AURORA, ON, March 10 /PRNewswire-FirstCall/ -
MI Developments Inc. (TSX: MIM.A, MIM.B; NYSE: MIM) ("MID"
or the "Company") today announced its results for the three-month
period and year ended December 31, 2010.
The results for the three-month periods and years ended December
31, 2010 and 2009 are summarized below (all figures are in U.S.
dollars):
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MID
CONSOLIDATED |
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Three months
ended
December 31, |
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Year ended
December 31, |
(in thousands, except per share
figures) |
|
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2010 |
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2009 |
|
|
2010 |
|
2009 |
Revenues |
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|
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|
Real Estate Business |
|
|
|
$ |
43,655 |
|
$ |
58,042 |
|
$ |
174,480 |
$ |
224,034 |
|
Racing & Gaming Business(1) |
|
|
|
|
65,796 |
|
|
- |
|
|
183,880 |
|
- |
|
MEC(2)(3) |
|
|
|
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- |
|
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- |
|
|
- |
|
152,935 |
|
Eliminations |
|
|
|
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- |
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- |
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- |
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(9,636) |
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|
|
$ |
109,451 |
|
$ |
58,042 |
|
$ |
358,360 |
$ |
367,333 |
Net income (loss) attributable to
MID |
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Real Estate Business |
|
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|
$ |
(42,016) |
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$ |
(72,800) |
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$ |
24,671 |
$ |
11,717 |
|
Racing & Gaming Business |
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|
|
|
(47,292) |
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- |
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|
(76,683) |
|
- |
|
MEC - continuing operations |
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- |
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- |
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|
- |
|
(54,763) |
|
Eliminations |
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|
- |
|
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- |
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- |
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(107) |
|
Loss from continuing operations |
|
|
|
$ |
(89,308) |
|
$ |
(72,800) |
|
$ |
(52,012) |
$ |
(43,153) |
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Income from MEC discontinued
operations(4) |
|
|
|
|
- |
|
|
- |
|
|
- |
|
864 |
|
|
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$ |
(89,308) |
|
$ |
(72,800) |
|
$ |
(52,012) |
$ |
(42,289) |
Diluted loss attributable to MID per
share from continuing operations |
|
|
|
$ |
(1.91) |
|
$ |
(1.56) |
|
$ |
(1.11) |
$ |
(0.93) |
Diluted loss attributable to MID per
share |
|
|
|
$ |
(1.91) |
|
$ |
(1.56) |
|
$ |
(1.11) |
$ |
(0.91) |
Real Estate
Business |
|
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|
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|
|
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Funds from operations ("FFO")(5) |
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$ |
(31,445) |
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$ |
(61,873) |
|
$ |
67,436 |
$ |
52,860 |
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Diluted FFO per share(5) |
|
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|
$ |
(0.67) |
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$ |
(1.32) |
|
$ |
1.44 |
$ |
1.13 |
______________________________________
(1) |
On April 30, 2010, certain assets of Magna Entertainment Corp.
("MEC") were transferred to MID, including Santa Anita Park, Golden
Gate Fields, Gulfstream Park (including MEC's interest in The
Village at Gulfstream ParkTM, a joint venture between
MEC and Forest City Enterprises, Inc.), Portland Meadows, The
Maryland Jockey Club ("MJC") which includes Pimlico Race Course and
Laurel Park, AmTote and XpressBet® (the "Transferred Assets"),
pursuant to the Joint Plan of Affiliated Debtors, the Official
Committee of Unsecured Creditors, MID and MI Developments US
Financing Inc. pursuant to the Bankruptcy Code (as amended, the
"Plan"). Effective July 1, 2010, the Company has joint
venture interests with Penn National Gaming, Inc. in MJC's real
estate and racing operations and future gaming opportunities at the
MJC properties. The Company sold its 49% interest in
MJC to Penn National Gaming, Inc. on July 1, 2010. |
(2) |
On March 5, 2009 (the "Petition Date"), MEC and certain of its
subsidiaries (collectively, the "Debtors") filed voluntary
petitions for reorganization under Chapter 11 of Title 11 of the
United States Code in the United States Bankruptcy Court for the
District of Delaware (the "Court") and were granted recognition of
the Chapter 11 proceedings from the Ontario Superior Court of
Justice under section 18.6 of the Companies' Creditors Arrangement
Act (the "CCAA") in Canada. As a result of the MEC Chapter 11
filing at the Petition Date, the Company concluded that, under
United States generally accepted accounting principles ("U.S.
GAAP"), it ceased to have the ability to exert control over MEC on
or about the Petition Date. Accordingly, the Company's
investment in MEC was deconsolidated from the Company's results
beginning on the Petition Date. The Company's results of
operations for the year ended December 31, 2009 include the results
of MEC up to the Petition Date of March 5, 2009. Transactions
and balances between the "Real Estate Business" and "MEC" segments
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 for periods prior to the
Petition Date. |
(3) |
Excludes revenues from MEC's discontinued operations which
include Remington Park, Thistledown, Portland Meadows and Magna
RacinoTM. |
(4) |
Discontinued operations represent MEC's discontinued
operations, net of certain related consolidation adjustments.
MEC's discontinued operations for the year ended December 31, 2009
include the operations of Remington Park, Thistledown, Portland
Meadows and Magna Racino™. |
(5) |
FFO and diluted FFO per share are measures widely used by
analysts and investors in evaluating the operating performance of
real estate companies. However, FFO does not have a
standardized meaning under U.S. GAAP and therefore may not be
comparable to similar measures presented by other companies.
The Company determines FFO using the definition prescribed in the
United States by the National Association of Real Estate Investment
Trusts® ("NAREIT"). For a reconciliation of FFO to net income
(loss), please refer to the section titled "Real Estate Business
- Reconciliation of Funds From Operations to Net Income
(Loss)". |
REORGANIZATION PROPOSAL
On December 22, 2010, the Company received a reorganization
proposal which contemplates the elimination of MID's dual class
share capital structure through which Mr. Frank Stronach and his
family control MID (the "Stronach Shareholder"). The
reorganization proposal achieves this through: i) the cancellation
of all 363,414 MID Class B Shares ("Class B Shares") held by the
Stronach Shareholder upon the transfer to the Stronach Shareholder
of MID's Racing & Gaming Business as well as lands held for
development as described in note 5(a) to the consolidated financial
statements and other assets (and associated liabilities), and $20
million of working capital as of January 1, 2011 and ii) the
purchase for cancellation by MID of each of the other 183,999 Class
B Shares in consideration for 1.2 MID Class A Subordinate Voting
Shares, which following cancellation of the Class B Shares will be
renamed Common Shares. On January 31, 2011, the Company
entered into definitive agreements with respect to the
reorganization proposal.
The reorganization proposal was made by holders of MID's Class A
Subordinate Voting Shares representing in excess of 50% of the
outstanding Class A Subordinate Voting Shares (the "Initiating
Shareholders"), including eight of MID's top ten shareholders, and
is supported by the Stronach Shareholder, which holds 57% of the
votes attaching to MID's outstanding shares. Each of the
Initiating Shareholders and the Stronach Shareholder have agreed to
vote in favour of the proposed reorganization. In addition,
shareholders representing in excess of 50% of the outstanding Class
B Shares held by minority shareholders have also agreed to vote in
favour of the proposed reorganization.
The proposed reorganization will be implemented pursuant to a
court-approved plan of arrangement (the "Arrangement") under the
Business Corporations Act (Ontario) and will be subject to
approval by shareholders at the annual and general meeting
scheduled to be held on March 29, 2011 and the Ontario Superior
Court of Justice thereafter. The Board of Directors has
approved MID entering into the transaction and recommends that the
holders of MID Class A Subordinate Voting Shares and Class B Shares
vote in favour of the resolution approving the Arrangement (the
"Arrangement Resolution"). The votes represented by the
Stronach Shareholder, the Initiating Shareholders and the other
holders of the Class B Shares who have agreed to vote in favour of
the Arrangement will be sufficient to pass the Arrangement
Resolution.
MID CONSOLIDATED FINANCIAL RESULTS
Three-Month Period Ended December 31, 2010
For the three-months ended December 31, 2010, the Company's
revenues increased by $51.4 million from $58.0 million in the
fourth quarter of 2009 to $109.4 million in the fourth quarter of
2010. The Real Estate Business revenues decreased by $14.4
million from $58.0 million in 2009 to $43.7 million in 2010.
The Racing & Gaming Business revenues were $65.8 million in
2010 with no comparative amount in 2009.
Real Estate Business
The reduction in our Real Estate Business revenues of $14.4
million is due to a decrease in interest and other income from MEC
of $13.3 million and a decrease in rental revenue of $1.1
million.
Interest and other income from MEC consist of interest and fees
earned in relation to loan facilities between MID and MEC and
certain of its subsidiaries. These loan facilities were
settled and interest and other income thereon ceased in the second
quarter of 2010 as the Debtors' Chapter 11 process concluded
following the close of business on April 30, 2010, the effective
date of the Plan.
With respect to the decrease in our rental revenue of $1.1
million, the additional rent earned from contractual rent increases
and completed projects on-stream were more than offset by the
effect of changes in foreign currency exchange rates and the
negative impact of vacancies, renewals and re-leasing.
Real Estate Business net loss in the fourth quarter of 2010
decreased by $30.8 million to $42.0 million from a net loss of
$72.8 million in the prior year period. The decrease in net
loss is primarily due to a $90.8 impairment provision related to
the loans receivable from MEC and a $7.8 million currency
translation loss incurred in the fourth quarter of 2009 relating to
the reduction in the net investment of a foreign operation,
partially offset in the current period by an increase in the
write-down of long-lived assets of $36.1 million, the decrease of
$13.2 million in interest and other income from MEC and an increase
of $20.5 million in income tax expense.
In the fourth quarter of 2010, the Real Estate Business recorded
impairment charges totalling $40.6 million relating to parcels of
land held for development. In the comparative 2009
period, the Real Estate Business had an impairment charge related
to one of its income producing properties of $4.5
million. The increase in income tax expense of $20.5
million in the fourth quarter of 2010 is primarily due to (i) an
internal amalgamation which was undertaken in 2010 with the
unintended result of causing the Company to incur $12.7 million of
current income tax expense (the Company has retained legal counsel
to apply to the Ontario Superior Court of Justice to have the
amalgamation set aside and cancelled and the outcome of this
process is uncertain), (ii) a tax benefit of $5.6 million booked on
the impairment charges relating to the MEC loans in 2009 and (iii)
lower net loss in the fourth quarter of 2010.
FFO for the fourth quarter of 2010 improved from a loss of $61.9
million in the prior year period to a loss of $31.4 million in 2010
due primarily to the reduced net loss for the reasons noted
above.
Racing & Gaming Business
The Company acquired the Racing & Gaming Business on April
30, 2010 pursuant to the Plan. As a result, the fourth
quarter of 2010 includes the operations of the Racing & Gaming
Business for the entire period. There are no comparative
results for the Racing & Gaming Business in the fourth quarter
of 2009.
For the three-months ended December 31, 2010, our racetracks
hosted a total of 89 live race days and generated racing, gaming
and other revenues of $65.8 million.
The Racing & Gaming Business net loss for the fourth quarter
of 2010 was $47.3 million. Contributing to the net loss is the
seasonal nature of the Racing & Gaming Business. Our
racing operations historically operate at a loss in the second half
of the year with the first quarter of the year being the most
profitable. The net loss from the core Racing & Gaming
operations (the Racing & Gaming Business excluding the equity
loss from the Company's investments) in the fourth quarter of 2010
was $23.7 million. The net loss in the fourth quarter of 2010
was also significantly impacted by the Company's share of losses of
$23.6 million incurred from our equity accounted investments,
primarily Maryland RE & R LLC and Laurel Gaming LLC.
Also in the fourth quarter of 2010, the Racing
& Gaming Business recorded a write-down of long-lived and
intangible assets of $3.5 million at XpressBet® whose
operations were adversely impacted by certain credit card companies
and financial institutions choosing to block otherwise exempt
internet gambling transactions.
