 22,064 $ 34,674
Restricted cash
(note 19) 13,358 28,264
Accounts receivable 27,078 32,533
Loans receivable
from MEC, net
(note 19) - -
Due from MID
(note 19) 945 4,464
Income taxes
receivable - 1,229
Prepaid expenses and
other 21,560 16,335
Assets held for sale
(note 5) - 1,493
Discontinued
operations (note 4) 31,459 24,724
-----------------------------------------------
116,464 143,716
Real estate
properties, net
(note 8) 731,244 718,620
Fixed assets, net 73,795 85,751
Racing licences 109,868 109,868
Other assets 6,135 5,334
Loans receivable from
MEC (note 19) - -
Deferred rent
receivable - -
Future tax assets 39,625 39,621
Assets held for sale
(note 5) 26,984 38,647
Discontinued
operations (note 4) 82,604 110,999
-----------------------------------------------
$ 1,186,719 $ 1,252,556
-----------------------------------------------
-----------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness
(note 9) $ 43,249 $ 39,214
Accounts payable and
accrued liabilities 92,514 124,140
Income taxes payable 1,160 -
Loan payable to MID,
net (note 19) 190,158 137,002
Due to MEC (note 19) - -
Long-term debt due
within one year
(note 9) 10,671 10,654
Deferred revenue 2,883 4,339
Liabilities related
to assets held for
sale (note 5) - 171
Discontinued
operations (note 4) 42,882 48,378
-----------------------------------------------
383,517 363,898
Long-term debt
(note 9) 83,497 89,680
Senior unsecured
debentures, net - -
Note obligations, net 218,279 216,050
Loan payable to MID,
net (note 19) 66,981 67,107
Other long-term
liabilities 32,286 24,105
Future tax liabilities 84,223 81,297
Minority interest 114,436 156,359
Liabilities related to
assets held for sale
(note 5) 876 876
Discontinued
operations (note 4) 39,865 40,635
-----------------------------------------------
1,023,960 1,040,007
-----------------------------------------------
Shareholders' equity:
Share capital
(note 10)
Contributed surplus
(note 11)
Deficit
Accumulated other
comprehensive income
(note 12)
-----------------------------------------------
162,759 212,549
-----------------------------------------------
$ 1,186,719 $ 1,252,556
-----------------------------------------------
-----------------------------------------------
Commitments and contingencies (note 20)
See accompanying notes
Notes to Interim Consolidated Financial Statements
(All amounts in U.S. dollars and all tabular amounts in thousands unless
otherwise noted)
(All amounts as at September 30, 2008 and December 31, 2007 and for the
three-month and nine-month periods ended September 30, 2008 and 2007
are unaudited)
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of MI Developments Inc. and its subsidiaries (collectively,
"MID" or the "Company"). MID is a real estate operating company that
currently owns, leases, manages and develops a predominantly industrial
rental portfolio leased primarily to Magna International Inc. and its
automotive operating units ("Magna"). MID also acquires land that it
intends to develop for mixed-use and residential projects. The Company
also holds a controlling interest in Magna Entertainment Corp. ("MEC"),
an owner and operator of horse racetracks and a supplier of live racing
content to the inter-track, off-track and account wagering markets. At
September 30, 2008, the Company owned approximately 54% of MEC's total
equity, representing approximately 96% of the total voting power of its
outstanding stock. MEC's results are consolidated with the Company's
results, with outside ownership accounted for as a minority interest.
(a) Magna Entertainment Corp.
The results of operations and the financial position of MEC have been
included in the unaudited interim consolidated financial statements
on a going concern basis, which contemplates the realization of MEC's
assets and the discharge of MEC's liabilities in the normal course of
business for the foreseeable future. MEC has incurred a net loss
(before the amount attributed to the minority interest) of
$93.8 million for the nine months ended September 30, 2008, and net
losses before minority interest recovery of $68.8 million,
$65.4 million and $107.4 million for the years ended December 31,
2007, 2006 and 2005, respectively. At September 30, 2008, MEC had a
working capital deficiency of $267.1 million and $255.4 million of
debt scheduled to mature in the 12-month period ending September 30,
2009, including (i) $36.5 million under MEC's $40.0 million senior
secured revolving credit facility with a Canadian financial
institution (the "MEC Credit Facility"), which is scheduled to mature
on November 17, 2008 (note 9), (ii) $88.6 million under a bridge loan
(the "MEC Bridge Loan") of up to $125.0 million (initially up to
$80.0 million) from a wholly-owned subsidiary of MID (the "MID
Lender"), which is scheduled to mature on December 1, 2008 (note 19)
and (iii) MEC's obligation to repay $100.0 million of indebtedness
under the Gulfstream Park project financing facility with the MID
Lender by December 1, 2008 (note 19). Accordingly, MEC's ability to
continue as a going concern is in substantial doubt and is dependent
on MEC generating cash flows that are adequate to sustain the
operations of the business, renewing or extending current financing
arrangements and meeting its obligations with respect to secured and
unsecured creditors, none of which is assured. If MEC is unable to
repay its obligations when due or satisfy required covenants in its
debt agreements, substantially all of its current and long-term debt
will also become due on demand as a result of cross-default
provisions within loan agreements, unless MEC is able to obtain
waivers, modifications or extensions. The availability of such
waivers, modifications or extensions is not assured and, if
available, the terms thereof are not yet determinable. On
September 12, 2007, MEC's Board of Directors approved a debt
elimination plan (the "MEC Debt Elimination Plan") designed to
eliminate MEC's net debt by December 31, 2008 by generating funds
from the sale of assets (notes 4 and 5), entering into strategic
transactions involving certain of MEC's racing, gaming and technology
operations, and a possible future equity issuance. The success of the
MEC Debt Elimination Plan is not assured. To address short-term
liquidity concerns and provide sufficient time to implement the MEC
Debt Elimination Plan, MEC arranged $100.0 million of funding in
September 2007, comprised of (i) a $20.0 million private placement of
MEC's Class A Subordinate Voting Stock ("MEC Class A Stock") to Fair
Enterprise Limited ("FEL"), a company that forms part of an estate
planning vehicle for the family of Mr. Frank Stronach, the Company's
Chairman and the Chairman and Chief Executive Officer of MEC,
completed in October 2007; and (ii) the MEC Bridge Loan. Although MEC
continues to take steps to implement the MEC Debt Elimination Plan,
MEC does not expect to execute its plan on the originally
contemplated time schedule, if at all. As a result, MEC has needed
and will again need to seek extensions from existing lenders and
additional funds in the short-term from one or more possible sources,
which may include the Company. The availability of such extensions
and additional funds is not assured and, if available, the terms
thereof are not yet determinable. These unaudited interim
consolidated financial statements do not give effect to any
adjustments to recorded amounts and their classification which would
be necessary should MEC be unable to continue as a going concern and,
therefore, be required to realize its assets and discharge its
liabilities in other than the normal course of business and at
amounts different from those reflected in the unaudited interim
consolidated financial statements.
The uncertainty regarding MEC's ability to continue as a going
concern does not impact the realization of the Company's assets and
discharge of its liabilities in the normal course of its real estate
business. MID's real estate business has not guaranteed any of MEC's
indebtedness.
MEC's racing business is seasonal in nature and racing revenues and
operating results for any quarter will not be indicative of the
racing revenues and operating results for the year. MEC's racing
operations have historically operated at a loss in the second half of
the year, with the third quarter typically generating the largest
operating loss. This seasonality has resulted in large quarterly
fluctuations in MEC's revenues and operating results.
(b) Consolidated Financial Statements
The unaudited interim consolidated financial statements have been
prepared in U.S. dollars following Canadian generally accepted
accounting principles ("GAAP") and the accounting policies as set out
in the annual consolidated financial statements for the year ended
December 31, 2007, except as disclosed in note 2.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements. Accordingly,
these unaudited interim consolidated financial statements should be
read in conjunction with the annual consolidated financial statements
for the year ended December 31, 2007.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments necessary to present
fairly the financial position at September 30, 2008 and 2007, and the
results of operations and cash flows for the three-month and nine-
month periods ended September 30, 2008 and 2007.
Financial data and related measurements are presented on the
consolidated statements of income (loss), consolidated statements of
cash flows, and consolidated balance sheets in two categories, "Real
Estate Business" and "Magna Entertainment Corp.", which correspond to
the Company's reporting segments as described in note 18 to the
unaudited interim consolidated financial statements. Transactions and
balances between the "Real Estate Business" and "Magna Entertainment
Corp." segments have not been eliminated in the presentation of each
segment's financial data and related measurements. However, the
effects of transactions between these two segments, which are further
described in note 19, are eliminated in the consolidated results of
operations and financial position of the Company.
The Company has reclassified certain prior period amounts to reflect
the restatement for MEC's discontinued operations (note 4), assets
held for sale (note 5) and reverse stock split (notes 14 and 20).
2. ACCOUNTING CHANGES
(a) Financial Instruments - Disclosure and Presentation
In December 2006, the Canadian Institute of Chartered Accountants
(the "CICA") issued additional disclosure and presentation standards
for financial instruments in Handbook Sections 3862, "Financial
Instruments - Disclosures", and 3863, "Financial Instruments -
Presentation", which replace Handbook Section 3861, "Financial
Instruments - Disclosure and Presentation". The Company has adopted
these new standards effective January 1, 2008. Handbook Section 3862
requires increased disclosure relating to the risks associated with
financial instruments and the Company's approach to managing those
risks. Handbook Section 3863 maintains the presentation requirements
of Handbook Section 3861.
Certain disclosures regarding the Company's consolidated financial
instruments were previously made in notes 1, 2, 9, 10, 11, 18 and 23
to the annual consolidated financial statements for the year ended
December 31, 2007 and do not differ materially at September 30, 2008,
except as disclosed in notes 9, 15, 17 and 20 to the unaudited
interim consolidated financial statements. The additional
disclosures required by Handbook Section 3862 have been made in notes
15 and 17 to the unaudited interim consolidated financial statements.
The adoption of Handbook Section 3863 did not have any impact on the
Company's unaudited interim consolidated financial statements.
(b) Capital Disclosures
The CICA issued Handbook Section 1535, "Capital Disclosures", in
December 2006, which requires that the Company disclose its
objectives, policies and processes for managing capital (which it
must define), as well as certain quantitative data. Handbook Section
1535 also requires the disclosure of any externally-imposed capital
requirements, whether the entity has complied with them and, if not,
the consequences of such non-compliance. The Company adopted the
requirements of Handbook Section 1535 on January 1, 2008 and the
required disclosures are contained in note 15 to the unaudited
interim consolidated financial statements.
(c) Going Concern
In June 2007, the CICA amended Handbook Section 1400, "General
Standards of Financial Statement Presentation", to include going
concern requirements. The amendments require management to make an
assessment of an entity's ability to continue as a going concern and
to disclose material uncertainties related to events or conditions
that may cast doubt upon the entity's ability to continue as a going
concern. In doing so, management must take into account information
about the future, which is at least, but not limited to, 12 months
from the balance sheet date. The Company's adoption on January 1,
2008 of the amendments to Handbook Section 1400 did not have any
impact on the Company's unaudited interim consolidated financial
statements or the disclosure contained in note 1 to the unaudited
interim consolidated financial statements.
3. DISCUSSIONS WITH MID SHAREHOLDERS AND POTENTIAL REORGANIZATION
TRANSACTION
On March 31, 2008, MID received a reorganization proposal on behalf
of various shareholders of MID, including entities affiliated with
the Stronach Trust (the "Stronach Group"), MID's controlling
shareholder. The reorganization proposal was supported by MID
shareholders owning more than 50% of the outstanding Class A
Subordinate Voting Shares and approximately 95% of the outstanding
Class B Shares. The principal components of the reorganization
proposal are set out in MID's press release dated March 31, 2008,
which can be found on the Company's website at www.midevelopments.com
and on SEDAR at www.sedar.com. The stated objective of the
reorganization was to (a) effect a substantial cash distribution to
MID shareholders and (b) create a focused real estate investment
vehicle, which would distribute 80% of its available cash flow, in
which the interests of all shareholders would be fully aligned. The
reorganization proposal included the separation of MID and MEC.
Following the announcement of the reorganization proposal, certain of
the Company's shareholders expressed their opposition to the
proposal. Accordingly, in early June 2008, at the direction of a
special committee of independent directors (the "MID Special
Committee"), MID management commenced discussions with a number of
MID Class A shareholders, including those shareholders that had
supported the original reorganization proposal, in order to develop a
consensus on how to best amend and structure the proposed
reorganization to achieve the requisite level of shareholder support.
On August 22, 2008, MID announced that it had retained GMP Securities
L.P. ("GMP") as a financial advisor to liaise with shareholders in an
attempt to develop a consensus on how best to reorganize MID. No
consensus was reached with respect to amendments that would have
resulted in a revised reorganization proposal that MID would have
been asked to put before its shareholders for their consideration,
and although GMP continues to liaise with the Company's shareholders,
discussions with respect to the reorganization proposal have
effectively terminated.