Year Ended December 31, 2010
For the year ended December 31, 2010, the Company's revenues
decreased by $8.9 million from $367.3 million in 2009 to $358.4
million in 2010. The Real Estate Business revenues decreased
by $39.9 million from $214.4 million (revenue of $224.0 million
less intercompany elimination of $9.6 million) in 2009 to $174.5
million in 2010. The Racing & Gaming Business revenues
were $183.9 million in 2010 with no comparative amount in
2009. Revenues from the deconsolidated MEC were $152.9
million in 2009, which was earned from the period January 1, 2009
to March 5, 2009. The Company deconsolidated MEC's operations on
March 5, 2009 due to MEC's Chapter 11 filing and did not record any
further amounts subsequent to this date.
Real Estate Business
The reduction in the Real Estate Business revenues of $39.9
million is due to a decrease in interest and other income from MEC
of $41.6 million ($51.2 million less intercompany elimination of
$9.6 million) partially offset with an increase in rental revenue
of $1.7 million.
Interest and other income from MEC ceased in the second quarter
of 2010 as various MEC loan facilities were settled pursuant to the
Plan.
Rental revenues for 2010 increased $1.7 million to $172.6
million from $170.9 million in the prior year primarily due to the
positive impact of foreign exchange.
Real Estate Business net income of $24.7 million for 2010
increased by $13.0 million compared to net income of $11.7 million
in the prior year. The increase is primarily due to (i) the
impairment provision related to the loans receivable from MEC of
$90.8 million recorded in 2009, (ii) the impairment recovery
relating to loans receivable from MEC of $10.0 million and the
$21.0 million purchase price consideration adjustment related to
the Transferred Assets recorded in 2010 (iii) the 2010 increase in
the write-down of long-lived assets of $36.1 million, (iv) a
decrease in interest and other income from MEC of $51.3 million
during 2010, (v) an increase in income tax expense of $31.7 million
in 2010, (vi) a $7.8 million currency translation loss incurred in
2009 related to the reduction in the net investment of a foreign
operation and (vii) a decrease in general and administrative
expenses of $3.0 million.
The increase in the write-down of long-lived assets is described
above. The increase in income tax expense is due to the
internal amalgamation undertaken that resulted in $12.7 million of
current tax expense as discussed above, the reversal of a tax
benefit booked in 2009 of $11.2 million and with the balance
primarily due to the mix of taxable income earned in the various
countries in which the Real Estate Business operates as the
jurisdictions have different rates of taxation.
FFO for 2010 increased by $14.6 million or $0.31 per share as
compared to the prior year primarily due to increased net income of
$13.0 million for the reasons noted herein and the increase in
depreciation and the loss on disposal of real estate as compared to
the prior year.
Racing & Gaming Business
The Racing & Gaming Business for the year ended December 31,
2010 includes the results of operations since April 30, 2010, the
acquisition date of the Transferred Assets. For the year
ended December 31, 2009, MEC's results are included for the period
up to March 5, 2009, the date of MEC's Chapter 11 filing and
deconsolidation from the Company's results.
During 2010, our racetracks hosted a total of 155 live race days
and generated racing, gaming and other revenues of $183.9 million
with no comparable results in the prior year.
Racing & Gaming Business net loss in 2010 was $76.7
million. The loss from the core Racing & Gaming
operations was $47.2 million. The seasonal nature of our
Racing & Gaming Business contributed to the net loss from our
core business during the year. As the Company acquired the
Racing & Gaming Business on April 30, 2010, it did not benefit
from the first quarter's operation which historically is the most
profitable period. The net loss from our core business during
2010 was also attributable to the national trend of declining
pari-mutuel wagering activity. In addition, for the 2010
year, the Company's loss from equity accounted investments was
$29.5 million and the write-down of long-lived and intangible
assets was $3.5 million.
A more detailed discussion of MID's consolidated financial
results for the three-month period and year ended December 31, 2010
is contained in Management's Discussion and Analysis of Results of
Operations and Financial Position and the unaudited interim
consolidated financial statements and notes thereto, which are
attached to this press release. The 2010 Annual Report is
available through the internet on Canadian Securities
Administrators' Systems for Electronic Document Analysis and
Retrieval (SEDAR) and can be accessed at www.sedar.com and on the
United States Securities and Exchange Commission's Electronic Data
Gathering, Analysis and Retrieval System (EDGAR) which can be
accessed at www.sec.gov.
REAL ESTATE BUSINESS - RECONCILIATION OF FUNDS FROM
OPERATIONS TO NET INCOME (LOSS)
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Three
months ended
December 31, |
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Year ended
December 31, |
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(in thousands, except per share
information) |
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2010 |
|
|
2009 |
|
|
|
2010 |
|
|
2009 |
|
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|
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|
Net income (loss) |
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|
|
$ |
(42,016) |
|
$ |
(72,800) |
|
|
$ |
24,671 |
|
$ |
11,717 |
Add back depreciation and amortization |
|
|
|
|
10,571 |
|
|
10,870 |
|
|
|
41,560 |
|
|
41,349 |
Add back (deduct) loss (gain) on
disposal of real estate |
|
|
|
|
- |
|
|
57 |
|
|
|
1,205 |
|
|
(206) |
Funds from operations |
|
|
|
$ |
(31,445) |
|
$ |
(61,873) |
|
|
$ |
67,436 |
|
$ |
52,860 |
|
|
|
|
|
|
|
|
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Basic and diluted funds from operations per
share |
|
|
|
$ |
(0.67) |
|
$ |
(1.32) |
|
|
$ |
1.44 |
|
$ |
1.13 |
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|
Basic and diluted number of shares
outstanding |
|
|
|
|
46,708 |
|
|
46,708 |
|
|
|
46,708 |
|
|
46,708 |
|
|
|
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|
|
|
|
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|
DIVIDENDS
MID's Board of Directors has declared a dividend of $0.10 per
share on MID's Class A Subordinate Voting Shares and Class B Shares
for the fourth quarter ended December 31, 2010. The dividend
is payable on or about April 15, 2011 to shareholders of record at
the close of business on April 8, 2011.
Unless indicated otherwise, MID has designated the entire amount
of all past and future taxable dividends paid since January 1, 2006
to be an "eligible dividend" for purposes of the Income Tax Act
(Canada), as amended from time to time. Please contact your
tax advisor if you have any questions with regard to the
designation of eligible dividends.
ABOUT MID
MID is a real estate operating company engaged primarily in the
acquisition, development, construction, leasing, management and
ownership of a predominantly industrial rental portfolio leased
primarily to Magna International Inc. and its automotive operating
units in North America and Europe. MID also acquires land that it
intends to develop for mixed-use and residential projects.
Additionally, MID owns Santa Anita Park, Golden Gate Fields,
Gulfstream Park (including an interest in The Village at Gulfstream
Park™, a joint venture with Forest City Enterprises, Inc.), an
interest in joint ventures in The Maryland Jockey Club with Penn
National Gaming, Inc., Portland Meadows, AmTote and XpressBet®, and
through some of these assets, is a supplier, via simulcasting, of
live horseracing content to the inter-track, off-track and account
wagering markets. For further information about MID, please visit
www.midevelopments.com or call 905-713-6322.
For further information, please contact John Simonetti, Interim
Chief Financial Officer, at 905-726-7133.
OTHER INFORMATION
For further information about MID, please see our website at
www.midevelopments.com. Copies of financial data and other
publicly filed documents are available through the internet on
Canadian Securities Administrators' Systems for Electronic Document
Analysis and Retrieval (SEDAR) which can be accessed at
www.sedar.com and on the United States Securities and Exchange
Commission's Electronic Data Gathering, Analysis and Retrieval
System (EDGAR) which can be accessed at www.sec.gov.
FORWARD-LOOKING STATEMENTS
This press release may 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 events,
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 the Company's Annual Information Form
for 2010, filed on SEDAR at www.sedar.com and attached as Exhibit 1
to the Company's Annual Report on Form 40-F for the year ended
December 31, 2010, 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 statements were made and unless otherwise required
by applicable securities laws, the Company 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.
Management's Discussion and Analysis of
Results of Operations and Financial Position
For the three-month period and year ended
December 31, 2010
Management's Discussion and Analysis of Results
of Operations and Financial Position ("MD&A") of MI
Developments Inc. ("MID" or the "Company") summarizes the
significant factors affecting the consolidated operating results,
financial condition, liquidity and cash flows of MID for the
three-month period and year ended December 31, 2010. Unless
otherwise noted, all amounts are in United States ("U.S.") dollars
and all tabular amounts are in millions of U.S. dollars. This
MD&A should be read in conjunction with the accompanying
unaudited interim consolidated financial statements for the
three-month period and year ended December 31, 2010, which are
prepared in accordance with United States generally accepted
accounting principles ("U.S. GAAP"). For a reconciliation of
the Company's results of operations and financial position from
U.S. GAAP to Canadian generally accepted accounting principles
("Canadian GAAP"), see note 23 to the unaudited interim
consolidated financial statements. This MD&A is prepared
as at March 10, 2011. Additional information relating to MID,
including the Annual Information Form for 2010, can be obtained
from the Company's website at www.midevelopments.com and on SEDAR
at www.sedar.com.
OVERVIEW
MID is engaged primarily in the acquisition,
development, construction, leasing, management and ownership of a
predominantly industrial rental portfolio leased primarily to Magna
International Inc. ("Magna") and its automotive operating units.
MID also acquires land that it intends to develop for mixed-use and
residential projects. Additionally, MID is engaged in racing and
gaming operations and owns Santa Anita Park, Golden Gate Fields,
Gulfstream Park, Portland Meadows, AmTote International Inc.
("AmTote") and XpressBet, Inc. ("XpressBet®"), and through
some of these assets, is a supplier, via simulcasting, of live
horseracing content to the inter-track, off-track and account
wagering markets. In addition, effective July 1, 2010, the
Company owns a 51% interest in a joint venture with real estate and
racing operations in Maryland including, Pimlico Race Course,
Laurel Park and a thoroughbred training center and a 49% interest
in a joint venture which was established to pursue gaming
opportunities at the Maryland properties. The Company operates and
reports in two segments, the "Real Estate Business" and the "Racing
& Gaming Business".
Real Estate Business
The Real Estate Business is engaged primarily in
the acquisition, development, construction, leasing, management and
ownership of a predominantly industrial rental portfolio leased
primarily to Magna and its automotive operating units.
Members of the Magna group of companies are MID's primary tenants
and provide approximately 98% of the annual real estate revenue
generated by MID's income-producing properties (see "REAL ESTATE
BUSINESS - BUSINESS AND OPERATIONS OF MAGNA, OUR PRINCIPAL TENANT -
Our Relationship with Magna"). In addition, MID owns land
for industrial development and owns and acquires land to develop
for mixed-use and residential projects. The Company's primary
objective is to increase cash flow from its real estate operations,
net income and the value of its assets in order to maximize the
return on shareholders' equity over the long term.
The Real Estate Business is the successor to
Magna's real estate division, which prior to its spin-off from
Magna on August 29, 2003 was organized as an autonomous business
unit within Magna.
Racing & Gaming Business
The Racing & Gaming Business owns and
operates four thoroughbred racetracks located in the U.S., as well
as the simulcast wagering venues at these tracks, which consist of:
Santa Anita Park, Golden Gate Fields, Gulfstream Park (which
includes a casino with alternative gaming machines) and Portland
Meadows. In addition, the Racing & Gaming Business
operates: XpressBet®, a U.S. based national account wagering
business, AmTote, a provider of totalisator services to the
pari-mutuel industry and a thoroughbred training centre in Palm
Meadows, Florida. The Racing & Gaming Business also includes a
50% joint venture interest in The Village at Gulfstream Park™, an
outdoor shopping and entertainment centre located adjacent to
Gulfstream Park, a 50% joint venture interest in HRTV, LLC,
which owns Horse Racing TV®, a television network focused on horse
racing and effective July 1, 2010, a 51% joint venture interest in
Maryland RE & R LLC, which is engaged in real estate and racing
operations and owns two thoroughbred racetracks, Pimlico Race
Course and Laurel Park, as well as a thoroughbred training centre
and a 49% joint venture interest in Laurel Gaming LLC, which was
established to pursue gaming opportunities at the Maryland
properties.
The Racing & Gaming Business is the
successor to certain of the racing and gaming operations of Magna
Entertainment Corp. ("MEC"), certain of whose operations were
transferred to MID on April 30, 2010 pursuant to MEC's Plan of
Reorganization (the "Plan") under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") (see "SIGNIFICANT
MATTERS - TRANSFER OF MEC ASSETS TO MID").
Segmented Information
The Company's reportable segments reflect the
manner in which the Company is organized and managed by its senior
management. In this MD&A, we use the terms "Real Estate
Business" and "Racing & Gaming Business" to analyze the
financial results for the three-month periods ended and years ended
December 31, 2010 and 2009. The resuts of operations of the Racing
& Gaming Business for the three-month period ended December 31,
2010 include the results of the Transferred Assets for the entire
period and for the year ended December 31, 2010 include the results
of the Transferred Assets (see "SIGNIFICANT MATTERS - TRANSFER OF
MEC ASSETS TO MID") from April 30, 2010, the date the assets were
acquired by MID. The results of operations of the Racing &
Gaming Business for the year ended December 31, 2009 also include
MEC's results of operations for the period up to March 5, 2009 (the
"Petition Date"), the date on which MEC and certain of its
subsidiaries filed voluntary petitions for reorganiation under the
Bankruptcy Code. The results for the three-month period ended
December 31, 2009 do not include the results of MEC.
Subsequent to the effective date of the Plan on
April 30, 2010, the Company operates in two segments, the "Real
Estate Business" and the "Racing & Gaming Business". The
Company's reportable segments are determined based on the distinct
nature of their operations and each segment offers different
services and is managed separately. Prior to the
deconsolidation of MEC at March 5, 2009, the Company's operations
were segmented in the Company's internal financial reports between
wholly-owned operations ("Real Estate Business") and
publicly-traded operations ("MEC"). This segregation of
operations between wholly-owned and publicly-traded operations
recognized the fact that, in the case of the Real Estate Business,
the Company's Board of Directors (the "Board") and executive
management have direct responsibility for the key operating,
financing and resource allocation decisions, whereas, in the case
of MEC, such responsibility resided with MEC's separate Board of
Directors and executive management.
HIGHLIGHTS
During 2010, the Company settled its lawsuit
with the unsecured creditors of the bankrupt MEC and recovered
considerable value for its loans to MEC, including several
racetracks comprising significant tracts of land in major urban
cities in the United States. Magna, the major tenant of our
Real Estate Business emerged from a challenging period in the
automotive industry. During the three-month period ended
December 31, 2010, the Company received a proposal from certain
Class A Shareholders to eliminate MID's dual-class share structure
(see "SIGNIFICANT MATTERS - Reorganization Proposal").
For the fourth quarter of 2010, total revenues
increased $51.4 million mainly due to the acquisition of the
Transferred Assets on April 30, 2010. For the year ended
December 31, 2010, total revenues decreased $9.0 million from
$367.3 million to $358.4 million. Rental revenue increased by
$1.7 million in 2010 as compared to 2009 primarily as a result of
the impact of foreign currency exchange. Interest and other
income from MEC decreased from $43.5 million in 2009 to $1.8
million in 2010. Interest and other income from MEC ceased on April
30, 2010, the effective date of the Plan. Racing, gaming and
other revenues increased from $152.9 million in 2009 to $183.9
million in 2010.
For the fourth quarter of 2010, net loss
attributable to MID was $89.3 million in comparison to net loss of
$72.8 million in the fourth quarter of 2009. The increase in
net loss is due to the increase in the write-down of long-lived
assets in the Real Estate Business of $36.1 million, the decrease
in interest and other income from MEC of $13.3 million, the
increase in income tax expense of $20.4 million and the net loss of
the Transferred Assets of $47.3 million partially offset with the
impairment provision related to the loans receivable from MEC of
$90.8 million and the $7.8 million currency translation loss
recorded in 2009. For the year ended December 31, 2010, net loss
attributable to MID was $52.0 million in comparison to net loss of
$42.3 million in 2009. The Real Estate Business incurred net
income of $24.7 million in 2010 as compared to $11.7 million in
2009. In 2010, the Racing & Gaming Business experienced a
net loss of $76.7 million since the acquisition of the Transferred
Assets on April 30, 2010. In 2009, the Racing & Gaming
Business' net loss was $54.3 million for the period up to the
Petition Date of March 5, 2009.
Real Estate Business
|
Three
Months Ended |
|
Year Ended |
|
December 31, |
|
December 31, |
(in millions, except per share
information) |
2010 |
2009 |
Change |
|
2010 |
2009 |
Change |
|
|
|
|
|
|
|
|
Rental Revenues |
$ 43.7 |
$ 44.8 |
(3%) |
|
$ 172.7 |
$ 170.9 |
1% |
Interest and other income from
MEC(1) |
— |
13.3 |
(100%) |
|
1.8 |
53.1 |
(96%) |
Revenues |
43.7 |
58.0 |
(25%) |
|
174.5 |
224.0 |
(22%) |
Net income
(loss)(2) |
(42.0) |
(72.8) |
42% |
|
24.7 |
11.7 |
111% |
Funds from operations
("FFO")(3) |
(31.4) |
(61.9) |
49% |
|
67.4 |
52.9 |
28% |
Diluted FFO per
share(3) |
$ (0.67) |
$ (1.32) |
49% |
|
$ 1.44 |
$ 1.13 |
27% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As
at December 31, |
(in millions, except number of properties) |
|
|
|
|
2010 |
2009 |
Change |
|
|
|
|
|
|
|
|
Number of income-producing properties |
|
|
|
|
106 |
106 |
- |
Leaseable area (sq. ft.) |
|
|
|
|
27.5 |
27.4 |
1% |
Annualized lease payments ("ALP")(4) |
|
|
|
|
$ 176.8 |
$ 178.0 |
1% |
Income-producing property, gross book value
("IPP") |
|
|
|
|
$ 1,627.5 |
$ 1,639.0 |
1% |
ALP as percentage of IPP |
|
|
|
|
10.9% |
10.9% |
- |
(1) Prior
to the Petition Date, interest and other income from MEC is
eliminated from the Company's consolidated results of
operations. $13.3 million and $43.5 million, respectively of
interest and other income from MEC subsequent to the Petition Date
are included in the Company's consolidated results of operations
for the three-month period and year ended December 31, 2009.
In the three-month period and year ended December 31, 2010, nil and
$1.8 million, respectively, of interest and other income are
included in the Company's consolidated results of operations.
(2) Refer to footnote 4 under
"SELECTED ANNUAL AND QUARTERLY FINANCIAL DATA
(UNAUDITED)".
(3) FFO and diluted FFO per
share are measures widely used by analysts and investors in
evaluating the operating performance of real estate
companies. However, FFO does not have a standardized meaning
under generally accepted accounting principles and therefore may
not be comparable to similar measures presented by other companies.
For further details of the definition of FFO and a reconciliation
of FFO to net income (loss), see "RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED DECEMBER 31, 2010 - REAL ESTATE BUSINESS - Funds
From Operations" and "RESULTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 2010 - REAL ESTATE BUSINESS - Funds From
Operations".
(4) Annualized lease payments represent the total
annual rent of the Real Estate Business assuming the contractual
lease payments as at the last day of the reporting period were in
place for an entire year, with rents denominated in foreign
currencies being converted to U.S. dollars based on exchange rates
in effect at the last day of the reporting period (see "REAL
ESTATE BUSINESS - Foreign Currencies").
SIGNIFICANT MATTERS
Reorganization Proposal
On January 31, 2011, the Company entered into
definitive agreements with respect to a reorganization proposal
which contemplates the elimination of MID's dual class share
capital structure through which Mr. Frank Stronach and his family
control MID (the "Stronach Shareholder"). The reorganization
proposal achieves this through: i) the cancellation of all 363,414
Class B Shares held by the Stronach Shareholder upon the transfer
to the Stronach Shareholder of MID's Racing & Gaming Business
as well as lands held for development as described in note 5(a) to
the consolidated financial statements and other assets (and
associated liabilities), and $20 million of working capital as of
January 1, 2011 and ii) the purchase for cancellation by MID of
each of the other 183,999 Class B Shares in consideration for 1.2
Class A Subordinate Voting Shares, which following cancellation of
the Class B Shares will be renamed Common Shares.
The reorganization proposal was made by holders
of MID's Class A Subordinate Voting Shares representing in excess
of 50% of the outstanding Class A Subordinate Voting Shares (the
"Initiating Shareholders"), including eight of MID's top ten
shareholders, and is supported by MID's controlling shareholder,
which holds 57% of the votes attaching to MID's outstanding
shares. Each of the Initiating Shareholders and the Stronach
Shareholder have agreed to vote in favour of the proposed
reorganization. In addition, shareholders representing in
excess of 50% of the outstanding Class B Shares held by minority
shareholders have also agreed to vote in favour of the proposed
reorganization.
The proposed reorganization will be implemented
pursuant to a court-approved plan of arrangement (the
"Arrangement") under the Business Corporations Act (Ontario)
and will be subject to approval by shareholders at the annual and
general meeting scheduled to be held on March 29, 2011 and the
Ontario Superior Court of Justice thereafter. The Board of
Directors has approved MID entering into the transaction and
recommends that the holders of Class A Subordinate Voting Shares
and Class B Shares vote in favour of the resolution approving the
Arrangement (the "Arrangement Resolution"). The votes
represented by the Stronach Shareholder, the Initiating
Shareholders and the other holders of the Class B Shares who have
agreed to vote in favour of the Arrangement will be sufficient to
pass the Arrangement Resolution.
ST Acquisition Corp. Offer for MID
Shares
On October 1, 2010, ST Acquisition Corp.
(''STAC''), a corporation controlled by members of the Stronach
family, announced by way of press release that it intended to
acquire any or all of the outstanding Class A Subordinate Voting
Shares and Class B Shares of MID that it did not already own at a
price of $13.00 per share in cash (the ''Proposed STAC Offer'').
The closing price of the Class A Subordinate Voting Shares on the
TSX and the NYSE on September 30, 2010 was Cdn.$11.25 and $10.99,
respectively. The Proposed STAC Offer was not conditional on any
minimum number of shares being tendered. STAC has subsequently
advised MID that, as a result of the reorganization proposal, it
has suspended the Proposed STAC Offer.
Appointment Of Interim Chief Financial
Officer
On February 9, 2011, Mr. Rocco Liscio, MID's
Chief Financial Officer, passed away suddenly. Upon the
recommendation of the Corporate Governance and Compensation
Committee, the Board appointed Mr. John Simonetti on February 17,
2011 as Interim Chief Financial Officer of MID.
Appointment Of Chief Executive
Officer
On November 11, 2010, Mr. Dennis Mills resigned
from his position as Chief Executive Officer of MID however, he
continues in his role as Vice-Chairman and director of MID.
The Board of Directors appointed Mr. Frank Stronach as Chief
Executive Officer of MID. Mr. Stronach continues in his role
as Chairman and director of MID.
The Maryland Jockey Club Complaint
On February 15, 2011, Power Plant Entertainment
Casino Resorts Indiana, LLC, PPE Casino Resorts Maryland, LLC and
The Cordish Company (the "Plaintiffs") sued, among other
defendants, MID, certain subsidiary entities and joint ventures,
including The Maryland Jockey Club ("MJC") and certain of its
subsidiaries (collectively, the "MJC Entities"), as well as MID's
Chairman and Chief Executive Officer, Frank Stronach, in the
Circuit Court for Baltimore City in Baltimore Maryland. The
claims asserted in the Plaintiffs' complaint against MID, the MJC
Entities and Stronach (the "Complaint") are alleged to have arisen
from events that occurred in Maryland in connection with the
referendum conducted in November 2010 concerning the award of a
gaming license to Plaintiff PPE Casino Resorts Maryland, LLC to
conduct alternative gaming at the Arundel Mills Mall. The
specific claims asserted against MID, the MJC Entities and Mr.