MID is continuing to explore strategic transactions and alternatives
available in respect of its investment in MEC, including a
recapitalization, restructuring or sales of some or all of MEC's
assets, and evaluating whether, or to what extent, MID might
participate in any such transactions or alternatives. In October
2008, several MID shareholders sent letters to the MID Special
Committee and/or MID's Board of Directors (the "Board") expressing
their views as to the process and as to how best to reorganize MID,
including dealing with MID's investment in MEC, and one other person
that is involved in the U.S. horseracing industry has proposed that
MID sell to such person MID's loans to MEC. Many of these letters
have been publicly filed with the United States Securities and
Exchange Commission. Any potential transactions with MEC would be
subject to review by the MID Special Committee and the approval of
the Board. There can be no assurance that any transaction will be
completed.
The unaudited interim consolidated financial statements do not
reflect any adjustments that may be required should any transaction
be completed.
During the three-month and nine-month periods ended September 30,
2008, $1.2 million and $5.5 million, respectively, of advisory and
other costs have been incurred in connection with the reorganization
proposal and the exploration of alternatives in respect of MID's
investment in MEC, which costs are included in the Real Estate
Business' "general and administrative expenses" on the Company's
unaudited interim consolidated statements of income (loss).
4. DISCONTINUED OPERATIONS
In connection with the MEC Debt Elimination Plan, MEC announced its
intention to sell Great Lakes Downs in Michigan, Thistledown in Ohio
and its interest in Portland Meadows in Oregon. MEC also announced
its intention to explore the sale of Remington Park, a horseracing
and gaming facility in Oklahoma City.
In September 2007, MEC engaged a U.S. investment bank to assist in
soliciting potential purchasers and managing the sale process for
certain assets covered by the MEC Debt Elimination Plan. In October
2007, the U.S. investment bank began marketing Thistledown and
Remington Park for sale and initiated a program to locate potential
buyers. However, MEC has since taken over the sales process from the
U.S. investment bank and is currently in discussions with potential
buyers of these assets.
In November 2007, MEC began marketing its interest in Portland
Meadows for sale and is currently in discussions with potential
buyers for this asset.
In March 2008, MEC committed to a plan to sell Magna Racino(TM). MEC
has initiated a program to locate potential buyers and has begun
marketing the assets for sale through a real estate agent.
On July 16, 2008, MEC completed the sale of Great Lakes Downs in
Michigan for cash consideration of $5.0 million. The proceeds of
approximately $4.5 million, net of transaction costs, were used to
repay a portion of the MEC Bridge Loan (note 19). MEC recognized a
$0.5 million gain on disposition of Great Lakes Downs in the results
of discontinued operations for the three- month and nine-month
periods ended September 30, 2008.
MEC's results of operations related to discontinued operations for
the three-month and nine-month periods ended September 30, 2008 and
2007, and MEC's assets and liabilities related to discontinued
operations as at September 30, 2008 and December 31, 2007, are shown
in the following tables:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Revenues $ 33,438 $ 33,050 $ 99,028 $ 98,679
Costs and expenses 33,845 35,701 97,128 102,178
---------------------------------------------------------------------
(407) (2,651) 1,900 (3,499)
Depreciation and
amortization - 1,750 605 5,252
Interest expense,
net 1,080 968 2,630 3,129
Write-down of
long-lived assets
(note 6) - - 32,294 -
---------------------------------------------------------------------
Loss before
undernoted (1,487) (5,369) (33,629) (11,880)
Gain on
disposition 536 - 536 -
---------------------------------------------------------------------
Loss before income
taxes and
minority interest (951) (5,369) (33,093) (11,880)
Income tax
recovery
(note 13) (3,174) (133) (3,559) (295)
Minority interest 1,030 (2,182) (13,618) (4,826)
---------------------------------------------------------------------
MEC's income
(loss) from
discontinued
operations 1,193 (3,054) (15,916) (6,759)
---------------------------------------------------------------------
Eliminations
(note 19) 727 788 2,236 2,471
---------------------------------------------------------------------
Consolidated
income (loss)
from discontinued
operations $ 1,920 $ (2,266) $ (13,680) $ (4,288)
---------------------------------------------------------------------
---------------------------------------------------------------------
September December
As at 30, 2008 31, 2007
---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,346 $ 9,241
Restricted cash 14,265 7,069
Accounts receivable 4,600 6,602
Prepaid expenses and other 3,248 1,812
---------------------------------------------------------------------
31,459 24,724
---------------------------------------------------------------------
Real estate properties, net 55,949 81,035
Fixed assets, net 13,003 16,295
Other assets 105 122
Future tax assets 13,547 13,547
---------------------------------------------------------------------
82,604 110,999
---------------------------------------------------------------------
MEC's assets related to discontinued
operations 114,063 135,723
---------------------------------------------------------------------
Eliminations (note 19) (54) (72)
---------------------------------------------------------------------
Consolidated assets related to discontinued
operations $ 114,009 $ 135,651
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 30,481 $ 21,446
Income taxes payable 95 3,182
Long-term debt due within one year 10,946 22,096
Loan payable to MID 413 397
Deferred revenue 947 1,257
---------------------------------------------------------------------
42,882 48,378
---------------------------------------------------------------------
Long-term debt - 115
Loan payable to MID, net 25,325 26,143
Other long-term liabilities 993 830
Future tax liabilities 13,547 13,547
---------------------------------------------------------------------
39,865 40,635
---------------------------------------------------------------------
MEC's liabilities related to discontinued
operations 82,747 89,013
---------------------------------------------------------------------
Eliminations (note 19) (25,738) (26,540)
---------------------------------------------------------------------
Consolidated liabilities related to
discontinued operations $ 57,009 $ 62,473
---------------------------------------------------------------------
---------------------------------------------------------------------
5. ASSETS HELD FOR SALE
(a) In November and December 2007, MEC entered into sale agreements for
three parcels of excess real estate comprising approximately
825 acres located in Porter, New York, subject to the completion of
due diligence by the purchasers and customary closing conditions.
The sale of one parcel was completed in December 2007 for cash
consideration of $0.3 million, net of transaction costs, and the
sales of the two remaining parcels were completed in January 2008 for
total cash consideration of $1.5 million, net of transaction costs.
At December 31, 2007, the two parcels of excess real estate for which
the sale had not been completed were included in MEC's "assets held
for sale" on the Company's consolidated balance sheet. The net
proceeds received on closing were used to repay a portion of the MEC
Bridge Loan (note 19).
(b) On December 21, 2007, MEC entered into an agreement to sell 225 acres
of excess real estate located in Ebreichsdorf, Austria to a
subsidiary of Magna, a related party, for a purchase price of
20.0 million euros ($31.5 million), net of transaction costs. The
closing of the transaction occurred in April 2008 and MEC used
7.5 million euros of the net proceeds to repay a portion of a
15.0 million euro term loan facility with a European financial
institution and the remaining portion of the net proceeds to repay
$19.8 million of the MEC Bridge Loan (note 19).
(c) On August 9, 2007, MEC announced its intention to sell a real estate
property located in Dixon, California. In addition, in March 2008,
MEC committed to a plan to sell excess real estate in
Oberwaltersdorf, Austria. MEC is marketing these properties for sale
and has listed them with real estate brokers. Under the terms of the
MEC Bridge Loan (note 19), MEC is required to use the net proceeds
from the sale of these properties, after repayment of certain prior
ranking indebtedness of MEC, to pay down principal amounts
outstanding under the MEC Bridge Loan and the amount of such net
proceeds will permanently reduce the committed amount of the MEC
Bridge Loan.
(d) On August 12, 2008, MEC announced that it had entered into an
agreement to sell approximately 489 acres of excess real estate
located in Ocala, Florida to Lincoln Property Company and Orion
Investment Properties, Inc. for a purchase price of $16.5 million
cash, subject to a 90-day due diligence period in favour of the
purchasers. On November 3, 2008, MEC announced that the prospective
purchasers had terminated the agreement. MEC has announced that it
still intends to sell the Ocala property and will re- initiate its
marketing efforts.
(e) The MEC Debt Elimination Plan also contemplates the sale of real
estate properties located in Aventura and Hallandale, Florida, both
adjacent to Gulfstream Park, and Anne Arundel County, Maryland,
adjacent to Laurel Park. MEC has also announced that it intends to
explore selling its membership interests in the mixed-use
developments at Gulfstream Park racetrack in Florida and Santa Anita
Park racetrack in California that it is pursuing under joint venture
arrangements with Forest City Enterprises, Inc. ("Forest City") and
Caruso Affiliated ("Caruso"), respectively. MEC has also announced
that it intends to explore other strategic transactions involving
other racing, gaming and technology operations. These potential
transactions may include: partnerships or joint ventures in respect
of the existing gaming facility at Gulfstream Park; partnerships or
joint ventures in respect of potential alternative gaming operations
at other MEC racetracks that currently do not have gaming operations;
and transactions involving MEC's technology operations, which may
include one or more of the assets that comprise MEC's PariMax
business.
At September 30, 2008, all of the criteria required to classify an
asset as held for sale, or operations as discontinued operations
(note 4), in accordance with GAAP were not met in relation to the
assets and operations described in the preceding paragraph and,
accordingly, these assets and operations continue to be classified as
held and in use.
MEC's assets classified as held for sale and corresponding
liabilities, related to the transactions described in sections (a),
(b), (c) and (d) above, at September 30, 2008 and December 31, 2007, are
shown in the table below.
(restated -
note 5(c))
September December
As at 30, 2008 31, 2007
-------------------------------------------------------------------------
ASSETS
Current assets:
Real estate properties, net
Porter, New York (note 6) $ - $ 1,493
-------------------------------------------------------------------------
Real estate properties, net
Dixon, California (note 6) 14,139 19,139
Ocala, Florida 8,399 8,407
Oberwaltersdorf, Austria 4,446 4,482
Ebreichsdorf, Austria - 6,619
-------------------------------------------------------------------------
26,984 38,647
-------------------------------------------------------------------------
$ 26,984 $ 40,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Future tax liabilities $ - $ 171
-------------------------------------------------------------------------
Future tax liabilities 876 876
-------------------------------------------------------------------------
$ 876 $ 1,047
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. WRITE-DOWN OF MEC'S LONG-LIVED ASSETS
When long-lived assets are identified as held for sale, the carrying
value is reduced, if necessary, to the estimated net realizable
value. Net realizable value is evaluated at each interim reporting
period based on discounted net future cash flows of the assets and,
if appropriate, appraisals and/or estimated net sales proceeds from
pending offers.
Write-downs relating to long-lived assets have been recognized as
follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Assets Held For Sale
(note 5)
Dixon,
California(i) $ - $ - $ 5,000 $ -
Porter,
New York(ii) - 1,444 - 1,444
-------------------------------------------------------------------------
$ - $ 1,444 $ 5,000 $ 1,444
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discontinued
Operations (note 4)
Magna
Racino(TM)(iii) $ - $ - $ 29,195 $ -
Portland
Meadows(iv) - - 3,099 -
-------------------------------------------------------------------------
$ - $ - $ 32,294 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) As a result of significant weakness in the Northern California
real estate market and the U.S. financial market, MEC recorded an
impairment charge of $5.0 million related to the Dixon, California
real estate property (note 5(c)) in the nine months ended
September 30, 2008, which represents the excess of the carrying
value of the asset over the estimated net realizable value.
(ii) In connection with the sales plan relating to the real estate in
Porter, New York (note 5(a)), MEC recognized an impairment loss of
$1.4 million in the three-month and nine-month periods ended
September 30, 2007, which represented the excess of the carrying
value over the estimated fair value of these properties, less
selling costs. In the three months ended December 31, 2007,
$0.1 million of this impairment charge was reversed based on the
actual net proceeds realized in the disposition of these
properties.
(iii) As a result of the classification of Magna Racino(TM) as
discontinued operations, MEC recorded an impairment charge,
included in discontinued operations, of $29.2 million in nine
months ended September 30, 2008, which represents the excess of
the carrying value of the assets over the estimated net realizable
value.
(iv) In June 2003, the Oregon Racing Commission ("ORC") adopted
regulations that permitted wagering through instant racing
terminals as a form of pari-mutuel wagering at Portland Meadows
(the "Instant Racing Rules"). In September 2006, the ORC granted a
request by Portland Meadows to offer instant racing under its
2006-2007 race meet licence. In June 2007, the ORC, acting under
the advice of the Oregon Attorney General, temporarily suspended
and began proceedings to repeal the Instant Racing Rules. In
September 2007, the ORC denied a request by Portland Meadows to
offer instant racing under its 2007-2008 race meet licence. In
response to this denial, MEC requested the holding of a contested
case hearing, which took place in January 2008. On February 27,
2008, the Office of Administrative Hearings released a proposed
order in MEC's favour, approving instant racing as a legal form of
wager at Portland Meadows. However, on April 25, 2008, the ORC
issued an order rejecting that recommendation. In May 2008, MEC
filed a petition with the Oregon Court of Appeal for judicial
review of the order of the ORC. A decision from the Oregon Court
of Appeal on Instant Racing is expected in the first or second
quarter of 2009. Based primarily on the ORC's order to reject the
Office of Administrative Hearings' recommendation, MEC recorded an
impairment charge of $3.1 million, included in discontinued
operations, in the nine months ended September 30, 2008 related to
the instant racing terminals and build-out of the instant racing
facility.