Stronach are for alleged civil conspiracy, false light invasion of
privacy and defamation. The Complaint seeks an award against
all defendants in the amount of $300 million in compensatory
damages and $300 million in punitive damages. The Company
believes this claim is without merit.
Transaction With Penn National Gaming,
Inc.
On May 6, 2010, the Company, through an indirect
wholly-owned subsidiary, entered into an agreement with a
wholly-owned subsidiary of Penn National Gaming, Inc. ("Penn")
providing for joint ventures to own and operate MJC's real estate
and racing operations and the right to pursue gaming opportunities
at MJC properties. On July 1, 2010, all closing conditions
relating to this transaction were completed. Accordingly, the
Company has a 51% joint venture interest in Maryland RE & R
LLC, which owns MJC's real estate and racing operations in Maryland
including Pimlico Race Course, Laurel Park and a thoroughbred
training centre (the "Real Estate and Racing Venture"). The
Real Estate and Racing Venture is managed by MID. The Company also
has a 49% joint venture interest in Laurel Gaming LLC, established
to develop and operate any future gaming opportunities other than
racing at the Maryland properties (the "Gaming Venture"). The
Gaming Venture is managed by Penn. Penn paid MID $26.3
million for Penn's interest in the Real Estate and Racing Venture
and the Gaming Venture on closing, which included a working capital
adjustment and the reimbursement of certain expenses of
approximately $0.3 million. MID and Penn have agreed to ensure
adequate operating capital at MJC, pursuant to an operating plan as
mutually determined by MID and Penn and approved by the Maryland
Racing Commission, until December 31, 2011. The Company realized a
loss of $0.1 million relating to the disposition of its 49%
interest in MJC in the year ended December 31, 2010. From the
date of transfer of April 30, 2010 to June 30, 2010, the Company
consolidated the results of MJC in the consolidated financial
statements. However, as a result of the Company's disposition
of its 49% interest, the Company accounts for its investment using
the equity method of accounting.
Transfer Of MEC Assets To MID
On April 30, 2010, in satisfaction of MID's
claims relating to the 2007 MEC Bridge Loan, the 2008 MEC Loan and
the MEC Project Financing Facilities, certain assets of MEC were
transferred to MID, including, among other assets, Santa Anita
Park, Golden Gate Fields, Gulfstream Park (including MEC's interest
in The Village at Gulfstream Park™, a joint venture
between MEC and Forest City Enterprises, Inc.), Portland Meadows,
MJC (which includes Pimlico Race Course and Laurel Park), AmTote
and XpressBet® (the "Transferred Assets"), pursuant to the Joint
Plan of Affiliated Debtors, the Official Committee of Unsecured
Creditors (the "Creditors' Committee"), MID and MI Developments US
Financing Inc. pursuant to the Bankruptcy Code.
The Company accounted for the transfer of the
Transferred Assets, in satisfaction of MID's claims relating to the
2007 MEC Bridge Loan, the 2008 MEC Loan and the MEC Project
Financing Facilities, with an estimated fair value of $347.1
million at April 30, 2010 and the cash payment of $89.0 million to
the unsecured creditors of MEC plus $1.5 million as a reimbursement
for certain expenses incurred in connection with the action
commenced by the Creditors Committee under the acquisition method
of accounting. The Company also received in cash the balance of the
net proceeds from the sale by MEC of Remington Park of $51.0
million and cash of $40.0 million included in the working capital
of the Transferred Assets.
MEC'S Bankruptcy
Chapter 11 Filing and Plan of
Reorganization
On the Petition Date, MEC and certain of its
subsidiaries (collectively, the "Debtors") filed voluntary
petitions for reorganization under the Bankruptcy Code in the U.S.
Bankruptcy Court for the District of Delaware (the "Court") and
were granted recognition of the Chapter 11 proceedings from the
Ontario Superior Court of Justice under section 18.6 of the
Companies' Creditors Arrangement Act in Canada.
MEC filed for Chapter 11 protection in order to
implement a comprehensive financial restructuring and conduct an
orderly sales process for its assets. Under Chapter 11, the
Debtors operated as "debtors-in-possession" under the jurisdiction
of the Court and in accordance with the applicable provisions of
the Bankruptcy Code and orders of the Court. In general, the
Debtors were authorized under Chapter 11 to continue to operate as
an ongoing business, but could not engage in transactions outside
the ordinary course of business without the prior approval of the
Court. The filing of the Chapter 11 petitions constituted an
event of default under certain of the Debtors' debt obligations,
including those with MID Islandi s.f. and subsequently MID U.S.
Financing Inc. (the "MID Lender"), and those debt obligations
became automatically and immediately due and payable.
However, subject to certain exceptions under the Bankruptcy Code,
the Debtors' Chapter 11 filing automatically enjoined, or stayed,
the continuation of any judicial or administrative proceedings or
other actions against the Debtors or their property to recover on,
collect or secure a claim arising prior to the Petition Date.
The Company did not guarantee any of the Debtors' debt obligations
or other commitments. Under the priority scheme established
by the Bankruptcy Code, unless creditors agreed to different
treatment, allowed pre-petition claims and allowed post-petition
expenses would be satisfied in full before stockholders are
entitled to receive any distribution or retain any property in a
Chapter 11 proceeding.
On July 21, 2009, the MID Lender was named as a
defendant in an action commenced by the Creditors' Committee in
connection with the Debtors' Chapter 11 proceedings asserting,
among other things, fraudulent transfer and recharacterization or
equitable subordination of MID claims. On August 21, 2009,
the Creditors' Committee filed an amended complaint to add MID and
Mr. Frank Stronach, among others, as defendants, and to include
additional claims for relief, specifically a breach of fiduciary
duty claim against all defendants, a breach of fiduciary duty claim
against MID and the MID Lender, and a claim for aiding and abetting
a breach of fiduciary duty claim against all defendants. On
August 24, 2009, MID and the MID Lender filed a motion to dismiss
the claims against them by the Creditors' Committee. The
Court denied the motion on September 22, 2009. On October 16,
2009, MID and the MID Lender filed their answer to the complaint,
denying the allegations asserted against them.
On January 11, 2010, the Company announced that
MID, the MID Lender, MEC and the Creditors' Committee had agreed in
principle to the terms of a global settlement and release in
connection with the action. Under the terms of the
settlement, as amended, in exchange for the dismissal of the action
with prejudice and releases of MID, the MID Lender, their
affiliates, and all current and former officers and directors of
MID and MEC and their respective affiliates, the unsecured
creditors of MEC received on the effective date of the Plan on
April 30, 2010 cash of $89.0 million plus $1.5 million as a
reimbursement for certain expenses incurred in connection with the
action. Under the terms of the settlement, MID received the
Transferred Assets. The settlement and release was
implemented through the Plan.
On February 18, 2010, MID announced that MEC had
filed the Plan and related Disclosure Statement (the "Disclosure
Statement") in connection with the MEC Chapter 11 proceedings which
provided for, among other things, the transfer of the Transferred
Assets to MID. On March 23, 2010, the Plan was amended to
include MJC in the Transferred Assets. On April 26, 2010, MID
announced that the Plan was confirmed by order of the Court.
On April 30, 2010, the closing conditions of the Plan were
satisfied or waived, and the Plan became effective following the
close of business on April 30, 2010.
In satisfaction of MID's claims relating to the
2007 MEC Bridge Loan, the 2008 MEC Loan and the MEC Project
Financing Facilities (each discussed further under "LOANS
RECEIVABLE FROM MEC"), in addition to the Transferred Assets
that were transferred to MID on the effective date of the Plan, MID
received $19.9 million of the net proceeds from the sale of
Thistledown by the Debtors on July 29, 2010 and the unsecured
creditors of MEC received the net proceeds in excess of such
amount. In addition, the Plan provided that upon the
completion of the sale of Lone Star LP by the Debtors pursuant to
an agreement previously filed in the Court, the unsecured creditors
of MEC will receive the first $20.0 million of the net proceeds
from such sale and MID will receive any net proceeds in excess of
such amount, which is estimated to be approximately $27.0
million. The estimated proceeds of $27.0 million will consist
of $12.0 million in cash and a note receivable of $15.0
million. The note receivable will bear interest at 5.0% per
annum and will be repaid in three $5.0 million instalments plus
accrued interest every 9 months from the date of closing. As
a result, the note receivable will mature 27 months after
closing. The note receivable is unsecured but has been
guaranteed by the parent company of the purchaser. The
aggregate proceeds from the sale of Lone Star LP are included in
"receivable from reorganized MEC" on the accompanying unaudited
interim consolidated balance sheets at December 31, 2010. The risks
and uncertainties relating to the sale of Lone Star LP pursuant to
the Plan include, among others:
- that the closing does not occur or is delayed;
- if closing does not occur, it is uncertain as to how long the
process for the marketing and sale of such asset will take;
and
- if closing does not occur, there is uncertainty as to whether
or at what price such asset will be sold or whether any bids by any
third party for such asset will materialize or be successful.
MID also has the right to receive any proceeds
from the litigation by MEC against PA Meadows, LLC for future
payments under the holdback agreement relating to MEC's prior sale
of The Meadows racetrack ("The Meadows Holdback Note") and
litigation against Cushion Track Footing USA, LLC relating to the
failure to install a racing surface at Santa Anita Park suitable
for the purpose for which it was intended. The litigation
proceeding with Cushion Track Footing USA, LLC is pending in the
Court. In February 2011, an unfavourable decision in the
litigation proceedings with PA Meadows, LLC was made by the
Court. As a result, MID expects that payments from The
Meadows Holdback Note will commence once PA Meadows, LLC has
available excess cash flows, if any as initially agreed to.
Under the Plan, rights of MID and MEC against
MEC's directors' and officers' insurers were preserved with regard
to the settlement in order to seek appropriate compensation for the
releases of all current and former officers and directors of MID
and MEC and their respective affiliates. On July 19, 2010,
September 2, 2010 and October 29, 2010, MID received $13.0 million,
$5.9 million and $2.5 million respectively, for an aggregate total
of $21.4 million of compensation from MEC's directors' and
officers' insurers. Pursuant to the Plan, on April 30, 2010,
MID also received $51.0 million of the amounts previously
segregated by the Debtors from the sale of Remington Park.
As at December 31, 2010, the Company's equity
investment in MEC consisted of 2,923,302 shares of its Class B
Stock and 218,116 shares of its Class A Subordinate Voting Stock
("MEC Class A Stock"), representing approximately 96% of the total
voting power of its outstanding stock and approximately 54% of the
total equity interest in MEC. MEC Class A Stock was delisted
from the Toronto Stock Exchange effective at the close of market on
April 1, 2009 and from the Nasdaq Stock Market effective at the
opening of business on April 6, 2009. As a result of the MEC
Chapter 11 filing, the carrying value of MID's equity investment in
MEC was reduced to zero at the Petition Date. Under the Plan,
on the date the shares of Lone Star LP or substantially all the
assets of Lone Star LP are sold by the Debtors, all MEC stock will
be cancelled and the holders of MEC shares will not be entitled to
receive or retain any property or interest in property under the
Plan, and the stock of the reorganized MEC will be issued and
distributed to the administrator retained by the Debtors to
administer the Plan.
For a more detailed discussion of the Plan and
the Disclosure Statement, please refer to the "Second Amended Third
Modified Joint Plan of the Affiliated Debtors, The Official
Committee of Unsecured Creditors, MI Developments Inc. and MI
Developments US Financing Inc., pursuant to Chapter 11 of the
United States Bankruptcy Code" dated April 28, 2010 and the
"Disclosure Statement for the Second Amended Third Modified Joint
Plan of Affiliated Debtors, the Official Committee of Unsecured
Creditors, MI Developments Inc. and MI Developments US Financing
Inc., pursuant to Chapter 11 of the United States Bankruptcy
Code". The complete Plan and Disclosure Statement are
available on SEDAR at www.sedar.com.
MEC Asset Sales
The Debtors' Chapter 11 filing contemplated the
Debtors selling all or substantially all their assets through an
auction process and using the proceeds to satisfy claims against
the Debtors, including indebtedness owed to the MID Lender. Since
the Petition Date, the Debtors have entered into and completed
various asset sales, including assets sold pursuant to orders
obtained by the Debtors from the Court in the Chapter 11
cases. The auction process was suspended as a result of the
Plan, which addressed the disposition of the Debtors' remaining
assets. Details of such asset sales are discussed in note
2(b) to the unaudited interim consolidated financial statements for
the three-month period and year ended December 31, 2010.
Deconsolidation of MEC
As a result of the MEC Chapter 11 filing on the
Petition Date, the Company concluded that, under U.S. GAAP, it
ceased to have the ability to exert control over MEC on or about
the Petition Date. Accordingly, the Company's investment in
MEC was deconsolidated from the Company's results beginning on the
Petition Date.
Prior to the Petition Date, MEC's results were
consolidated with the Company's results, with outside ownership
accounted for as a non-controlling interest. As of the
Petition Date, the Company's consolidated balance sheet included
MEC's net assets of $84.3 million. As of the Petition Date,
the Company's total equity also included accumulated other
comprehensive income of $19.8 million and a non-controlling
interest of $18.3 million related to MEC.
Upon deconsolidation of MEC, the Company
recorded a $46.7 million reduction to the carrying value of its
investment in, and amounts due from, MEC, which is included in the
Company's consolidated statement of loss for the year ended
December 31, 2009.
U.S. GAAP requires the carrying values of any
investment in, and amounts due from, a deconsolidated subsidiary to
be adjusted to their fair value at the date of
deconsolidation. In light of the significant uncertainty, at
the Petition Date, as to whether MEC shareholders, including MID,
would receive any recovery at the conclusion of MEC's Chapter 11
process, the carrying value of MID's equity investment in MEC was
reduced to zero. Although, subject to the uncertainties of
MEC's Chapter 11 process, MID management believed at the Petition
Date that the MID Lender's claims were adequately secured and
therefore had no reason to believe that the amount of the MEC loan
facilities with the MID Lender was impaired upon the
deconsolidation of MEC, a reduction in the carrying values of the
MEC loan facilities (see "LOANS RECEIVABLE FROM MEC") was
required under U.S. GAAP, reflecting the fact that certain of the
MEC loan facilities bore interest at a fixed rate of 10.5% per
annum, which was not considered to be reflective of the market rate
of interest that would have been used had such facilities been
established on the Petition Date. The fair value of the loans
receivable from MEC was determined at the Petition Date based on
the estimated future cash flows of the loans receivable from MEC
being discounted to the Petition Date using a discount rate equal
to the London Interbank Offered Rate ("LIBOR") plus 12.0%.
The discount rate was equal to the interest rate charged to MEC on
the secured non-revolving debtor-in-possession financing facility
(the "DIP Loan") that was implemented as of the Petition Date, and
therefore was considered to approximate a reasonable market
interest rate for the MEC loan facilities for this purpose.
Accordingly, upon deconsolidation of MEC, the Company reduced its
carrying values of the MEC loan facilities by $0.5 million (net of
derecognizing $1.9 million of unamortized deferred arrangement fees
at the Petition Date). As a result, the adjusted aggregate
carrying values of the MEC loan facilities at the Petition Date was
$2.4 million less than the aggregate face value of the MEC loan
facilities. The adjusted carrying values were accreted up to
the face value of the MEC loan facilities over the estimated period
of time before the loans were expected to be repaid, with such
accretion being recognized in "interest and other income from MEC"
on the Company's consolidated statements of loss.
REAL ESTATE BUSINESS
Our real estate assets are comprised of
income-producing properties, properties under development and
properties held for development (see "RESULTS OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 2010 - Real Estate Business - Real
Estate Properties").
Our income-producing properties consist of heavy
industrial manufacturing facilities, light industrial properties,
corporate offices, product development and engineering centres and
test facilities. The Real Estate Business holds a global
portfolio of 106 income-producing industrial and commercial
properties located in nine countries: Canada, the United States,
Mexico, Austria, Germany, the Czech Republic, the United Kingdom,
Spain and Poland. This portfolio of income-producing
properties represents 27.5 million square feet of leaseable area
with a net book value of approximately $1.2 billion at December 31,
2010. The lease payments are primarily denominated in three
currencies: the euro, the Canadian dollar and the U.S. dollar.
Subject to the significant decline in the level
of business received from Magna over the past five years as
discussed under "BUSINESS AND OPERATION OF MAGNA, OUR PRINCIPAL
TENANT - Our Relationship with Magna" below, as well as the
downturn in the global real estate markets over the past few years,
we intend to continue to use our local market expertise, cost
controls and long-established relationships with the Magna group to
expand our existing real estate portfolio of industrial and
commercial properties both with the Magna group and, potentially,
with other parties. In addition, we intend to use our
development expertise and financial flexibility to diversify our
business by engaging in the development of mixed-use and
residential projects on lands we may acquire.
The Real Estate Business also owns approximately
1,400 acres of land held for future development (see "REAL
ESTATE BUSINESS - Real Estate Properties - Properties Held for
Development").
Business and Operations of Magna, Our Principal
Tenant
Magna and certain of its subsidiaries are the
tenants of all but 14 of the Real Estate Business' income-producing
properties. Magna is the most diversified global automotive
supplier. Magna designs, develops and manufactures
technologically advanced automotive systems, assemblies, modules
and components, and engineers and assembles complete vehicles,
primarily for sale to original equipment manufacturers ("OEMs") of
cars and light trucks. Magna's product capabilities span a number
of major automotive areas, including interior systems, seating
systems, closure systems, body and chassis systems, vision systems,
electronic systems, exterior systems, powertrain systems, roof
systems, hybrid electric vehicles/systems and complete vehicle
engineering and assembly.
The terms of the Real Estate Business' lease
arrangements with Magna generally provide for the following:
- leases on a "triple-net" basis, under which tenants are
contractually obligated to pay directly or reimburse the Real
Estate Business for virtually all costs of occupancy, including
operating costs, property taxes and maintenance capital
expenditures;
- rent escalations based on either fixed-rate steps or
inflation;
- renewal options tied to market rental rates or inflation;
- environmental indemnities from the tenant; and
- tenant's right of first refusal on sale of property.
Our Relationship with Magna
For the years ended December 31, 2010 and 2009,
the Magna group contributed approximately 98% of the rental
revenues of our Real Estate Business and Magna continues to be our
principal tenant. Our income-producing property portfolio has
grown from 75 properties totalling approximately 12.4 million
square feet at the end of 1998 to 106 properties totalling
approximately 27.5 million square feet of leaseable area at
December 31, 2010. Between the end of 1998 and the end of
2010, the total leaseable area of our income-producing property
portfolio has increased by approximately 15.1 million square feet
(net of dispositions), representing a 12-year compound annual
growth rate of approximately 6.9%.
The level of business MID has received from
Magna has significantly declined over the past five years.
This decline is primarily due to: pressures in the automotive
industry and Magna's plant rationalization strategy, which have
resulted in the closing of a number of manufacturing facilities in
high cost countries; and uncertainty over MID's ownership structure
and strategic direction due largely to the ongoing disputes between
the Company and certain of its shareholders which the
reorganization proposal described above under "SIGNIFICANT
MATTERS - Reorganization Proposal" is designed to
address, including the litigation that is described under
the section "SIGNIFICANT MATTERS - Participation in MEC's
Bankruptcy and Asset Sales - Chapter 11 Filing and Plan of
Reorganization". Although MID continues to explore
alternatives to re-establish a strong and active relationship with
Magna, these factors may translate into a more permanent reduction
in the quantum of business that MID receives from Magna. Our
income-producing property portfolio decreased from 109 properties
at the end of 2006 to 106 properties at December 31, 2010 and total
leaseable area remained consistent at approximately 27.5 million
square feet. Between the end of 2004 and the end of 2010, the
total leaseable area of our income-producing property portfolio
grew at a compound annual growth rate of approximately 1.2%.
On May 6, 2010, Magna announced that it had
entered into a transaction agreement with the Stronach Trust, our
controlling shareholder, under which holders of Magna's Class A
Subordinate Voting Shares would be given the opportunity to decide
whether to eliminate the dual class share capital structure through
which the Stronach Trust controlled Magna. On July 23, 2010,
Magna's shareholders approved the proposed plan and on August 17,
2010, the Ontario Superior Court also approved the proposed plan.
Effective August 31, 2010, Magna's dual class share capital
structure was eliminated resulting in the Stronach Trust no longer
having a controlling interest in Magna. As a result,
MID and Magna have ceased to be under common control for tax
purposes and our foreign earnings may be subject to a significantly
higher rate of tax which will adversely affect our after-tax
results of operations and Funds From Operations ("FFO") (see
"RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD AND YEAR ENDED
DECEMBER 31, 2010 - REAL ESTATE BUSINESS - Funds From
Operations"). In addition, there is uncertainty whether
the cessation of control of Magna by the Stronach Trust, and the
proposed reorganization by which the Stronach Trust would cease to
control MID, would have any impact on our relationship with
Magna.
Automotive Industry Trends and Magna Plant
Rationalization Strategy
Magna's success is primarily dependent upon the
levels of North American and European car and light truck
production by Magna's customers and the relative amount of content
Magna has on the various programs. OEM production volumes in
different regions may be impacted by factors which may vary from
one region to the next, including but not limited to general
economic and political conditions, interest rates, credit
availability, energy and fuel prices, international conflicts,
labour relations issues, regulatory requirements, trade agreements,
infrastructure, legislative changes, and environmental emissions
and safety issues. These factors and a number of other economic,
industry and risk factors which also affect Magna's success,
including such things as relative currency values, commodities
prices, price reduction pressures from Magna's customers, the
financial condition of Magna's supply base and competition from
manufacturers with operations in low cost countries, are discussed
in our Annual Information Form and Annual Report on Form 40-F, each
in respect of the year ended December 31, 2010.
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. Given
these trends, there is a risk that Magna may take additional steps
to offset the production declines and capacity reductions, which
might include closing additional facilities which are leased from
MID and growing its manufacturing presence in new markets where MID
to date has not had a significant presence.
During the first quarter of 2010, the lease
agreement relating to a property in Canada representing 132
thousand square feet of leaseable area, which was included in
Magna's plant rationalization, expired and was not re-leased by
Magna. During the second quarter of 2010, a property in the
United States leased to Magna, which was also included in Magna's
plant rationalization, representing 249 thousand square feet of
leaseable area, was leased to a non-Magna party. As a result,
a lease termination fee of $1.9 million was recorded in the second
quarter of 2010 and will be collected based on a repayment schedule
over the remaining term of the original lease which was scheduled
to expire in September 2013. During the fourth quarter of
2010, three properties in the United States were removed from
Magna's plant rationalization strategy and one property in Germany
was included. Two of the properties removed from the plant
rationalization strategy will continue to be occupied until the end
of their lease terms in July 2013 and February 2014 and the third
property is expected to be occupied until December 2013. One
property in Germany representing 105 thousand square feet of
leaseable area was included in Magna's plant rationalization
strategy during the fourth quarter of 2010. Magna's plant
rationalization strategy currently includes 9 facilities under
lease from the Company (two in Canada, six in the United States and
one in Germany) with an aggregate net book value of $25.4 million
at December 31, 2010. These 9 facilities represent 1.0
million square feet of leaseable area with annualized lease
payments of approximately $4.1 million, or 2.3% of MID's annualized
lease payments at December 31, 2010. The weighted
average lease term to expiry (based on leaseable area) of these
properties at December 31, 2010, disregarding renewal options, is
approximately 5.7 years. MID management expects that given
Magna's publicly disclosed strategy of continuously seeking to
optimize its global manufacturing footprint, Magna may further
rationalize facilities. Magna continues to be bound by the
terms of the lease agreements for these leased properties
regardless of its plant rationalization strategy. However, in
light of the importance of the relationship with Magna to the
success of the Real Estate Business, MID management continues to
evaluate alternatives that provide Magna with the flexibility it
requires to operate its automotive business, including potentially
releasing Magna from its obligation to continue to pay rent under
these leases, and any additional leases that may become subject to
the Magna plant rationalization strategy in the future, under
certain circumstances.