7. EARNINGS (LOSS) PER SHARE
Diluted earnings (loss) per share for the three-month and nine-month
periods ended September 30, 2008 and 2007 are computed as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(restated (restated
- note 4) - note 4)
2008 2007 2008 2007
-------------------------------------------------------------------------
Income (loss) from
continuing
operations $ 14,785 $ (552) $ 65,023 $ 32,308
Income (loss) from
discontinued
operations 1,920 (2,266) (13,680) (4,288)
-------------------------------------------------------------------------
Net income (loss) $ 16,705 $ (2,818) $ 51,343 $ 28,020
-------------------------------------------------------------------------
Weighted average
number of Class A
Subordinate Voting
and Class B Shares
outstanding during
the period
(thousands) 46,708 48,324 46,708 48,348
Dilutive impact of
stock options
(thousands) - - - 21
-------------------------------------------------------------------------
46,708 48,324 46,708 48,369
-------------------------------------------------------------------------
Diluted earnings
(loss) per Class A
Subordinate Voting
or Class B Share
- from continuing
operations $ 0.32 $ (0.01) $ 1.39 $ 0.67
- from discontinued
operations 0.04 (0.05) (0.29) (0.09)
-------------------------------------------------------------------------
$ 0.36 $ (0.06) $ 1.10 $ 0.58
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The computation of diluted earnings (loss) per share for the three-month
and nine-month periods ended September 30, 2008 excludes the effect of
the potential exercise of 506,544 (2007 - 551,444) and 516,444
(2007 - 140,000) options, respectively, to acquire Class A Subordinate
Voting Shares of the Company because the effect would be anti-dilutive.
8. REAL ESTATE PROPERTIES
(a) Real estate properties consist of:
(restated -
notes 4, 5)
September December
As at 30, 2008 31, 2007
-------------------------------------------------------------------------
Real Estate Business
Revenue-producing properties
Land $ 222,533 $ 226,269
Buildings, parking lots and roadways - cost 1,431,160 1,444,241
Buildings, parking lots and roadways
- accumulated depreciation (370,665) (345,825)
-------------------------------------------------------------------------
1,283,028 1,324,685
-------------------------------------------------------------------------
Development properties
Land and improvements 224,009 226,248
Properties under development 539 9,541
-------------------------------------------------------------------------
224,548 235,789
-------------------------------------------------------------------------
Properties held for sale 486 1,447
-------------------------------------------------------------------------
1,508,062 1,561,921
-------------------------------------------------------------------------
MEC
Revenue-producing racetrack properties
Land and improvements 164,858 164,856
Buildings - cost 550,920 544,543
Buildings - accumulated depreciation (130,812) (113,620)
Construction in progress 67,879 42,666
-------------------------------------------------------------------------
652,845 638,445
-------------------------------------------------------------------------
Under-utilized racetrack real estate 76,130 76,130
-------------------------------------------------------------------------
Revenue-producing non-racetrack properties
Land and improvements 159 2,015
Buildings - cost 2,117 2,123
Buildings - accumulated depreciation (7) (93)
-------------------------------------------------------------------------
2,269 4,045
-------------------------------------------------------------------------
731,244 718,620
-------------------------------------------------------------------------
Eliminations (note 19) (55,380) (55,387)
-------------------------------------------------------------------------
Consolidated $ 2,183,926 $ 2,225,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) During the second quarter of 2008, the Real Estate Business
determined that the plan of sale criteria under generally accepted
accounting principles was no longer met for one property included in
"properties held for sale" at December 31, 2007, as the Company
intends to lease the property to a third party tenant. Accordingly,
the property, consisting of land and a vacant building with an
aggregate carrying value of $1.3 million, has been included in
"revenue-producing properties" as at September 30, 2008.
(c) During the second quarter of 2008, the Real Estate Business
determined that one property included in "revenue-producing
properties" at December 31, 2007 is expected to be sold after its
lease expiry date in September 2008. Accordingly, the property,
consisting of land and a vacant building with an aggregate carrying
value of $0.5 million (net of a $0.5 million write-down to the
property's estimated net realizable value in the second quarter of
2008), has been included in "properties held for sale" as at
September 30, 2008.
9. BANK INDEBTEDNESS AND LONG-TERM DEBT
(a) During the nine months ended September 30, 2008, the maturity date of
the MEC Credit Facility was extended from March 31, 2008 to October
15, 2008. In October 2008, the maturity date was extended to November
17, 2008. Borrowings under the MEC Credit Facility are available by
way of U.S. dollar loans and letters of credit, each bearing interest
at the U.S. base rate plus 5.0% or the London Interbank Offered Rate
("LIBOR") plus 6.0%. Loans under the MEC Credit Facility are
collateralized by a first charge on the assets of Golden Gate Fields
and a second charge on the assets of Santa Anita Park, and are
guaranteed by certain of MEC's subsidiaries. At September 30, 2008,
MEC had borrowed $36.5 million (December 31, 2007 - $34.9 million)
under the MEC Credit Facility and had issued letters of credit
totalling $3.4 million (December 31, 2007 - $4.3 million), such that
$0.1 million was unused and available. The weighted average interest
rate on the borrowings outstanding under the MEC Credit Facility at
September 30, 2008 was 8.8% (December 31, 2007 - 11.0%).
(b) At December 31, 2007, MEC's wholly-owned subsidiary AmTote
International, Inc. ("AmTote") had three financing arrangements with
a U.S. financial institution: (i) a $3.0 million revolving credit
facility to finance working capital requirements (the "AmTote Credit
Facility"), (ii) a $4.2 million term loan (the "AmTote Term Loan")
and (iii) a term loan of up to $10.0 million to finance up to 80% of
eligible capital costs related to tote service contracts (the "AmTote
Equipment Term Loan"). The AmTote Credit Facility, AmTote Term Loan
and AmTote Equipment Term Loan were scheduled to mature on May 1,
2008, May 11, 2011 and May 11, 2012, respectively, but on April 30,
2008, the maturity dates were amended to May 30, 2008 for the AmTote
Credit Facility and May 30, 2009 for both term loan facilities. On
May 30, 2008, the AmTote Credit Facility was fully repaid and
terminated. Borrowings under the AmTote Term Loan and the AmTote
Equipment Term Loan bear interest at LIBOR plus 3.0%. Both term loan
facilities are collateralized by a first charge on AmTote's assets
and a pledge of the stock of AmTote. At September 30, 2008, $2.6
million and $2.4 million (December 31, 2008 - $3.3 million and $2.0
million) were outstanding under the AmTote Term Loan and the AmTote
Equipment Term Loan, respectively. As a result of the amendments to
the maturity dates, amounts outstanding under the AmTote Term Loan
and the AmTote Equipment Term Loan are reflected in MEC's "long-term
debt due within one year" on the Company's unaudited interim
consolidated balance sheet at September 30, 2008.
(c) One of MEC's subsidiaries, Pimlico Racing Association, Inc., has a
revolving term loan facility with a U.S. financial institution that
permits the prepayment of outstanding principal without penalty. This
facility matures on December 1, 2013, bears interest at either the
U.S. prime rate or LIBOR plus 2.6% per annum and is collateralized by
deeds of trust on land, buildings and improvements and security
interests in all other assets of the subsidiary and certain
affiliates of The Maryland Jockey Club ("MJC"). On August 5, 2008,
the revolving term loan facility was amended to reduce the maximum
undrawn availability from $7.7 million to $4.5 million. At September
30, 2008, MEC had borrowings of $1.6 million (December 31, 2007 -
nil) under this facility.
(d) One of MEC's European wholly-owned subsidiaries had a bank term loan
with a European financial institution of up to 3.5 million euros
bearing interest at the Euro Overnight Index Average Rate plus 3.8%
per annum. This bank term loan facility was fully repaid when the
facility expired on July 31, 2008.
10. SHARE CAPITAL
Changes in the Company's Class A Subordinate Voting Shares and Class B
Shares are shown in the following table:
Class A Subordinate
Voting Shares Class B Shares
------------------------ -------------------------
Stated Stated
Number Value Number Value
-------------------------------------------------------------------------
Shares issued and
outstanding,
December 31, 2006 47,782,908 $ 1,559,476 547,413 $ 17,866
Issued on exercise of
stock options 38,456 1,303 - -
-------------------------------------------------------------------------
Shares issued and
outstanding,
March 31, 2007 and
June 30, 2007 47,821,364 1,560,779 547,413 17,866
Shares purchased for
cancellation (485,700) (15,853) - -
-------------------------------------------------------------------------
Shares issued and
outstanding,
September 30, 2007 47,335,664 1,544,926 547,413 17,866
Shares purchased for
cancellation (1,175,100) (38,352) - -
-------------------------------------------------------------------------
Shares issued and
outstanding,
December 31, 2007,
March 31, 2008,
June 30, 2008 and
September 30, 2008 46,160,564 $ 1,506,574 547,413 $ 17,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
-----------------------
Stated
Number Value
----------------------------------------------
Shares issued and
outstanding,
December 31, 2006 48,330,321 $ 1,577,342
Issued on exercise of
stock options 38,456 1,303
----------------------------------------------
Shares issued and
outstanding,
March 31, 2007 and
June 30, 2007 48,368,777 1,578,645
Shares purchased for
cancellation (485,700) (15,853)
-----------------------------------------------
Shares issued and
outstanding,
September 30, 2007 47,883,077 1,562,792
Shares purchased for
cancellation (1,175,100) (38,352)
-----------------------------------------------
Shares issued and
outstanding,
December 31, 2007,
March 31, 2008,
June 30, 2008 and
September 30, 2008 46,707,977 $ 1,524,440
----------------------------------------------
----------------------------------------------
Pursuant to the terms of a normal course issuer bid program for which the
Company received approval from the Toronto Stock Exchange ("TSX") on
September 29, 2006, the Company was authorized, from October 4, 2006 to
October 3, 2007, to purchase for cancellation, through the facilities of
the TSX and the New York Stock Exchange ("NYSE"), up to 3,257,895 Class A
Subordinate Voting Shares, being 10% of the Public Float, as such term is
defined by the TSX.
Pursuant to the terms of a normal course issuer bid program for which the
Company received approval from the TSX on October 2, 2007, the Company
was authorized, from October 8, 2007 to October 7, 2008, to purchase for
cancellation, through the facilities of the TSX and the NYSE, up to
2,531,354 Class A Subordinate Voting Shares, being 10% of the Public
Float.
During 2007, the Company purchased an aggregate of 1,660,800 Class A
Subordinate Voting Shares for cancellation under these programs for cash
consideration of $52.1 million (Cdn. $31.13 per share on a weighted
average basis). These amounts include the purchase of 485,700 shares for
cancellation in the three-month and nine-month periods ended September
30, 2007 for cash consideration of $15.4 million (Cdn. $32.58 per share
on a weighted average basis), of which $3.6 million was paid after
September 30, 2007. The Company's historical Canadian carrying value of
these shares purchased for cancellation in excess of the purchase price
was $6.2 million, which has been credited to "contributed surplus" (note
11). The aggregate amount of the purchase price and the amount credited
to "contributed surplus", in excess of the Company's U.S. historical
reported carrying value of these shares purchased for cancellation, was
$5.8 million and has been charged to "accumulated other comprehensive
income" (note 12).
The price that MID paid for shares purchased pursuant to the bids was the
market price at the time of acquisition. No shares were purchased for
cancellation in 2008.
11. CONTRIBUTED SURPLUS
Changes in the Company's contributed surplus are shown in the following
table:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Contributed surplus,
beginning of period $ 27,779 $ 2,674 $ 27,517 $ 2,667
Carrying value of
shares purchased for
cancellation
in excess of
purchase price
(note 10) - 6,222 - 6,222
Stock-based
compensation 312 223 574 475
Transfer to share
capital on exercise
of stock options - - - (245)
-------------------------------------------------------------------------
Contributed surplus,
end of period $ 28,091 $ 9,119 $ 28,091 $ 9,119
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in the Company's accumulated other comprehensive income are shown
in the following table:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Accumulated other
comprehensive income,
beginning of period $ 277,796 $ 200,693 $ 241,939 $ 166,553
Change in fair value
of interest rate
swaps, net of taxes
and minority interest (24) (191) 5 (247)
Foreign currency
translation
adjustment, net of
minority interest (i) (55,513) 45,869 (19,790) 80,717
Reversal of foreign
currency translation
gain related
to shares purchased
for cancellation
(note 10) - (5,778) - (5,778)
Recognition of foreign
currency translation
translation loss
(gain) in net income
(loss) (ii) - - 105 (652)
-------------------------------------------------------------------------
Accumulated other
comprehensive income,
end of period (iii) $ 222,259 $ 240,593 $ 222,259 $ 240,593
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the three-month and nine-month periods ended September 30,
2008 and 2007, the Company reported unrealized foreign currency
translation gains and losses related to its self-sustaining
operations having functional currencies other than the U.S.
dollar. The losses in the three-month and nine-month periods
ended September 30, 2008 are primarily due to the weakening of the
euro and the Canadian dollar against the U.S. dollar. The gains
in the three-month and nine-month periods ended September 30, 2007
are primarily due to the strengthening of the euro and the
Canadian dollar against the U.S. dollar.