RACING & GAMING BUSINESS
The Racing & Gaming Business owns and
operates four thoroughbred racetracks located in the U.S., as well
as the simulcast wagering venues at these tracks, which consist of:
Santa Anita Park, Golden Gate Fields, Gulfstream Park (which
includes a casino with alternative gaming machines) and Portland
Meadows. In addition, the Racing & Gaming Business
operates: XpressBet®, a U.S. based national account wagering
business, AmTote, a provider of totalisator services to the
pari-mutuel industry and a thoroughbred training centre in Palm
Meadows, Florida. The Racing & Gaming Business also includes a
50% joint venture interest in The Village at Gulfstream Park™, an
outdoor shopping and entertainment centre located adjacent to
Gulfstream Park, a 50% joint venture interest in HRTV, LLC, which
owns Horse Racing TV®, a television network focused on horse racing
and effective July 1, 2010, a 51% joint venture interest in
Maryland RE & R LLC, which owns MJC's real estate and racing
operations including Pimlico Race Course, Laurel Park and a
thoroughbred training centre and a 49% interest in Laurel Gaming
LLC, a joint venture established to pursue gaming opportunities at
the Maryland properties.
The Racing & Gaming Business' primary source
of racing revenues is commissions earned from pari-mutuel wagering.
Pari-mutuel wagering on horse racing is a form of wagering in which
wagers on horse races are aggregated in a commingled pool of wagers
(the "mutuel pool") and the payoff to winning customers is
determined by both the total dollar amount of wagers in the mutuel
pool and the allocation of those dollars among the various kinds of
bets. Unlike casino gambling, the customers bet against each other,
and not against us, and therefore no risk of loss is borne with
respect to any wagering conducted. The Racing & Gaming Business
retains a pre-determined percentage of the total amount wagered
(the "take-out") on each event, regardless of the outcome of the
wagering event, and the remaining balance of the mutuel pool is
distributed to the winning customers. Of the percentage retained, a
portion is paid to the horse owners in the form of purses or
winnings, which encourage the horse owners and their trainers to
enter their horses in our races. Our share of pari-mutuel wagering
revenues is based on pre-determined percentages of various
categories of the pooled wagers at our racetracks. The maximum
pre-determined percentages are approved by state regulators.
Pari-mutuel wagering on horse racing occurs on the live races being
conducted at racetracks, as well as on televised racing signals, or
simulcasts, received or imported by the simulcast wagering
facilities located at such racetracks or off-track betting ("OTB")
facilities, and through various forms of account wagering. Our
racetracks have simulcast wagering facilities to complement our
live horse racing, enabling our customers to wager on horse races
being held at other racetracks.
The Racing & Gaming Business derives
pari-mutuel wagering revenues from the following primary
sources:
- Wagers placed at our racetracks or our OTB facilities on live
racing conducted at our racetracks;
- Wagers placed at our racetracks' simulcast wagering venues or
our OTB facilities on races imported from other racetracks;
- Wagers placed at other locations (i.e. other racetracks,
OTB facilities or casinos) on live racing signals exported by
our racetracks; and
- Wagers placed by telephone or over the Internet by customers
enrolled in XpressBet®, our account wagering platform.
Wagers placed at our racetracks or our OTB
facilities on live racing conducted at one of our racetracks
produce more net revenue for us than wagers placed on imported
racing signals, because we must pay the racetrack sending us its
signal a fee generally equal to 3% to 4% of the amount wagered on
its race. Wagers placed on imported signals, in turn, produce more
revenue for us than wagers placed on our signals exported to
off-track venues (i.e. other racetracks, OTB facilities or
casinos), where we are paid a commission generally equal to only 3%
to 5% of the amount wagered at the off-track venue on the signal we
export to those venues. Revenues from our telephone and Internet
account wagering operations vary depending upon the source of the
signal upon which the wager is placed.
We also generate gaming revenues from our
Gulfstream Park gaming operations. Gaming revenues represent
the net win earned on slot wagers. Net win is the difference
between wagers placed and winning payouts to patrons.
We also generate non-wagering revenues which
include totalisator equipment sales and service revenues from
AmTote earned in the provision of totalisator services to
racetracks, food and beverage sales, program sales, admissions,
parking, sponsorship, rental fees and other revenues.
Live race days are a significant factor in the
operating and financial performance of our racing business. Another
significant factor is the level of wagering per customer on our
racing content on-track, at inter-track simulcast locations and at
OTB facilities. There are also many other factors that have a
significant impact on our racetrack revenues. Such factors
include, but are not limited to: attendance at our racetracks,
inter-track simulcast locations and OTB facilities; activity
through our XpressBet® system; the number of races conducted at our
racetracks and at racetracks whose signals we import and the
average field size per race; our ability to attract the industry's
top horses and trainers; inclement weather; and changes in the
economy.
We recognize racing revenue prior to our payment
of purses, stakes, awards and pari-mutuel taxes. The racing costs
relating to these revenues are shown as "purses, awards and other"
in our consolidated financial statements. We recognize
gaming revenue prior to our payment of taxes and purses. The
gaming costs relating to these revenues are also shown as "purses,
awards and other" in our consolidated financial
statements.
Our operating costs principally include salaries
and benefits, the cost of providing totalisator services and
manufacturing totalisator equipment, utilities, racetrack repairs
and maintenance expenses, sales and marketing expenses, rent,
printing costs, property taxes, license fees and insurance
premiums.
Racing Industry Trends
The overall trend in the horse racing industry
is declining handle and revenues. The total U.S. wagering
handle is down 7.8% for the fourth quarter and 7.3% for the year
ended December 31, 2010 in comparison to the respective comparative
prior year periods. This follows a decrease in total industry
handle from 2007 to 2009 of 16.4% (Source: Equibase Company LLC,
The Jockey Club). In addition, due to the overall reduction
in the supply of horses, many racetracks in the U.S. have had to
reduce the number of race days or have experienced smaller field
sizes.
There has been a general decline in the number
of people attending and wagering at live horse races at North
American racetracks due to a number of factors, including increased
competition from other forms of gaming, unwillingness of customers
to travel a significant distance to racetracks and the increasing
availability of off-track and account wagering. The declining
attendance at live horse racing events has prompted racetracks to
rely increasingly on revenues from inter-track, off-track and
account wagering markets. The industry-wide focus on inter-track,
off-track and account wagering markets has increased competition
among racetracks for outlets to simulcast their live races.
Government Regulation Impacting The Racing & Gaming
Business
Horse racing is a highly regulated industry
(see "RISKS AND UNCERTAINTIES - RACING & GAMING
BUSINESS"). In the U.S., individual states control the
operations of racetracks located within their respective
jurisdictions with the intent of, among other things, protecting
the public from unfair and illegal gambling practices, generating
tax revenue, licensing racetracks and operators and preventing
organized crime from being involved in the industry. Although
the specific form may vary, states that regulate horse racing
generally do so through a horse racing commission or other
regulatory authority. Regulatory authorities perform
background checks on all racetrack owners prior to granting them
the necessary operating licenses. Horse owners, trainers,
jockeys, drivers, stewards, judges and backstretch personnel are
also subject to licensing by regulatory authorities. State
regulation of horse races extends to virtually every aspect of
racing and usually extends to details such as the presence and
placement of specific race officials, including timers, placing
judges, starters and patrol judges.
In the U.S., interstate pari-mutuel wagering on
horse racing is also subject to the federal Interstate Horseracing
Act of 1978 and the federal Interstate Wire Act of 1961. As a
result of these two statutes, racetracks are able to commingle
wagers from different racetracks and wagering facilities and
broadcast horse racing events to other licensed
establishments.
With respect to our racetracks, licenses to
conduct live horse racing and to participate in simulcast wagering
are required, and there is no assurance that these licenses will be
granted, renewed or maintained in good standing, as applicable.
California
In California, the California Horse Racing Board
("CHRB") is responsible for regulating the form of wagering, the
length and conduct of meets and the allocation and distribution of
pari-mutuel wagers within the limits set by the California
legislature. We file license applications with the CHRB to license
three of our subsidiaries. Applications are filed for Los Angeles
Turf Club, Incorporated to conduct a race meet at Santa Anita Park,
Pacific Racing Association to conduct two race meets at Golden Gate
Fields and XpressBet®, as an out-of-state account wagering
hub, to place wagers on behalf of California residents. At
present, the CHRB has not licensed other thoroughbred racetracks in
Southern California to conduct racing during the time that Santa
Anita Park conducts racing. However, night quarter horse
racing is conducted at Los Alamitos Race Course in Southern
California during portions of Santa Anita's meets. As with
the Southern California market, the CHRB has not licensed other
thoroughbred racetracks in Northern California to conduct racing
during the time Golden Gate Fields conducts racing.
Currently, there are two other licensees in California that are
licensed to conduct account wagering in that state. After we
acquired the three California licensed subsidiaries as part of the
Transferred Assets pursuant to the Plan, the CHRB requested license
amendments for each of these three California licensed
subsidiaries. As part of this amended license application
process, on July 22, 2010, the CHRB agreed to extend the existing
licenses of the Los Angeles Turf Club, Incorporated, Pacific Racing
Association and XpressBet® advance deposit wagering until
December 26, 2010 and also agreed to extend the existing waiver of
Business and Professions Codes sections 19483 and 19484 prohibiting
common ownership of racing licenses, in order for us to prepare and
submit to the CHRB a comprehensive plan setting forth our intended
business practices and procedures for operation of Santa Anita Park
and Golden Gate Fields as thoroughbred horse racing venues, as well
as the operation of XpressBet® as an account deposit
wagering platform accepting wagers from California residents. This
comprehensive plan was submitted to the CHRB and was the subject of
CHRB discussion at its September 16, 2010 meeting but was instead
carried over to the CHRB's November 9, 2010 meeting. On
November 9, 2010, the CHRB granted waivers to the Company under
Sections 19483 and 19484 of the California Business &
Professional Code with respect to MID's ownership of Santa Anita
Park, Golden Gate Fields and XpressBet®.
Our financial condition and operating results
could be materially adversely affected by legislative changes or
action by the CHRB that would increase the number of competitive
racing days, reduce the number of racing days available to us,
authorize other forms of wagering, grant additional licenses
authorizing competitors to conduct account wagering, discontinue
the waiver of provisions prohibiting common ownership of racing
licenses, or remove or limit our authority to conduct racing,
simulcast operation or account wagering in California as it is
currently being conducted.
Historically, the CHRB has granted Santa Anita
Park an annual license to operate 17 weeks of live racing,
commencing in late December and continuing through mid-April.
For 2011, Santa Anita Park has also been granted 6 weeks of live
racing from late September through early November. There is
no guarantee that any particular race days will be granted to Santa
Anita Park for subsequent years.
Maryland
In Maryland, the Maryland Racing Commission
approves annual licenses for racetracks to conduct thoroughbred and
standardbred horse races with pari-mutuel wagering. However,
Maryland's racing law effectively provides that except for Pimlico
and Laurel Park, the Maryland Racing Commission may not issue
thoroughbred racetrack licenses or thoroughbred race dates to any
racetracks that have a circumference of at least one mile and are
located within the Baltimore and Washington, D.C. markets.
Other than a track located in Timonium, Maryland (a northern suburb
of Baltimore), which has a racetrack circumference of less than one
mile and which typically conducts an eight-day race meeting in
connection with the Maryland State Fair, the Maryland Racing
Commission has not approved a thoroughbred track license or
thoroughbred race dates for any racetrack in either the Baltimore
or Washington, D.C. markets. The Maryland Racing Commission
approved the transfer of the Maryland racing entities to us as part
of the Transferred Assets pursuant to the Plan. As a result of
MEC's Chapter 11 bankruptcy filing on March 5, 2009, however,
audited financial statements were not provided to the Maryland
Racing Commission for Laurel Racing Assoc., Inc. ("LRA") and
Pimlico Racing Association, Inc., our racing licensees in Maryland,
for fiscal years 2008 and 2009 in accordance with legislative
requirements. We are currently working with the Maryland Racing
Commission to resolve this issue.
On May 6, 2010, we and Penn announced the
intention to establish joint ventures in respect of the Company's
Maryland racing and gaming assets (see "SIGNIFICANT MATTERS -
TRANSACTION WITH PENN NATIONAL GAMING, INC."). On June
28, 2010, the Maryland Racing Commission approved the continued
licensure of Laurel Racing Assoc., Inc. and The Maryland Jockey
Club of Baltimore City, Inc. to own and operate Laurel Park and
Pimlico Race Course subject to MID and Penn National Gaming, Inc.,
through a subsidiary, submitting a business/operating plan
respecting the joint venture Maryland racing operations on or
before September 30, 2010. As a result of this approval, the joint
venture transaction closed on July 1, 2010.
In November 2008, the voters of Maryland
approved an amendment to the constitution that legalized the
potential for slot facilities in five Maryland counties. One of
these counties is Anne Arundel County in which Laurel Park is
situated. The Maryland Video Facilities Lottery Location Commission
("VLT Location Commission") was formed to accept bids for video
lottery slot machine licenses. On February 2, 2009, LRA filed an
application for a video lottery facility terminal license without
the initial license fee deposit. This application was rejected by
the VLT Location Commission. LRA formally filed appeals before the
Maryland State Board of Contract Appeals to preserve its rights.
LRA has filed a Notice of Dismissal of the appeals before the
Maryland State Board of Contract Appeals on March 1, 2011.
On December 9, 2009, the Commission
conditionally awarded the future video lottery terminal license in
Anne Arundel County to PPE Casino Resorts Maryland, LLC ("PPE")
contingent on zoning approval. On December 21, 2009, the Anne
Arundel County Council passed Bill 82-09, which authorizes
conditional use zoning for a video lottery facility within Anne
Arundel County at all W1 Industrial Park zoning districts and
regional commercial complexes, which include both Arundel Mills
Mall and Laurel Park. A petition was circulated to repeal
Bill 82-09. On February 23, 2010, PPE filed a complaint
(subsequently amended) against Anne Arundel County Board of
Supervisors of Election for declaratory and injunctive relief
testing the validity of the petition. The complaint was based on
allegations of fraud during the signature collection process and
that Bill 82-09 was not the proper subject of a referendum. On June
25, 2010, the Circuit Court for Anne Arundel County ruled against
PPE on all claims except the question of referability. The Circuit
Court decided that Bill 82-09 was part of an integral and
interrelated State appropriation and, thus, nonreferable. An appeal
was filed and on July 20, 2010, the Maryland Court of Appeals
ordered that the judgment of the Circuit Court for Anne Arundel
County be reversed and the case was remanded to that court with
instructions to enter an order directing that the referendum be
placed on the ballot at the November 2, 2010 general
election. The result of the ballot on November 2, 2010 was
unfavourable in that the previously approved zoning for the Anne
Arundel VLT facility was granted to Arundel Mills Mall.
As a result, MJC will continue to assess its options going
forward.
MJC and Penn had been granted an extension to
submit their joint business plan pending the outcome of the
November 2, 2010 referendum. On December 22, 2010, an agreement was
reached between MJC and Maryland Thoroughbred Horsemen's
Association ("MTHA") and Maryland Horse Breeders' Association, Inc.
("MHBA") whereby MJC agreed to conduct 146 live racing days in 2011
and MTHA and MHBA agreed to make a contribution of $1.7 million to
MJC for the year 2011 as additional funding for the operation of
the race meets at Laurel Park and Pimlico. This agreement was
conditional upon an allocation of funds to MJC from the State of
Maryland in the amount of $3.5 million to $4.0 million to support
the agreed racing schedule. This agreement was approved by the
Maryland Racing Commission. No amounts have been received as
of yet.
Florida
In Florida, the Division of Pari-Mutuel Wagering
considers applications for annual licenses for thoroughbred,
standardbred and quarter horse meetings with pari-mutuel wagering
and the operation of slot machine gaming and poker rooms. On
August 23, 2010, the Division of Pari-Mutuel Wagering issued an
order approving the issuance of Gulfstream Park Racing Association,
Inc.'s ("GPRA") shares to MI Developments Investments Inc., our
wholly-owned subsidiary, after a suitability review by the Division
of Pari-Mutuel Wagering consistent with section 550.1815, Florida
Statutes, of any holder of a more than 10% ownership in an entity
which possesses a pari-mutuel permit or slot machine
license.
On July 1, 2010, Florida Senate Bill 788 was
enacted into law. This law reduced the tax on gross gaming revenue
on slot machines at pari-mutuel facilities in Florida from 50% to
35%. In addition, the change in the law allows a quarter horse
permittee located in Miami-Dade County to be eligible for a full
slot machine license (2,000 machines) and the operation of a poker
room (no limitation on table number). GPRA currently holds a
quarter horse permit for Miami-Dade County.
Oregon
In Oregon, the Oregon Racing Commission approves
annual licenses for horse and greyhound racetracks, and
multi-jurisdictional account wagering hubs. The Oregon Racing
Commission has not licensed any operators of horse racetracks in
the Portland area, other than Portland Meadows. Portland
Meadows received its racing license for the 2010 -2011 meet on July
7, 2010.
XpressBet®
In addition to conducting live horse racing with
pari-mutuel wagering at our various tracks in the U.S., we conduct
telephone and internet account wagering through our subsidiary,
XpressBet® and other affiliated entities. XpressBet®
currently holds a license to serve as a multi-jurisdictional
account wagering hub by the Oregon Racing Commission which expires
June 30, 2011. The Oregon license enables XpressBet® to open
accounts and accept wagering instructions on behalf of U.S citizens
in respect of horse and dog races and to open accounts and accept
wagering instructions on behalf of non-U.S. citizens in respect of
horse races. XpressBet® also holds account wagering licenses
issued by the California Horse Racing Board, the Idaho Racing
Commission, the Illinois Racing Board, the Montana Board of Horse
Racing, the Virginia Racing Commission and the Washington Horse
Racing Commission. XpressBet® also has received regulatory
approvals from the Maryland Racing Commission and the Massachusetts
Racing Commission to open accounts and place wagers on behalf of
residents from those states. The two entities that conduct
horseracing and pari-mutuel wagering at The Meadows racetrack in
Washington, Pennsylvania are entitled to serve as a
Pennsylvania-based account wagering hub by virtue of their annual
licenses to conduct standardbred racing and pari-mutuel
wagering. XpressBet® has an agreement with the entities that
conduct horseracing and pari-mutuel wagering at The Meadows to
provide account wagering services to those entities' account
holders and to conduct their respective account wagering operations
under the brand XpressBet®. In accordance with its
multi-jurisdictional hub license from Oregon and, to the extent
applicable, state-based requirements imposed by states where it is
licensed or otherwise approved, XpressBet® opens wagering accounts
on behalf of residents from various states and countries and
processes wagering instructions from those account holders in
respect of races conducted throughout the U.S. and in other
countries.
Laws governing account wagering in the U.S. vary
from state to state. Currently, approximately 21 states have
expressly authorized some form of account wagering by their
residents. A smaller number of states have expressly
prohibited pari-mutuel wagering and/or account wagering. The
remaining states have authorized pari-mutuel wagering but have
neither expressly authorized nor expressly prohibited their
residents from placing wagers through account wagering hubs located
in different states. We believe that the amendment to the
Federal Interstate Horseracing Act of 1978 clarified that an
account wagering operator may open accounts on behalf of and accept
wagering instructions from residents of states where pari-mutuel
wagering is legal and where providing wagering instructions to
account wagering operators located in other states is not expressly
prohibited by statute, regulation or other government
restrictions. Although our account wagering operations are
conducted in accordance with what we believe is a valid
interpretation of applicable state and federal law, certain state
attorneys general, district attorneys and other law enforcement
officials have expressed concern over the legality of interstate
account wagering. The amendment to the Federal Interstate
Horseracing Act of 1978 may not be interpreted similarly by all
interested parties, and there may be challenges to our account
wagering activities or those of other account wagering operations
by both state and federal law enforcement authorities, which could
have a material adverse effect on our account wagering business
which, in turn, could have a material adverse effect on our
business, financial conditions, operating results and
performance.
The Unlawful Internet Gambling Enforcement Act
became effective September 30, 2006, which prohibits the use of
credit cards, checks, electronic funds transfers and certain other
funding methods for most forms of internet gambling. The law
contains an exemption for pari-mutuel wagers placed pursuant to the
Federal Interstate Horseracing Act of 1978. The U.S. Treasury
Department, in consultation with the U.S. Federal Reserve Board and
the U.S. Department of Justice, issued regulations which could
potentially benefit all or a portion of our account wagering
operations. However, during the third quarter some financial
institutions commenced blocking internet gambling transactions
which have negatively impacted XpressBet®'s operations. We are
currently considering other options to manage our account wagering
transactions.
In addition to placing account wagers on behalf
of U.S. residents, we also place wagers on behalf of account
holders who reside in countries other than the U.S. In the
case of foreign-based account wagers, they are placed either
directly or indirectly through our Oregon-licensed
XpressBet® subsidiary. Regardless of which entity
processes a wager, we comply with the regulatory requirements
imposed by each of the jurisdictions that have licensed us to
accept wagers from non-U.S. residents. The laws regarding
account wagering by residents of countries other than the U.S. vary
from country to country, and we seek to understand and comply with
those laws to the greatest extent possible. As with any issue
that turns on the interpretation of legal requirements, it is
possible that law enforcement authorities from these foreign
jurisdictions may disagree with our interpretation of their laws in
respect of account wagering and seek to challenge our ability to
place account wagers on behalf of their residents. In certain
cases, such challenges could have a material adverse effect on our
business, financial conditions, operating results and prospects,
including the licenses we hold to conduct horse racing and
pari-mutuel wagering (including account wagering) in the U.S.
FOREIGN CURRENCIES
Fluctuations in the U.S. dollar's value relative
to other currencies will result in fluctuations in the reported
U.S. dollar value of revenues, expenses, income, cash flows, assets
and liabilities. At December 31, 2010, approximately 75% of
the Real Estate Business' rental revenues are denominated in
currencies other than the U.S. dollar (see "RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010 - REAL ESTATE
BUSINESS - Annualized Lease Payments"). As such,
material changes in the value of the U.S. dollar relative to these
foreign currencies (primarily the euro and Canadian dollar) may
have a significant impact on the Real Estate Business' results.
The following table reflects the changes in the
average exchange rates during the three-month periods and years
ended December 31, 2010 and 2009, as well as the exchange rates as
at December 31, 2010 and 2009, between the most common currencies
in which the Company conducts business and MID's U.S. dollar
reporting currency.
|
Average Exchange Rates |
|
Average
Exchange Rates |
|
Three Months Ended |
|
For the Years Ended |
|
December 31, |
|
December 31, |
|
2010 |
2009 |
Change |
|
2010 |
2009 |
Change |
1 Canadian dollar equals U.S. dollars |
0.987 |
0.948 |
4% |
|
0.971 |
0.881 |
10% |
1 euro equals U.S. dollars |
1.359 |
1.475 |
(8%) |
|
1.327 |
1.393 |
(5%) |
|
|
|
Exchange Rates |
|
|
|
As at |
|
|
|
December 31, |
|
|
|
|
|
2010 |
2009 |
Change |
1 Canadian dollar equals U.S. dollars |
|
|
|
|
1.005 |
0.955 |
5% |
1 euro equals U.S. dollars |
|
|
|
|
1.339 |
1.433 |
(7%) |
The results of operations and financial position
of all Canadian and most European operations are translated into
U.S. dollars using the exchange rates shown in the preceding
table. The changes in these foreign exchange rates impacted
the reported U.S. dollar amounts of the Company's revenues,
expenses, income, assets and liabilities. From time to time,
the Company may enter into derivative financial arrangements for
currency hedging purposes, but the Company's policy is not to
utilize such arrangements for speculative purposes.