(ii) Included in the Real Estate Business' "other gains, net" for the
nine months ended September 30, 2008, is a $0.1 million currency
translation loss (nine months ended September 30, 2007 -
$0.7 million gain) realized from capital transactions that gave
rise to a reduction in the net investment in certain foreign
operations.
(iii) Accumulated other comprehensive income consists of:
September December
As at 30, 2008 31, 2007
-------------------------------------------------------------------------
Foreign currency translation adjustment, net of
minority interest $ 222,676 $ 242,369
Fair value of interest rate swaps, net of taxes
and minority interest (417) (430)
-------------------------------------------------------------------------
$ 222,259 $ 241,939
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. INCOME TAXES
The Company conducts operations in a number of countries with varying
statutory rates of taxation. Judgement is required in the estimation of
income taxes, and future income tax assets and liabilities, in each of
the Company's operating jurisdictions. This process involves estimating
actual current tax exposure, assessing temporary differences that result
from the different treatments of items for tax and accounting purposes,
assessing whether it is more likely than not that future income tax
assets will be realized and, based on all the available evidence,
determining if a valuation allowance is required on all or a portion of
such future income tax assets. The Company's effective tax rate can vary
significantly quarter to quarter due to changes in (i) the proportion of
income earned in each tax jurisdiction, (ii) current and future statutory
rates of taxation, (iii) estimates of tax exposures, (iv) the assessment
of whether it is more likely than not that future income tax assets will
be realized and (v) the valuation allowances recorded on future tax
assets.
The Real Estate Business' income tax expense (recovery) for the three-
month and nine-month periods ended September 30, 2008 is inclusive of an
aggregate income tax recovery of $12.5 million and $12.1 million,
respectively, due to revisions to estimates of certain tax exposures and
the ability to benefit from certain income tax loss carryforwards
previously not recognized, both driven by the results of tax audits in
certain tax jurisdictions. Similarly, MEC's income tax recovery for
discontinued operations (note 4) is inclusive of a $3.1 million income
tax recovery due to revisions to estimates of certain tax exposures
driven by the results of tax audits in certain tax jurisdictions.
The Real Estate Business' income tax expense for the three-month and
nine-month periods ended September 30, 2007 includes (i) a recovery of
$1.6 million realized from the reduction in future tax rates in Canada,
Germany and the United Kingdom enacted in the third quarter of 2007 and
(ii) a net $1.1 million recovery primarily due to a favourable tax
reassessment received in the third quarter of 2007 in relation to land
sold in a prior year.
14. STOCK-BASED COMPENSATION
(a) On August 29, 2003, MID's Board of Directors approved the Incentive
Stock Option Plan (the "MID Plan"), which allows for the grant of
stock options or stock appreciation rights to directors, officers,
employees and consultants. Amendments to the MID Plan were approved
by the Company's shareholders at the May 11, 2007 Annual and Special
Meeting, and became effective on June 6, 2007. At December 31, 2007,
a maximum of 2.61 million MID Class A Subordinate Voting Shares are
available to be issued under the MID Plan.
MID has granted stock options to certain directors and officers to
purchase MID's Class A Subordinate Voting Shares. Such options have
generally been granted with 1/5th of the options vesting on the date
of grant and the remaining options vesting over a period of four
years at a rate of 1/5th on each anniversary of the date of grant.
Options expire on the tenth anniversary of the date of grant, subject
to earlier cancellation in the events specified in the stock option
agreement entered into by MID with each recipient of options. A
reconciliation of the changes in stock options outstanding is
presented below:
2008 2007
------------------------ --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Price Price
Number (Cdn. $) Number (Cdn. $)
-------------------------------------------------------------------------
Stock options
outstanding,
January 1 516,544 35.09 465,000 36.08
Exercised - - (38,456) 32.19
-------------------------------------------------------------------------
Stock options
outstanding, March 31 516,544 35.09 426,544 36.43
Expired (10,000) 41.17 - -
-------------------------------------------------------------------------
Stock options
outstanding, June 30 506,544 34.97 426,544 36.43
Granted - - 125,000 32.21
Forfeited (6,000) 41.17 (35,000) 41.17
-------------------------------------------------------------------------
Stock options
outstanding,
September 30 500,544 34.89 516,544 35.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options
exercisable,
September 30 381,544 34.16 280,544 31.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company estimates the fair value of stock options granted at the date
of grant using the Black-Scholes option valuation model. The Black-
Scholes option valuation model was developed for use in estimating the
fair value of freely traded options, which are fully transferable and
have no vesting restrictions. In addition, this model requires the input
of subjective assumptions, including expected dividend yields, future
stock price volatility and expected time until exercise. Although the
assumptions used reflect management's best estimates, they involve
inherent uncertainties based on market conditions outside of the
Company's control. Because the Company's outstanding stock options have
characteristics that are significantly different from those of traded
options, and because changes in any of the assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide the only measure of the fair value of
the Company's stock options. The assumptions used in determining the fair
value of the MID stock options granted are shown in the table below:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Risk-free interest rate - 4.3% - 4.3%
Expected dividend yield - 1.92% - 1.92%
Expected volatility of
MID's Class A
Subordinate Voting
Shares - 18.9% - 18.9%
Weighted average
expected life (years) - 4.0 - 4.0
Weighted average fair
value per option
granted - $5.51 - $5.51
-------------------------------------------------------------------------
Effective November 3, 2003, MID established a Non-Employee Director
Share-Based Compensation Plan (the "DSP"), which provides for a deferral
of up to 100% of each outside director's total annual remuneration from
the Company, at specified levels elected by each director, until such
director ceases to be a director of the Company. The amounts deferred are
reflected by notional deferred share units ("DSUs") whose value reflects
the market price of the Company's Class A Subordinate Voting Shares at
the time that the particular payment(s) to the director is determined.
The value of a DSU will appreciate or depreciate with changes in the
market price of the Class A Subordinate Voting Shares. The DSP also takes
into account any dividends paid on the Class A Subordinate Voting Shares.
Effective January 1, 2005, all directors were required to receive at
least 50% of their Board and Committee compensation fees (excluding
Special Committee fees, effective January 1, 2006) in DSUs. On January 1,
2008, the DSP was amended such that this 50% minimum requirement is only
applicable to Board retainer fees. Under the DSP, when a director leaves
the Board, the director receives a cash payment at an elected date equal
to the value of the accrued DSUs at such date. There is no option under
the DSP for directors to receive Class A Subordinate Voting Shares in
exchange for DSUs. A reconciliation of the changes in DSUs outstanding is
presented below:
2008 2007
-------------------------------------------------------------------------
DSUs outstanding, January 1 41,452 27,319
Granted 6,012 4,241
-------------------------------------------------------------------------
DSUs outstanding, March 31 47,464 31,560
Granted 5,579 3,025
-------------------------------------------------------------------------
DSUs outstanding, June 30 53,043 34,585
Granted 8,194 3,568
-------------------------------------------------------------------------
DSUs outstanding, September 30 61,237 38,153
-------------------------------------------------------------------------
During the three and nine months ended September 30, 2008, the Real
Estate Business recognized stock-based compensation expense of $0.3
million (2007 - $0.2 million) and $0.6 million (2007 - $0.8 million),
respectively, which includes $3 thousand (2007 - $3 thousand) and $27
thousand (2007 - $0.3 million), respectively, pertaining to DSUs.
(b) During the third quarter of 2008, MEC completed a reverse stock split
whereby every twenty shares of MEC Class A Stock and MEC Class B
Stock have been consolidated into one share of MEC Class A Stock and
MEC Class B Stock, respectively (note 20(n)). In addition, the
number of, and exercise price for, all MEC stock options were
adjusted to reflect the 1:20 consolidation. Accordingly, all of the
disclosures below pertaining to MEC's long-term incentive plan,
performance share awards and options to purchase shares have been
restated for all retroactive periods to reflect the effect of the
reverse stock split.
MEC has a long-term incentive plan (the "MEC Plan"), adopted in 2000
and amended in 2007, which allows for the grant of non-qualified
stock options, incentive stock options, stock appreciation rights,
restricted stock, bonus stock and performance shares to MEC's
directors, officers, employees, consultants, independent contractors
and agents. A maximum of 440 thousand shares of MEC Class A Stock are
available to be issued under the MEC Plan, of which 390 thousand are
available for issuance pursuant to stock options and tandem stock
appreciation rights and 50 thousand are available for issuance
pursuant to any other type of award under the MEC Plan.
Under a 2005 incentive compensation program (the "MEC Program"), MEC
awarded performance shares of MEC Class A Stock to certain of MEC's
officers and key employees. The number of shares of MEC Class A Stock
underlying the 2005 Performance Share Awards was based either on a
percentage of a guaranteed bonus or a percentage of total 2005
compensation divided by the market value of the stock on the date the
MEC Program was approved by the Compensation Committee of MEC's Board
of Directors. The 2005 Performance Share Awards vested over a six or
eight month period to December 31, 2005 and were distributed, subject
to certain conditions, in two equal instalments. The first
distribution date occurred in March 2006 and the second distribution
date occurred in March 2007.
For 2006, MEC continued the MEC Program as described in the preceding
paragraph. The program was similar in all respects except that the
performance shares granted in 2006 vested over a 12-month period to
December 31, 2006 and were distributed, subject to certain
conditions, prior to March 31, 2007.
Accordingly, for the nine months ended September 30, 2007, MEC issued
8,737 of these vested performance share awards with a stated value of
$0.6 million and 324 performance share awards were forfeited. No
performance share awards remain to be issued under the 2005 and 2006
incentive compensation arrangements subsequent to March 31, 2007. MEC
did not continue its performance share award program subsequent to
2006.
During the nine months ended September 30, 2008, MEC issued 21,687
(2007 - 1,547) shares of MEC Class A Stock with a stated value of
$0.2 million (2007 - $0.1 million) to MEC's directors in payment of
services rendered. As a result, the Company recognized a dilution
loss of $0.4 million (included in MEC's "other gains, net") in the
nine months ended September 30, 2008 (2007 - $4 thousand dilution
gain).
MEC grants stock options ("MEC Stock Options") to certain directors,
officers, key employees and consultants to purchase shares of MEC
Class A Stock. All MEC Stock Options give the grantee the right to
purchase MEC Class A Stock at a price no less than the fair market
value of such stock at the date of grant. Generally, MEC Stock
Options under the MEC Plan vest over a period of two to six years
from the date of grant at rates of 1/7th to 1/3rd per year and expire
on or before the tenth anniversary of the date of grant, subject to
earlier cancellation upon the occurrence of certain events specified
in the stock option agreements entered into by MEC with each
recipient of MEC Stock Options. A reconciliation of the changes in
MEC Stock Options outstanding is presented below:
2008 2007
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price $ Number Price $
---------------------------------------------------------------------
MEC Stock Options
outstanding,
January 1 247,500 116.40 245,250 121.60
Forfeited or
expired (10,000) 111.20 (8,300) 134.80
---------------------------------------------------------------------
MEC Stock Options
outstanding,
March 31 237,500 116.60 236,950 121.20
Forfeited or
expired (550) 133.20 (1,250) 114.20
---------------------------------------------------------------------
MEC Stock Options
outstanding,
June 30 236,950 116.55 235,700 121.40
Granted - - 19,500 64.00
Forfeited or
expired - - (700) 104.00
---------------------------------------------------------------------
MEC Stock Options
outstanding,
September 30 236,950 116.55 254,500 117.00
---------------------------------------------------------------------
---------------------------------------------------------------------
MEC Stock Options
exercisable,
September 30 220,802 118.92 221,783 120.40
---------------------------------------------------------------------
---------------------------------------------------------------------
The fair value of MEC Stock Options granted is estimated at the date
of grant using the Black-Scholes option valuation model, which
requires the use of subjective assumptions and may not necessarily
provide the only measure of the fair value of MEC Stock Options (as
described further in note 14(a)). The weighted average assumptions
used in determining the fair value of the MEC stock options granted
are shown in the table below:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Risk-free interest
rate - 4.2% - 4.2%
Expected dividend
yield - - - -
Expected
volatility of
MEC Class A Stock - 55.9% - 55.9%
Weighted average
expected life
(years) - 5.0 - 5.0
Weighted average
fair value per
option granted - $ 27.20 - $ 27.20
---------------------------------------------------------------------
---------------------------------------------------------------------
During the three-month and nine-month periods ended September 30,
2008, MEC recognized total stock-based compensation expense of $36
thousand (2007 - $0.5 million) and $0.3 million (2007 -
$0.7 million), respectively, relating to performance share awards,
director compensation and stock options under the MEC Plan.
15. CAPITAL MANAGEMENT AND LIQUIDITY
The capital resources managed by the Company include:
- cash and cash equivalents;
- credit facilities;
- long-term debt;
- additional borrowing capacity; and
- shareholders' equity.
Each of the Company's reportable segments (note 18) has different capital
management objectives.
Real Estate Business
The Real Estate Business' objectives when managing capital include
ensuring that there are adequate capital resources to sustain operations
and maintaining a capital structure that allows the Real Estate Business
to take advantage of suitable investment opportunities as they arise. The
Real Estate Business monitors its capital based on its ratio of debt to
total capitalization, which it regards as a measure of its ability to
access additional capital as required.
The Real Estate Business must also comply with the terms of its debt
agreements, including its $50.0 million unsecured revolving credit
facility (the "MID Credit Facility") and the trust indenture for its
Cdn. $265.0 million senior unsecured debentures (the "Debentures"), which
include the following limitations:
- secured indebtedness not to exceed 15% of net tangible assets;
- funded debt not to exceed 40% of total capitalization; and
- total interest coverage of no less than 3:1.
At September 30, 2008 and December 31, 2007, the Company had no
borrowings under the MID Credit Facility, which expires on December 21,
2008, but had issued letters of credit totalling $0.3 million.
At September 30, 2008, the Real Estate Business' debt to total
capitalization was 14% (December 31, 2007 - 15%) and the Real Estate
Business was in compliance with all of its covenants. The outstanding
total debt at September 30, 2008 was $259.7 million (December 31, 2007 -
$274.7 million), which is comprised of $253.3 million (December 31, 2007 -
$267.6 million) of the Debentures and $6.4 million (December 31, 2007 -
$7.1 million) of mortgages payable on two properties. The Real Estate
Business' total capitalization at September 30, 2008 was $1.90 billion
(December 31, 2007 - $1.86 billion).
The Real Estate Business generated cash flows from operating activities
of $132.6 million in the nine months ended September 30, 2008 and had
cash and cash equivalents of $156.3 million at September 30, 2008.
The Real Estate Business' strategy for managing its liquidity needs
includes (i) using its cash resources and cash flows from operating
activities, (ii) drawing on the MID Credit Facility if and as needed and
(iii) accessing additional capital by issuing debt, equity or a
combination of securities as required to finance its operations and
capital expenditures. The capital requirements to finance additional
acquisition and development activity will depend on the availability of
suitable investment opportunities and related funding sources.
As disclosed in note 3, MID continues to explore a range of alternatives
in respect of its MEC investment, including evaluating whether or to what
extent MID might participate in a recapitalization or restructuring of
MEC. The participation by MID in any such transaction could result in a
significant increase in the Company's financial leverage, change the risk
profile of the Real Estate Business and/or limit its financial
flexibility to take advantage of certain investment opportunities. In
addition, if the Real Estate Business' funded debt were to exceed 40% of
its total capitalization as a result of these changes, the Company might
be required to repay the Debentures and potentially pay a prepayment
premium determined in accordance with the terms of the applicable trust
indenture, as described in note 11 to the annual consolidated financial
statements for the year ended December 31, 2007.
MEC
MEC's capital is monitored by its separate Board of Directors and
management team based on its level of net debt. MEC must also comply with
the terms of its debt agreements. Many of these debt arrangements are
obligations of individual MEC business units and require compliance with
numerous financial and other covenants. As at September 30, 2008, MEC's
net debt was $618.1 million (December 31, 2007 - $564.5 million) and MEC
was in compliance with all of its covenants. MID's Real Estate Business
has not guaranteed any of MEC's indebtedness.
Under the MEC Debt Elimination Plan (note 1), MEC's capital management
objective is to significantly reduce or eliminate its net debt by
generating funds from the sale of assets (notes 4 and 5), entering into
strategic transactions involving certain of MEC's racing, gaming and
technology operations, and a possible future equity issuance. These
proceeds are to be used to fund MEC's operations and applied to eliminate
MEC's net debt, including amounts owed to the MID Lender (note 19).
Although MEC continues to take steps to implement its plan, MEC does not
expect to be able to complete asset sales as quickly as originally
planned nor does MEC expect to achieve proceeds of disposition as high as
originally contemplated. In order for MEC to fund its ongoing operations
and provide sufficient time to implement the MEC Debt Elimination Plan,
MEC will again need to seek extensions from existing lenders, including
the Company, the availability of which is not yet determinable.
As discussed in note 1, MEC's ability to continue as a going concern is
in substantial doubt and is dependent on MEC generating cash flows that
are adequate to sustain the operations of the business, renewing or
extending current financing arrangements and meeting its obligations with
respect to secured and unsecured creditors, none of which is assured. If
MEC is unable to repay its obligations when due or satisfy required
covenants in its debt agreements, substantially all of its current and
long-term debt will also become due on demand as a result of cross-
default provisions within its loan agreements, unless MEC is able to
obtain waivers, modifications or extensions. The availability of such
waivers, modifications or extensions is not assured and, if available,
the terms thereof are not yet determinable.
16. DETAILS OF CASH FROM OPERATING ACTIVITIES
(a) Items not involving current cash flows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(restated (restated
- note 4) - note 4)
2008 2007 2008 2007
---------------------------------------------------------------------
Real Estate
Business
Straight-line rent
adjustment $ (4) $ 150 $ (38) $ 387
Interest and other
income from MEC (2,295) (156) (4,823) (299)
Stock-based
compensation
expense 315 226 601 763
Depreciation and
amortization 10,956 10,434 33,359 30,581
Write-down of
long-lived
assets - - 450 -
Gain on disposal
of real estate - (96) - (1,478)
Future income
taxes (865) (494) 1,782 1,361
Other losses
(gains) - - 105 (652)
Other 126 85 301 241
---------------------------------------------------------------------
8,233 10,149 31,737 30,904
---------------------------------------------------------------------
MEC
Stock-based
compensation
expense 36 463 267 735
Interest expense
with MID - - - 75
Depreciation and
amortization 11,244 9,974 33,283 27,438
Amortization of
debt issuance
costs 2,896 715 8,046 1,567
Write-down of
long-lived assets - 1,444 5,000 1,444
Gain on disposal
of real estate (122) (100) (24,462) (48,754)
Other gains, net (19) - (1,589) (4)
Future income
taxes (86) (124) 1,476 (1,692)
Minority interest (23,660) (18,759) (29,610) (25,211)
Other 365 (1,951) 2,723 (2,939)
---------------------------------------------------------------------
(9,346) (8,338) (4,866) (47,341)
---------------------------------------------------------------------
Eliminations
(note 19) (249) (255) (2,413) 49,453
---------------------------------------------------------------------
Consolidated $ (1,362) $ 1,556 $ 24,458 $ 33,016
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Changes in non-cash balances:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
(restated (restated
- note 4) - note 4)
2008 2007 2008 2007
---------------------------------------------------------------------
Real Estate
Business
Accounts
receivable $ 3,428 $ 1,525 $ 4,169 $ 2,219
Loans receivable
from MEC, net (321) (128) (654) (128)
Prepaid expenses
and other - (789) 129 (744)
Accounts payable
and accrued
liabilities 1,297 3,326 6,277 5,386
Income taxes (10,277) (439) (8,658) 4,576
Deferred revenue (1,689) (1,019) (515) (746)
---------------------------------------------------------------------
(7,562) 2,476 748 10,563
---------------------------------------------------------------------
MEC
Restricted cash (1,625) (3,685) 14,906 14,945
Accounts
receivable 10,223 9,310 8,981 3,136
Prepaid expenses
and other 2,187 1,649 (5,030) (2,335)
Accounts payable
and accrued
liabilities 2,504 (840) (26,191) (27,586)
Income taxes 860 (932) 2,401 584
Loans Payable to
MID, net 321 128 654 128
Deferred revenue 111 (2,533) (1,456) (2,221)
---------------------------------------------------------------------
14,581 3,097 (5,735) (13,349)
---------------------------------------------------------------------
Eliminations
(note 19) 99 715 381 544
---------------------------------------------------------------------
Consolidated $ 7,118 $ 6,288 $ (4,606) $ (2,242)
---------------------------------------------------------------------
---------------------------------------------------------------------
17. FINANCIAL INSTRUMENTS
(a) Interest Rate Risk
The Company's consolidated results of operations are primarily
exposed to interest rate risk on its credit facilities and MEC's
variable-rate long-term debt. Based on the balances of these
financial liabilities outstanding as at September 30, 2008, a
50 basis point change in annual interest rates, with all other
variables held constant, would have impacted consolidated "interest
expense, net" for the nine months ended September 30, 2008 by
approximately $0.4 million.
The Company is also exposed to interest rate risk on short-term
investments with maturities of up to three months from the date of
acquisition that are included in "cash and cash equivalents" and
"restricted cash" on the Company's consolidated balance sheets. The
balance of the Company's short- term investments fluctuates depending
on the timing of the Company's operating cash flows, capital
expenditures and other liquidity requirements. Assuming the balance
of short-term investments at September 30, 2008 were outstanding
throughout the entire nine months then ended, a 50 basis point change
in annual interest rates, with all other variables held constant,
would have impacted consolidated "interest expense, net" by
approximately $0.5 million for the nine months ended September 30,
2008.
MEC occasionally utilizes interest rate swap contracts to hedge
exposure to interest rate fluctuations on variable rate debt. At
March 31, 2008, MEC had four interest rate swap contracts outstanding
in connection with a LIBOR- based term loan facility described in
note 18(c) to the annual consolidated financial statements for the
year ended December 31, 2007. Based on the interest rate swap
contracts in place at September 30, 2008, a 50 basis point change in
interest rates would have impacted other comprehensive income (loss)
(excluding related minority interest and tax effects) by
approximately $0.5 million for the nine months ended September 30,
2008.
(b) Currency Risk
The Company is structured such that its foreign operations are self-
sustaining. As a result, the Company's currency risk associated with
financial instruments is limited as its financial assets and
liabilities are generally denominated in the functional currency of
the subsidiary that holds the financial instrument. However, the Real
Estate Business' corporate operations, which utilize the Canadian
dollar as the functional currency, have exposure to U.S. dollar and
euro denominated financial assets and liabilities. Similarly, MEC's
operations, which utilize the U.S. dollar as the functional currency,
have exposure to Canadian dollar denominated financial assets and
liabilities. Based on the balance of these financial instruments at
September 30, 2008, a 10% change in exchange rates between the
Canadian dollar and the relevant currencies at September 30, 2008
would not have had a material impact on the Company's consolidated
net income for the nine months ended September 30, 2008.
(c) Credit Risk
MEC, in the normal course of business, settles wagers for racetracks
that it does not operate or manage and is thereby exposed to credit
risk. However, these receivables are generally not a significant
portion of the Company's total assets and are comprised of a large
number of accounts. At September 30, 2008, MEC's "accounts
receivable" included on the Company's consolidated balance sheet are
net of an allowance for doubtful accounts of $1.6 million
(December 31, 2007 - $1.8 million), which is estimated based on a
review of specific customer balances and related historical
collection experience. For the three and nine months ended
September 30, 2008, MEC incurred a bad debt recovery of $0.2 million
(2007 - $30 thousand expense) and bad debt expense of $0.1 million
(2007 - $3 million expense), respectively.
18. SEGMENTED INFORMATION
The Company's reportable segments reflect how the Company is organized
and managed by senior management. The Company's operations are segmented
in the Company's internal financial reports between wholly-owned
operations (Real Estate Business) and publicly-traded operations (MEC).
The segregation of operations between wholly-owned and publicly-traded
operations recognizes the fact that, in the case of the Real Estate
Business, the Company's Board of Directors and executive management have
direct responsibility for the key operating, financing and resource
allocation decisions, whereas, in the case of MEC, such responsibility
resides with MEC's separate Board of Directors and executive management.
The Company's reporting segments are as follows:
Real Estate Business
At September 30, 2008, the Real Estate Business owns real estate assets
in Canada, Austria, the United States, Germany, Mexico, the Czech
Republic, the United Kingdom, Spain and Poland. Substantially all of
these real estate assets are leased to, or are under development for
subsequent lease to, Magna's automotive operating units. The Real Estate
Business also owns certain properties that are being held for future
development or sale.
MEC
MEC operates or manages seven thoroughbred racetracks, one standardbred
racetrack and two racetracks that run both thoroughbred and quarter horse
meets, as well as the simulcast wagering venues at these tracks. Also,
MEC used to manage the thoroughbred and standardbred racing at Magna
Racino(TM), but a local operator is now managing meets at that facility.
Three of the racetracks owned or operated by MEC (two in the United
States and one in Austria) include casino operations with alternative
gaming machines. In addition, MEC operates off-track betting ("OTB")
facilities, a United States based national account wagering business
known as XpressBet(R) and a European account wagering service known as
MagnaBet(TM). Under a series of March 2007 agreements with Churchill
Downs Incorporated ("CDI"), MEC owns a 50% interest in a joint venture,
TrackNet Media Group, LLC ("TrackNet Media"), a content management
company formed for distribution of the full breadth of MEC's and CDI's
horseracing content (note 20). A separate joint venture with CDI, "HRTV,
LLC", also involves the ownership by each of MEC and CDI of 50% shares in
HorseRacing TV(R) ("HRTV(R)"), a television network focused on
horseracing that MEC initially launched on the Racetrack Television
Network. MEC also owns AmTote, a provider of totalisator services to the
pari-mutuel industry. To support certain of MEC's thoroughbred
racetracks, MEC owns and operates thoroughbred training centres in Palm
Beach County, Florida and in the Baltimore, Maryland area and, under a
triple-net lease agreement with MID, operates an additional thoroughbred
training centre situated near San Diego, California. MEC also owns and
operates production facilities in Austria and in North Carolina for
StreuFex(TM), a straw-based horse bedding product. In addition to
racetracks, MEC's real estate portfolio includes a residential
development in Austria.
As described in note 1, the Company's consolidated statements of income
(loss), consolidated statements of cash flows and consolidated balance
sheets have been arranged to provide detailed, discrete financial
information on the Real Estate Business and MEC reporting segments.
19. TRANSACTIONS WITH RELATED PARTIES
Mr. Frank Stronach, the Company's Chairman, the Chairman of Magna, and
the Chairman and Chief Executive Officer of MEC, and three other members
of his family are trustees of the Stronach Trust. The Stronach Trust
controls the Company through the right to direct the votes attaching to
66% of the Company's Class B Shares. Magna is controlled by M Unicar Inc.
("M Unicar"), a Canadian holding company whose shareholders consist of
the Stronach Trust and certain members of Magna's management. M Unicar
indirectly owns Magna Class A Subordinate Voting Shares and Class B
Shares representing in aggregate approximately 65% of the total voting
power attaching to all Magna's shares. The Stronach Trust indirectly owns
the shares carrying the substantial majority of the votes of M Unicar. As
the Company and Magna may be considered to be under the common control of
the Stronach Trust, they are considered to be related parties for
accounting purposes.
(a) Bridge Loans and Project Financings
On September 13, 2007, MID announced that the MID Lender had agreed
to provide MEC with the MEC Bridge Loan of up to $80.0 million
(subsequently increased to $125.0 million as discussed below). The
MEC Bridge Loan, together with a $20.0 million private placement of
MEC Class A Stock to FEL (the "FEL Equity Investment") completed in
October 2007, was intended to provide short-term funding to MEC as it
sought to implement the MEC Debt Elimination Plan (note 1). At that
time, the MID Lender also agreed to amend the MEC Project Financing
Facilities (as defined below) by, among other things, requiring
repayment of at least $100.0 million under the Gulfstream Park
project financing facility on or prior to May 31, 2008 (subsequently
extended to December 1, 2008 as discussed below) and waiving the
make-whole payment, if applicable, for any repayments made under
either of the MEC Project Financing Facilities prior to that date.
Pursuant to a consulting agreement between MID and MEC, which
requires MEC to reimburse MID for its expenses, MID management has
provided assistance to MEC in implementing the MEC Debt Elimination
Plan.
(i) MEC Bridge Loan
The MEC Bridge Loan has been made available through a non-
revolving facility provided by the MID Lender. The MEC Bridge
Loan proceeds may only be used by MEC in accordance with the
MEC Debt Elimination Plan and are available solely to fund: (i)
operations; (ii) payments of principal, interest and costs,
fees and expenses due under the MEC Bridge Loan and the MEC
Project Financing Facilities; (iii) mandatory payments of
interest in connection with permitted debt under the MEC Bridge
Loan; (iv) mandatory capital expenditures; and (v) capital
expenditures required pursuant to the terms of the joint
venture arrangements between MEC and Forest City and Caruso
(note 20).
The MEC Bridge Loan initially had a maturity date of May 31,
2008 and bore interest at a rate per annum equal to LIBOR plus
10.0% prior to December 31, 2007, at which time the interest
rate on outstanding and subsequent advances was increased to
LIBOR plus 11.0% (set at 16.2% at December 31, 2007). On
February 29, 2008, the interest rate on outstanding and
subsequent advances under the MEC Bridge Loan was increased by
a further 1.0% (set at 15.7% at September 30, 2008).
During the nine months ended September 30, 2008, the maturity
date of the MEC Bridge Loan was extended from May 31, 2008 to
October 31, 2008, the maximum commitment under the MEC Bridge
Loan was increased from $80.0 million to $110.0 million, MEC
was given the ability to re-borrow $21.5 million that had been
previously repaid from proceeds of asset sales (note 5) and MEC
was permitted to use up to $2.0 million to fund costs
associated with the November 2008 gaming referendum in
Maryland. In October 2008, the maturity date of the MEC Bridge
Loan was extended to December 1, 2008, the maximum commitment
under the MEC Bridge Loan was increased to $125.0 million, MEC
was given the ability to re-borrow $4.5 million that had been
previously repaid from proceeds of an additional asset sale
(note 4) and MEC was permitted to use up to an additional
$1.0 million to fund costs associated with the November 2008
gaming referendum in Maryland. Draws under the MEC Bridge Loan
are not permitted after November 17, 2008 unless the MEC Credit
Facility (note 9) is further extended or replaced.
The MEC Bridge Loan is secured by certain assets of MEC,
including first ranking security over the Dixon, Ocala and
Thistledown lands, second ranking security over Golden Gate
Fields and third ranking security over Santa Anita Park. In
addition, the MEC Bridge Loan is guaranteed by certain MEC
subsidiaries and MEC has pledged the shares and all other
interests MEC has in each of the guarantor subsidiaries (or
provided negative pledges where a pledge was not possible due
to regulatory constraints or due to a pledge to an existing
third party lender). The MEC Bridge Loan is cross-defaulted to
all other obligations of MEC and its subsidiaries to the MID
Lender, including the MEC Project Financing Facilities.
The MEC Bridge Loan must be repaid with, and the commitment is
reduced by, amounts equal to all net proceeds realized by MEC
from asset sales and issuances of equity (other than the FEL
Equity Investment) or debt, subject to amounts required to be
paid to MEC's existing lenders. Amounts repaid subsequent to
the changes made in October 2008 cannot be re-borrowed. During
the three and nine months ended September 30, 2008,
$4.5 million and $26.0 million, respectively, of the MEC Bridge
Loan was repaid from proceeds of MEC asset sales (notes 4
and 5).
The MID Lender received an arrangement fee of $2.4 million (3%
of the commitment) at closing and received an additional
arrangement fee of $0.8 million on February 29, 2008 (1% of the
then current commitment). In connection with the amendments
during the nine months ended September 30, 2008, the MID Lender
received aggregate fees of $3.2 million. Subsequent to quarter-
end, the MID Lender received a fee of $1.3 million in
connection with the changes made in October 2008 (1% of the
increased maximum commitment). The MID Lender also receives an
annual commitment fee equal to 1% of the undrawn facility. All
fees, expenses and closing costs incurred by the MID Lender in
connection with the MEC Bridge Loan and the changes thereto are
paid by MEC.
At September 30, 2008, $88.6 million (December 31, 2007 - $36.9
million) due under the MEC Bridge Loan was included in the Real
Estate Business' current portion of "loans receivable from MEC,
net" on the Company's consolidated balance sheet, net of $0.6
million (December 31, 2007 - $1.4 million) of unamortized
deferred arrangement fees. MEC's current portion of "loans
payable to MID, net" on the Company's consolidated balance
sheet includes borrowings of $88.6 million (December 31, 2007 -
$35.9 million), net of $0.6 million (December 31, 2007 - $2.4
million) unamortized deferred financing costs. This net balance
will be accreted to its face value over the remaining term to
maturity of the MEC Bridge Loan.
(ii) MEC Project Financings
The MID Lender has made available separate project financing
facilities to Gulfstream Park Racing Association, Inc. ("GPRA")
and Remington Park, Inc., the wholly-owned subsidiaries of MEC
that own and/or operate Gulfstream Park and Remington Park,
respectively, in the amounts of $162.3 million and $34.2
million, respectively, plus costs and capitalized interest in
each case as discussed below (together, the "MEC Project
Financing Facilities"). The MEC Project Financing Facilities
have a term of 10 years (except as described below for the two
slot machine tranches of the Gulfstream Park project financing
facility) from the relevant completion dates for the
construction projects at Gulfstream Park and Remington Park,
which occurred in February 2006 and November 2005,
respectively.
The Remington Park project financing and the Gulfstream Park
project financing contain cross-guarantee, cross-default and
cross-collateralization provisions. The Remington Park project
financing is secured by all assets of the borrower (including
first ranking security over the Remington Park leasehold
interest), excluding licences and permits, and is guaranteed by
the MEC subsidiaries that own Gulfstream Park and the Palm
Meadows Training Center. The security package also includes
second ranking security over the lands owned by Gulfstream Park
and second ranking security over the Palm Meadows Training
Center and the shares of the owner of the Palm Meadows Training
Center (in each case, behind security granted for the
Gulfstream Park project financing). In addition, the borrower
has agreed not to pledge any licences or permits held by it and
MEC has agreed not to pledge the shares of the borrower or the
owner of Gulfstream Park. The Gulfstream Park project financing
is guaranteed by MEC's subsidiaries that own and operate the
Palm Meadows Training Center and Remington Park and is secured
principally by security over the lands (or, in the case of
Remington Park, over the leasehold interest) forming part of
the operations at Gulfstream Park, the Palm Meadows Training
Center and Remington Park and over all other assets of
Gulfstream Park, the Palm Meadows Training Center and Remington
Park, excluding licences and permits (which cannot be subject
to security under applicable legislation).
In July 2006 and December 2006, the Gulfstream Park project
financing facility was amended to increase the amount available
from $115.0 million (plus costs and capitalized interest) by
adding new tranches of up to $25.8 million (plus costs and
capitalized interest) and $21.5 million (plus costs and
capitalized interest), respectively. Both tranches were
established to fund MEC's design and construction of slot
machine facilities located in the existing Gulfstream Park
clubhouse building, as well as related capital expenditures and
start-up costs, including the acquisition and installation of
slot machines. The new tranches of the Gulfstream Park project
financing facility both mature on December 31, 2011. Interest
under the December 2006 tranche was capitalized until May 1,
2007, at which time monthly blended payments of principal and
interest became payable to the MID Lender based on a 25-year
amortization period commencing on such date. Advances relating
to the slot machine tranches are made available by way of
progress draws and there is no make-whole payment associated
with the new tranches. Also in July 2006, the Gulfstream Park
project financing facility was further amended to introduce a
mandatory annual cash flow sweep of not less than 75% of
Gulfstream Park's total excess cash flow, after permitted
capital expenditures and debt service, which will be used to
repay the additional principal amounts being made available
under the new tranches. The July 2006 and December 2006
amendments did not affect the fact that the Gulfstream Park
project financing facility continues to be cross-guaranteed,
cross-defaulted and cross- collateralized with the Remington
Park project financing facility. The consideration for the July
2006 and December 2006 amendments was an arrangement fee of 1%
of the amount of each new tranche, which amounts are
capitalized under the Gulfstream Park project financing
facility.
In September 2007, the terms of the Gulfstream Park project
financing facility were amended such that: (i) MEC was added as
a guarantor under that facility; (ii) the borrower and all of
the guarantors agreed to use commercially reasonable efforts to
implement the MEC Debt Elimination Plan (including the sale of
specific assets by the time periods listed in the MEC Debt
Elimination Plan); and (iii) the borrower became obligated to
repay at least $100.0 million under the Gulfstream Park project
financing facility on or prior to May 31, 2008. In
consideration of these amendments and subject to certain
conditions, the MID Lender agreed to waive the make-whole
payment for any repayments made under the MEC Project Financing
Facilities on or prior to May 31, 2008 and adjust the
amortization schedule for the Gulfstream Park project financing
facility following receipt of the $100.0 million repayment,
provided that (i) repayments under the Gulfstream Park project
financing facility are first applied to the July 2006 slots
tranche, then to the December 2006 slots tranche (for each of
which there is no make-whole payment), and then to the original
tranche and (ii) no event of default exists under the MEC
Project Financing Facilities.
In connection with the amendments to the MEC Bridge Loan during
the nine months ended September 30, 2008, the MID Lender also
agreed to amend the Gulfstream Park project financing facility
by extending the deadline for repayment of at least $100.0
million from May 31, 2008 to October 31, 2008. In connection
with the October 2008 changes to the MEC Bridge Loan, the MID
Lender also agreed to extend the repayment deadline under the
Gulfstream Park project financing facility to December 1, 2008.
Any repayments made under either of the MEC Project Financing
Facilities on or prior to December 1, 2008 will not be subject
to a make-whole payment. Subsequent to quarter-end, the MID
Lender received a fee of $1.0 million in connection with the
October 2008 extension (1% of the minimum required repayment).
Since the relevant completion date (or since inception for the
July 2006 and December 2006 tranches of the Gulfstream Park
project financing facility), amounts outstanding under each of
the MEC Project Financing Facilities bear interest at a fixed
rate of 10.5% per annum, compounded semi-annually. Prior to
January 1, 2007, payment of interest was capitalized (except in
relation to the December 2006 tranche of the Gulfstream Park
project financing facility, for which the interest
capitalization period was extended to May 1, 2007). Commencing
January 1, 2007 (May 1, 2007 for the December 2006 tranche of
the Gulfstream Park project financing facility), the MID Lender
receives monthly blended payments of principal and interest
based on a 25-year amortization period under each of the MEC
Project Financing Facilities. Since the completion date for
Remington Park, there has also been in place a mandatory annual
cash flow sweep of not less than 75% of Remington Park's total
excess cash flow, after permitted capital expenditures and debt
service, which is used to pay capitalized interest on the
Remington Park project financing facility plus a portion of the
principal under the facility equal to the capitalized interest
on the Gulfstream Park project financing facility. There were
no such payments made during the three months ended September
30, 2008 (2007 - $1.6 million), and $1.7 million of such
payments made during the nine months ended September 30, 2008
(2007 - $3.3 million). During the three months ended March 31,
2008, Remington Park agreed to purchase 80 Class III slot
machines from GPRA with funding from the Remington Park project
financing facility. Accordingly, $1.0 million was advanced
under the existing Remington Park project financing facility
during the three months ended March 31, 2008.
At September 30, 2008, there were balances of $171.4 million
(December 31, 2007 - $172.1 million), and $26.8 million
(December 31, 2007 - $27.7 million) due under the Gulfstream
Park project financing facility and the Remington Park project
financing facility, respectively. The current portion of the
MEC Project Financing Facilities included in the Real Estate
Business' "loans receivable from MEC, net" at September 30,
2008 was $102.0 million, including the required $100.0 million
repayment discussed above. The current and non-current portions
of the MEC Project Financing Facilities, as reflected in MEC's
"loans payable to MID, net" on the Company's consolidated
balance sheet, are $102.0 million (including $0.4 million in
MEC's "discontinued operations" (note 4)) and $92.3 million
(including $25.3 million in MEC's "discontinued operations"
(note 4)), respectively, with the non-current portion being net
of $4.0 million of unamortized deferred financing costs. This
net balance will be accreted to its face value over the
remaining terms to maturity of the MEC Project Financing
Facilities.
In connection with the Gulfstream Park project financing
facility, MEC has placed into escrow (the "Gulfstream Escrow")
with the MID Lender proceeds from an asset sale which occurred
in fiscal 2005 and certain additional amounts necessary to
ensure that any remaining Gulfstream Park construction costs
(including the settlement of liens on the property) can be
funded, which escrowed amount has been and will be applied
against any such construction costs. At September 30, 2008, the
amount held under the Gulfstream Escrow was $0.9 million
(December 31, 2007 - $4.5 million). All funds in the Gulfstream
Escrow are reflected as the Real Estate Business' "restricted
cash" and "due to MEC" on the Company's consolidated balance
sheet.
Approximately $8.9 million of external third party costs have been
incurred in association with the MEC Bridge Loan and the MEC Project
Financing Facilities. At the MEC segment level, these costs are
recognized as deferred financing costs and are being amortized into
interest expense (of which a portion has been capitalized in the case
of the MEC Project Financing Facilities) over the respective term of
the MEC Bridge Loan and each of the MEC Project Financing Facilities.
At a consolidated level, such costs are charged to "general and
administrative" expenses in the periods in which they are incurred.
All interest and fees charged by the Real Estate Business relating to
the MEC Bridge Loan and the MEC Project Financing Facilities,
including any capitalization and subsequent amortization thereof by
MEC, and any adjustments to MEC's related deferred financing costs,
are eliminated from the Company's consolidated results of operations
and financial position.
(b) MEC's Real Estate Sales to Magna
In April 2008, MEC completed the sale to a subsidiary of Magna of 225
acres of excess real estate located in Ebreichsdorf, Austria for
proceeds of 20.0 million euros ($31.5 million), net of transaction
costs (note 5(b)). MEC recognized a gain in the nine months ended
September 30, 2008 of 15.5 million euros ($24.3 million), which is
included in MEC's "gain on disposal of real estate".
(c) Magna Lease Terminations
During the three months ended March 31, 2008, the Real Estate
Business and Magna completed a lease termination agreement
(retroactive to May 31, 2007) on a property in the United Kingdom
that the Real Estate Business is seeking to redevelop for residential
purposes. In April 2008, the Real Estate Business paid Magna $2.0
million to terminate the lease, and the termination payment is
included in the Real Estate Business' "real estate properties, net"
at September 30, 2008 on the Company's unaudited interim consolidated
balance sheet. The Real Estate Business had not recognized any
revenue under the lease of this property since May 31, 2007.
During the three months ended March 31, 2008, the Real Estate
Business and Magna also agreed to terminate the lease on a property
in Canada. In conjunction with the lease termination, Magna agreed to
pay the Company a fee of $3.9 million, which amount was collected in
April 2008 and has been recognized by the Real Estate Business in
"other gains, net" in the Company's unaudited interim consolidated
financial statements for the nine months ended September 30, 2008.
(d) Sale of MEC Real Estate to Joint Venture
On April 2, 2008, one of MEC's European wholly-owned subsidiaries,
Fontana Beteiligungs GmbH ("Fontana"), entered into an agreement to
sell real estate with a carrying value of 0.2 million euros ($0.3
million) located in Oberwaltersdorf, Austria to Fontana Immobilien
GmbH, an entity in which Fontana had a 50% joint venture equity
interest, for 0.8 million euros ($1.2 million). The purchase price
was originally payable in instalments according to the sale of
apartment units by the joint venture and, in any event, was due no
later than April 2, 2009. On August 1, 2008, Fontana sold its 50%
joint venture equity interest in Fontana Immobilien GmbH to a related
party. The sale price included nominal cash consideration equal to
Fontana's initial capital contribution and a future profit
participation in Fontana Immobilien GmbH. Fontana and Fontana
Immobilien GmbH also agreed to amend the real estate sale agreement
such that payment of the purchase price to Fontana was accelerated
to, and paid on, August 7, 2008, resulting in a gain in the three and
nine months ended September 30, 2008 of 0.6 million euros ($0.9
million), which is included in MEC's "gain on disposal of real
estate".
(e) MEC Real Estate Acquired by MID
During the first quarter of 2007, MID acquired all of MEC's interests
and rights in three real estate properties to be held for future
development: a 34 acre parcel in Aurora, Ontario; a 64 acre parcel of
excess land adjacent to MEC's racetrack at Laurel Park in Howard
County, Maryland; and a 157 acre parcel (together with certain
development rights) in Palm Beach County, Florida adjacent to MEC's
Palm Meadows Training Center. MID paid cash consideration of
approximately Cdn. $12.0 million ($10.1 million), $20.0 million and
$35.0 million, respectively, for these interests and rights. In
addition, MID granted MEC a profit participation right in respect of
each property, which entitles MEC to receive additional cash proceeds
equal to 15% of the net proceeds from any sale or development of the
applicable property after MID achieves a 15% internal rate of return.
During the second quarter of 2007, MID acquired all of MEC's interest
and rights in a 205 acre parcel of land located in Bonsall,
California for cash consideration of approximately $24.0 million. In
the three and nine months ended September 30, 2008, $0.1 million of
cash consideration previously held back was released to MEC. The
property currently houses the San Luis Rey Downs Thoroughbred
Training Facility operated by MEC. MID is holding the property for
future development and has agreed to lease the property to MEC on a
triple-net basis for nominal rent while MID pursues the necessary
entitlements and other approvals to permit the development of the
property. The term of the lease is three years, subject to early
termination by either party on four months written notice.
At the Real Estate Business and MEC segment levels, these
transactions have been recognized at the exchange amount, resulting
in MEC recognizing a gain in the three-month and nine-month periods
ended September 30, 2008 of $0.1 million (2007 - $0.1 million) and
$0.1 million (2007 - $48.8 million), respectively, included in MEC's
"gain on disposal of real estate". The effects of these transactions
are eliminated from the Company's unaudited interim consolidated
results of operations and financial position, except that $1.8
million of costs incurred by the Real Estate Business and MEC in
conjunction with these transactions have been included in the
consolidated "general and administrative" expenses in the nine months
ended September 30, 2007.
(f) Hurricane Katrina Relief Effort
In October 2005, the Real Estate Business purchased 791 acres of land
in Simmesport, Louisiana for $2.4 million. In the fourth quarter of
2005, the Real Estate Business committed to donating approximately 50
acres of this land to a not-for-profit organization established to
assist Hurricane Katrina redevelopment efforts with charitable
funding from Magna and other Canadian sources. In the second quarter
of 2007, the Real Estate Business committed to donating the remaining
741 acres of land to the same not-for-profit organization. As a
result, $2.0 million of costs associated with this further donation
is included in the Real Estate Business' "general and administrative"
expenses in the nine months ended September 30, 2007. The founding
members and officers of the not-for-profit organization are officers
and employees of MID and Magna.
20. COMMITMENTS AND CONTINGENCIES
(a) In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with, among others,
customers, suppliers and former employees. Management believes that
adequate provisions have been recorded in the accounts where
required. Although it is not possible to accurately estimate the
extent of potential costs and losses, if any, management believes,
but can provide no assurance, that the ultimate resolution of such
contingencies would not have a material adverse effect on the
financial position of the Company.
(b) On July 10, 2008, the Ontario Divisional Court dismissed the appeal
by Greenlight Capital, Inc. and certain of its affiliates of the
October 2006 decision of the Ontario Superior Court of Justice
dismissing Greenlight's oppression application against the Company
and certain of its current and former directors and officers. The
appeal hearing took place in April 2008.
(c) MEC generates a substantial amount of its revenues from wagering
activities and is subject to the risks inherent in the ownership and
operation of its racetracks. These include, among others, the risks
normally associated with changes in the general economic climate,
trends in the gaming industry, including competition from other
gaming institutions and state lottery commissions, and changes in tax
laws and gaming laws.
(d) On May 18, 2007, ODS Technologies, L.P., operating as TVG Network,
filed a summons against MEC, HRTV, LLC and XpressBet, Inc. seeking an
order that the defendants be enjoined from infringing certain patents
relating to interactive wagering systems and an award of damages to
compensate for the infringement. An Answer to Complaint, Affirmative
Defences and Counterclaims have been filed on behalf of the
defendants. The discovery and disposition process is ongoing and the
final outcome related to this summons is uncertain.
(e) In addition to the letters of credit issued under the Company's
credit facilities (notes 9 and 15), the Company had $4.1 million
(Real Estate Business - $3.2 million; MEC - $0.9 million) of letters
of credit issued with various financial institutions at September 30,
2008 to guarantee various construction projects. These letters of
credit are secured by cash deposits of the Company.
(f) MEC has provided indemnities related to surety bonds and letters of
credit issued in the process of obtaining licences and permits at
certain racetracks and to guarantee various construction projects
related to activities of its subsidiaries. At September 30, 2008,
these indemnities amounted to $6.5 million, with expiration dates
through 2009.
(g) At September 30, 2008, the Company's contractual commitments related
to construction and development projects outstanding amounted to
approximately $5.0 million (Real Estate Business - $4.8 million;
MEC - $0.2 million).
(h) On March 4, 2007, MEC entered into a series of customer-focused
agreements with CDI in order to enhance wagering integrity and
security, to own and operate HRTV(R), to buy and sell horseracing
content, and to promote the availability of horseracing signals to
customers worldwide. These agreements involved the formation of a
joint venture, TrackNet Media, a reciprocal content swap agreement
and the purchase by CDI from MEC of a 50% interest in HRTV(R).
TrackNet Media is the vehicle through which MEC and CDI horseracing
content is made available to third parties, including racetracks, OTB
facilities, casinos and advance deposit wagering ("ADW") companies.
TrackNet Media purchases horseracing content from third parties and
makes it available through the respective MEC and CDI outlets. Under
the reciprocal content swap agreement, MEC and CDI exchange their
respective horseracing signals. On March 4, 2007, HRTV, LLC was
created, with an effective date of April 27, 2007, in order to
facilitate the sale of 50% of HRTV(R) to CDI. Both MEC and CDI are
required to make quarterly capital contributions, on an equal basis,
until October 2009 to fund the operations of HRTV, LLC, however, MEC
may, under certain circumstances, be responsible for additional
capital commitments. As of September 30, 2008, MEC has not made any
additional capital contributions. MEC's share of the required capital
contributions to HRTV, LLC is expected to be approximately $7.0
million, of which $4.3 million had been contributed prior to
September 30, 2008.
(i) On December 8, 2005, legislation authorizing the operation of slot
machines within existing, licensed Broward County, Florida pari-
mutuel facilities that had conducted live racing or games during each
of 2002 and 2003 was passed by the Florida Legislature. On January 4,
2006, the Governor of Florida signed the legislation into law and,
subsequently, the Division of Pari-mutuel Wagering developed the
governing rules and regulations. Prior to the opening of the slots
facility at Gulfstream Park on November 15, 2006, MEC was awarded a
gaming licence for slot machine operations at Gulfstream Park in
October 2006 despite an August 2006 decision rendered by the Florida
First District Court of Appeals that ruled that a trial is necessary
to determine whether the constitutional amendment adopting the slots
initiative was invalid because the petitions bringing the initiative
forward did not contain the minimum number of valid signatures.
Previously, a lower court decision had granted summary judgment in
favour of "Floridians for a Level Playing Field" ("FLPF"), a group in
which GPRA is a member. Though FLPF pursued various procedural
options in response to the Florida First District Court of Appeals
decision, the Florida Supreme Court ruled in late September 2007 that
the matter was not procedurally proper for consideration by the
court. Its order effectively remanded the matter to the trial court
for a trial on the merits. MEC has disclosed that it expects that a
trial on the merits will likely take an additional year or more to
fully develop and that it could take as many as three years to
achieve a full factual record and trial court ruling for an appellate
court to review. At September 30, 2008, the carrying value of MEC's
fixed assets related to the slots facility is approximately $25.1
million. If the matter is ultimately decided in a manner adverse to
MEC, a write-down of these fixed assets may be required.
(j) In May 2005, MEC entered into a Limited Liability Company Agreement
with Forest City (collectively with MEC, the "Partnership Members")
concerning the planned development of "The Village at Gulfstream
Park(TM)". That agreement contemplates the development of a mixed-use
project consisting of residential units, parking, restaurants,
hotels, entertainment, retail outlets and other commercial use
projects on a portion of the Gulfstream Park property. Under the
Limited Liability Company Agreement, Forest City is required to
contribute up to a maximum of $15.0 million as an initial capital
contribution. MEC is obligated to contribute 50% of any equity
amounts in excess of $15.0 million as and when needed and, to
September 30, 2008, MEC has contributed $4.2 million. At September
30, 2008, approximately $72.5 million of net costs have been incurred
by The Village at Gulfstream Park, LLC, which have been funded by a
construction loan from a third party bank, as well as equity
contributions from MEC and Forest City. Included in MEC's "accounts
payable and accrued liabilities" is an obligation of approximately
$2.6 million reflecting MEC's unpaid share of equity contributions in
excess of $15.0 million. If either of the Partnership Members fails
to make required capital contributions when due, then the other
Partnership Member may advance such funds to the Limited Liability
Company, equal to the required capital contributions, as a recourse
loan or as a capital contribution for which the capital accounts of
the Partnership Members would be adjusted accordingly. The Limited
Liability Company Agreement also contemplated additional agreements
with MEC, including a ground lease, a reciprocal easement agreement,
a development agreement, a leasing agreement and a management
agreement, all of which have been executed. Upon the opening of The
Village at Gulfstream Park(TM), annual cash receipts (adjusted for
certain disbursements and reserves) will first be distributed to
Forest City, subject to certain limitations, until the initial
contribution accounts of the Partnership Members are equal.
Thereafter, the cash receipts are generally expected to be
distributed to the Partnership Members equally, provided they
maintain their equal interest in the partnership. The annual cash
payments made to Forest City to equalize the Partnership Members'
initial contribution accounts will not exceed the amount of annual
ground rent otherwise payable to a subsidiary of MEC.
(k) On September 28, 2006, certain of MEC's affiliates entered into
definitive operating agreements with Caruso regarding the proposed
development of The Shops at Santa Anita on approximately 51 acres of
excess land surrounding Santa Anita Park. Westfield Corporation
("Westfield"), a developer of a neighbouring parcel of land, has
challenged the manner in which the entitlement process for such
development has proceeded. On May 16, 2007, Westfield commenced civil
litigation in the Los Angeles Superior Court in an attempt to
overturn the Arcadia City Council's approval and granting of
entitlements related to the construction of The Shops at Santa Anita.
In addition, on May 21, 2007, Arcadia First! filed a petition against
the City of Arcadia to overturn the entitlements and named MEC and
certain of its subsidiaries as parties of interest. The first
hearings on the merits of the petitioners' claims were heard in May
2008. On July 23, 2008, the court issued a tentative opinion in
favour of the petitioners in part, concluding that eleven parts of
the final environmental impact report were deficient. On September
29, 2008, the court heard the respondents' motion to vacate the
tentative opinion and to enter a new and different decision. That
motion was denied and the court declared its tentative opinion to be
its final decision. The respondents are considering whether to amend
and supplement the environmental impact report in an attempt to cure
the eleven defects or, in the alternative, to file a notice of
appeal. The last day to file an appeal is December 16, 2008. As a
result of this legal challenge, development efforts may be delayed or
suspended. Under an April 2004 Letter of Intent, MEC is also
exploring the possibility of a joint venture with Caruso to develop
excess lands surrounding Golden Gate Fields. To September 30, 2008,
MEC has expended $10.7 million on these development initiatives, of
which $0.7 million was paid in the nine months ended September 30,
2008. These amounts have been included in MEC's "real estate
properties, net" on the Company's consolidated balance sheets. Under
the terms of these arrangements, MEC may be responsible to fund
additional costs. However, to September 30, 2008, no such payments
have been made.
(l) In November 2006, MEC sold its wholly-owned interest in The Meadows,
a standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a
company jointly owned by William Paulos and William Wortman,
controlling shareholders of Millennium Gaming, Inc., and a fund
managed by Oaktree Capital Management, LLC (together, "Millennium-
Oaktree"). On closing, MEC received cash consideration of $171.8
million, net of transaction costs of $3.2 million, and a $25.0
million holdback note payable to MEC over a five-year period, subject
to offset for certain indemnification obligations (the "Meadows
Holdback Note"). Based on the indemnification obligations and other
terms pertaining to the Meadows Holdback Note, the Meadows Holdback
Note will be recognized in the consolidated financial statements upon
the settlement of the indemnification obligations and as payments are
received.
The parties also entered into a racing services agreement whereby MEC
pays $50 thousand per annum and continues to operate, for its own
account, the racing operations at The Meadows until at least July
2011. On December 12, 2007, Cannery Casino Resorts, LLC, the parent
company of Millennium-Oaktree, announced it had entered into an
agreement to sell Millennium-Oaktree to Crown Limited. If the deal is
consummated, either party to the racing services agreement will have
the option to terminate the arrangement. $5.6 million of the gain
from the sale of The Meadows was initially deferred and included in
MEC's "other long-term liabilities" representing the estimated net
present value of the future operating losses expected over the term
of the racing services agreement. Such amount is being recognized as
a reduction of "general and administrative" expenses in MEC's results
of operations over the term of the racing services agreement.
Effective January 1, 2008, The Meadows entered into an agreement with
the Meadows Standardbred Owners Association, which expires on
December 31, 2009, whereby the horsemen will make contributions to
subsidize backside maintenance and marketing expenses at The Meadows.
As a result, the estimated operating losses expected over the
remaining term of the racing services agreement have been revised,
resulting in an additional $2.0 million of previously deferred gains
being recognized in MEC's "other gains, net" for the nine months
ended September 30, 2008.
Until December 25, 2007, The Meadows participated in a multi-employer
defined benefit pension plan for which the pension plan's total
vested liabilities exceeded the plan's assets. The New Jersey Sports
& Exposition Authority previously withdrew from the pension plan
effective November 1, 2007. As the only remaining participant in the
pension plan, The Meadows withdrew from the pension plan effective
December 25, 2007, which constituted a mass withdrawal. An updated
actuarial valuation is in the process of being obtained, however,
based on allocation information provided by the plan, the estimated
withdrawal liability of The Meadows is approximately $6.2 million.
This liability may be satisfied by annual payments of approximately
$0.3 million. As part of the indemnification obligations provided for
in the Meadows Holdback Note, the mass withdrawal liability that has
been triggered as a result of The Meadows' withdrawal from the plan
will be set-off against the amount owing to MEC under the Meadows
Holdback Note.
(m) MJC was party to agreements with the Maryland Thoroughbred Horsemen's
Association ("MTHA") and the Maryland Breeders' Association, which
expired on December 31, 2007, under which the horsemen and the
breeders each contributed 4.75% of the costs of simulcasting to MJC.
On August 28, 2008, MJC entered into an agreement under which the
MTHA paid $0.6 million as an expense contribution towards the costs
associated with simulcasting at MJC. In return, MJC agreed to conduct
65 live racing days during the period from September 4, 2008 to
December 31, 2008, maintain overnight purses at an average of $160
thousand per day during the aforementioned period, and maintain
stabling facilities at Laurel Park and the Bowie Training Center
during the aforementioned period.
(n) On February 12, 2008, MEC received notice from the Nasdaq Stock
Market ("Nasdaq") advising that, in accordance with Nasdaq
Marketplace Rule 4450(e)(2), MEC had until August 11, 2008 to regain
compliance with the minimum bid price required for the continued
listing of the MEC Class A Stock on Nasdaq, as set forth in Nasdaq
Marketplace Rule 4450(a)(5). MEC received this notice because the bid
price of its publicly held MEC Class A Stock closed below the $1.00
per share minimum for 30 consecutive business days prior to February
12, 2008.
In order to provide MEC with flexibility in addressing market-related
issues affecting its capitalization and to address the Nasdaq
continuous listing requirements, MEC's Board of Directors adopted a
resolution, approved by MEC stockholders on May 6, 2008, to amend
MEC's Certificate of Incorporation to permit a one-time reverse stock
split of MEC's Class A Stock and MEC Class B Stock, prior to May 6,
2009, in any whole number consolidated ratio from 1:10 to 1:20.
Effective July 22, 2008, MEC completed a reverse stock split of its
Class A Stock and Class B Stock utilizing a 1:20 consolidation ratio.
On August 5, 2008, MEC received notice from Nasdaq that it had
regained compliance with the minimum bid continued listing
requirement and the matter had been closed.
As a result of the reverse stock split, every twenty shares of MEC
Class A Stock and MEC Class B Stock have been consolidated into one
share of MEC Class A Stock and MEC Class B Stock, respectively. The
reverse stock split affects all shares of common stock, stock options
and convertible securities of MEC outstanding prior to the effective
date. The 58.6 million outstanding shares of MEC Class A Stock (4.4
million of which were held by MID) and 58.4 million outstanding
shares of MEC Class B Stock (all of which were held by MID) were
reduced to 2.9 million shares of MEC Class A Stock (0.2 million of
which are held by MID) and 2.9 million shares of MEC Class B Stock
(all of which continue to be held by MID), respectively.
Because the reverse stock split applies to all issued shares of MEC
Class A Stock and MEC Class B Stock, it did not alter the relative
rights and preferences of MID's interest in MEC, nor did it affect
MID's proportionate equity or voting interest in MEC, except to the
extent the reverse stock split resulted in fractional shares being
cashed out. The Company recorded a gain of $19 thousand, included in
"other gains" reported under the MEC segment for the three and nine
months ended September 30, 2008 in association with fractional shares
of MEC Class A Stock redeemed pursuant to MEC's reverse stock split.
As a result of the reverse stock split, the conversion price for
which each of MEC's $150.0 million of 8.55% convertible subordinated
notes and $75.0 million of 7.25% convertible subordinated notes are
convertible into shares of MEC Class A Stock has been adjusted from
$7.05 and $8.50 per share, respectively, to $141.00 and $170.00 per
share, respectively.
(o) On May 8, 2008, one of MEC's wholly-owned subsidiaries, Los Angeles
Turf Club, Incorporated, commenced civil litigation in the District
Court in Los Angeles for breach of contract. It is seeking damages in
excess of $8.4 million from Cushion Track Footing USA, LLC and other
defendants for failure to install a racing surface at Santa Anita
Park suitable for the purpose for which it was intended. The
defendants were served with the complaint and filed a motion to
dismiss the action for lack of personal jurisdiction. On October 22,
2008, the presiding judge denied the defendant's motions, such that
they are now required to file answers to the complaint within 20 days
of the judge's decision.
For further information: please contact Richard J. Smith, Executive
Vice- President and Chief Financial Officer, at (905) 726-7507; for
teleconferencing questions, please contact Andrea Sanelli at (905) 726-7504
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