Throughout this MD&A, reference is made, where relevant, to the
impact of foreign exchange fluctuations on reported U.S. dollar
amounts.
Foreign exchange rate changes have a minimal
impact in the Racing & Gaming Business.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31,
2010
The Racing & Gaming Business includes the
results of operations of the Transferred Assets for the entire
period in the three-month period ended December 31, 2010, while the
results for the year ended December 31, 2010 include the results
for the Transferred Assets from the date of transfer of April 30,
2010. The results of operations for the year ended December
31, 2009 include the results of MEC for the period up to March 5,
2009, the Petition Date. The deconsolidation of MEC as at March 5,
2009 and the acquisition of the Transferred Assets on April 30,
2010 affects virtually all of the Company's reported revenue,
expense, asset and liability balances, thus significantly limiting
the comparability from period to period of the Company's
consolidated statements of loss, consolidated statements of cash
flows and consolidated balance sheets. Transactions and
balances between the "Real Estate Business" and "Racing &
Gaming Business" 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 are eliminated in the consolidated results of
operations and financial position of the Company for periods
subsequent to the transfer of the Transferred Assets and prior to
the deconsolidation of MEC on the Petition Date.
(U.S. dollars in thousands)
|
Consolidated |
Real Estate
Business |
Racing & Gaming
Business |
|
|
|
|
|
|
|
Three Months Ended
December 31, |
2010 |
2009 |
2010 |
2009 |
2010 |
2009 |
Revenues |
|
|
|
|
|
|
Rental revenue |
$ 43,655 |
$ 44,778 |
$ 43,655 |
$ 44,778 |
$ — |
$ — |
Interest and other income from MEC |
— |
13,264 |
— |
13,264 |
— |
— |
Racing, gaming and other revenue |
65,796 |
— |
— |
— |
65,796 |
— |
|
109,451 |
58,042 |
43,655 |
58,042 |
65,796 |
— |
Operating costs, expenses and income |
|
|
|
|
|
|
Purses, awards and other |
37,097 |
— |
— |
— |
37,097 |
— |
Operating costs |
35,218 |
— |
— |
— |
35,218 |
— |
General and administrative |
26,747 |
20,450 |
16,293 |
20,450 |
10,454 |
— |
Depreciation and amortization |
14,047 |
10,870 |
10,571 |
10,870 |
3,476 |
— |
Interest expense, net |
4,198 |
3,695 |
4,222 |
3,695 |
(24) |
— |
Foreign exchange losses (gains) |
244 |
(408) |
428 |
(408) |
(184) |
— |
Equity loss |
23,605 |
— |
— |
— |
23,605 |
— |
Write-down of long-lived and
intangible assets |
44,159 |
4,498 |
40,646 |
4,498 |
3,513 |
— |
Impairment provision related to
loans receivable from MEC |
— |
90,800 |
— |
90,800 |
— |
— |
Operating loss |
(75,864) |
(71,863) |
(28,505) |
(71,863) |
(47,359) |
— |
Loss on disposal of real estate |
— |
(57) |
— |
(57) |
— |
— |
Other gains (losses), net |
42 |
(7,798) |
42 |
(7,798) |
— |
— |
Loss before income taxes |
(75,822) |
(79,718) |
(28,463) |
(79,718) |
(47,359) |
— |
Income tax expense (recovery) |
13,486 |
(6,918) |
13,553 |
(6,918) |
(67) |
— |
Net loss attributable to MID |
$ (89,308) |
$ (72,800) |
$ (42,016) |
$ (72,800) |
$ (47,292) |
$ — |
REAL ESTATE BUSINESS
Rental revenues for the three-month period ended
December 31, 2010 decreased $1.1 million to $43.7 million from
$44.8 million in comparison to the prior year period. The
additional rent earned from contractual rent increases, completed
projects on-stream was more than offset by the negative impact of
vacancies, renewals and re-leasing, changes in foreign currency
exchange rates and the straight-line rent adjustment.
Rental Revenue |
Rental revenue, three months ended December 31,
2009 |
$ 44.8 |
Contractual rent increases |
0.3 |
Completed projects on-stream |
0.2 |
Vacancies of income-producing
properties |
(0.2) |
Renewals and re-leasing of income-producing
properties |
(0.2) |
Effect of changes in foreign currency exchange
rates |
(1.0) |
Straight-line adjustment |
(0.1) |
Other |
(0.1) |
Rental revenue, three months ended December 31,
2010 |
$ 43.7 |
The $0.3 million increase in revenue from
contractual rent adjustments includes (i) $0.1 million from
cumulative CPI-based increases (being increases that occur every
five years or once a specified cumulative increase in CPI has
occurred) implemented in 2009 and 2010 on properties representing
5.9 million square feet of leaseable area and (ii) $0.2 million
from annual CPI-based increases implemented in 2010 on properties
representing 5.6 million square feet of leaseable area.
Completed projects on-stream contributed $0.2
million to rental revenue for the fourth quarter of 2010 in
comparison to the prior year period. Late in December 2009,
the Company acquired a 61 thousand square foot facility located in
Shelby Township, Michigan, which has been leased to a subsidiary of
Magna for six years, with the option to renew for two additional
periods of five years. The rental of this property increased
revenue by $0.1 million over the prior year period. The
completion of Phase I and Phase II of a Magna-related expansion
project in Mexico in May 2010 and August 2010 added 103 thousand
and 19 thousand square feet of leaseable area, respectively, and
increased revenue in the fourth quarter of 2010 by $0.1
million. The completion of a minor Magna-related project in
December 2010 marginally increased revenue in the fourth quarter of
2010.
One property became vacant in the first quarter
of 2010 upon the expiry of the lease agreement pertaining to 132
thousand square feet of leaseable area, resulting in a $0.2 million
reduction in revenues over the prior year period.
Renewals and re-leasing had a $0.2 million
negative impact on revenues compared to the prior year
period. The renewal of two Magna leases in the fourth quarter
of 2010, at lower negotiated market rental rates than the expiring
lease rates, relating to an aggregate of 177 thousand square feet
of leaseable area reduced revenues by a nominal amount in fourth
quarter of 2010. As a result of Magna's plant rationalization
strategy (see "REAL ESTATE BUSINESS - Automotive Industry and
Magna Plant Rationalization Strategy"), the Real Estate
Business terminated a lease with Magna in May 2010 for 246 thousand
square feet of leaseable area that had been vacated in 2009.
This property was subsequently re-leased to a third party for 12.5
years. The vacancy and re-leasing of this property resulted
in a $0.2 million decrease in revenues. During the fourth
quarter of 2010, revenues were reduced by $0.1 million due to a
lease negotiation with a Magna tenant relating to a 298 thousand
square foot facility in Mexico that was finalized in June
2010. The re-lease of a 41 thousand square foot facility in
Canada to a non-Magna tenant in 2009 and the renewal of a 85
thousand square foot facility in Canada to a non-Magna tenant in
February 2010 increased revenues by $0.1 million over the prior
year period.
For the fourth quarter of 2010, approximately
75% of the Real Estate Business' rental revenues are denominated in
currencies other than the U.S. dollar (primarily the euro and
Canadian dollar). Foreign exchange had a $1.0 million
negative impact on reported rental revenues, as the average foreign
exchange rate during the fourth quarter of 2010 relating to the
Canadian dollar strengthened against the U.S. dollar as compared to
the prior year period, but this was more than offset by the
negative impact on reported rental revenues as the average foreign
exchange rate relating to the euro weakened against the U.S. dollar
as compared to the prior year period.
Interest and Other Income from MEC
Interest and other income from MEC, consisting
of interest and fees earned in relation to loan facilities between
the MID Lender and MEC and certain of its subsidiaries, decreased
from $13.3 million in the fourth quarter of 2009 to nil in the
fourth quarter of 2010. As a result of the conclusion of the
Debtors' Chapter 11 process following the close of business on
April 30, 2010, the effective date of the Plan, the Company no
longer received interest and other income from MEC. For
further details of these loan facilities, see "LOANS RECEIVABLE
FROM MEC".
General and Administrative Expenses
General and administrative expenses decreased by
$4.2 million to $16.3 million in the fourth quarter of 2010 from
$20.5 million in the fourth quarter of 2009. General and
administrative expenses for the fourth quarter of 2009 include $8.8
million of advisory and other related costs incurred in connection
with MID's involvement in the Debtors' Chapter 11 process (see
"SIGNIFICANT MATTERS - MEC'S Bankruptcy - Chapter 11 Filing and
Plan of Reorganization") and matters heard by the Ontario
Securities Commission ("OSC"). Expenses for the fourth quarter of
2010 include $0.7 million of advisory and other related costs
incurred with respect to ST Acquisition Corp.'s intention to
acquire MID shares (see "SIGNIFICANT MATTERS - ST Acquisition
Corp. Offer for MID Shares") and the continued involvement in
MEC's Debtors' Chapter 11 process. Excluding advisory
and other costs, general and administrative expenses increased $3.9
million in the fourth quarter of 2010 primarily due to:
(i) |
increased insurance expense of $1.5 million primarily related
to increased premiums in connection with the Company's Directors'
and Officers' liability insurance. The Directors' and
Officers' liability insurance includes premiums paid for run-off
insurance related to the MEC bankruptcy which expires in June 2016
and covers claims arising from prior years to June 30, 2010; |
(ii) |
increased termination cost of $2.2 million relating to the
resignation of a member of senior management in the fourth quarter
of 2010; and |
(iii) |
increased compensation expense of $2.8 million primarily
pertaining to the Company's Non-Employee Director Share-Based
Compensation Plan resulting from the increase in the Company's
share price during the fourth quarter of 2010 as compared to
2009. |
Partially offsetting these increases in general
and administrative expenses is a reduction in stock-based
compensation expense of $1.3 million due to the issuance of 455,000
of stock options to purchase the Company's Class A Subordinate
Voting Shares in November 2009, decreased capital tax expense of
$0.3 million due to the elimination of capital tax in the province
of Ontario, Canada effective July 1, 2010 and decreased repairs and
maintenances of $0.6 million incurred at our properties.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased
by $0.3 million to $10.6 million in the fourth quarter of 2010
compared to $10.9 million in the prior year period, primarily due
to foreign exchange (see " FOREIGN CURRENCIES").
Interest Expense, Net
Net interest expense was $4.2 million in the
fourth quarter of 2010 ($4.3 million of interest expense less $0.1
million of interest income) compared to $3.7 million in the prior
year period ($3.8 million of interest expense less $0.1 million of
interest income). The increased net interest expense is
primarily due to $0.2 million of increased interest expense
associated with foreign exchange relating to the Company's
Debentures as they are denominated in Canadian dollars and $0.4
million associated with increased borrowings on the revolving
credit facility partially offset with $0.1 million of increased
interest capitalized for properties under development.
Foreign Exchange Losses (Gains)
The Real Estate Business recognized net foreign
exchange losses of $0.4 million for the fourth quarter of 2010
compared to net foreign exchange gains of $0.4 million in the prior
year period. The drivers of such foreign exchange losses and
gains are primarily the re-measurement of certain net current and
future tax balances of an MID subsidiary that has a functional
currency other than that in which income taxes are required to be
paid and the re-measurement of U.S. dollar denominated net assets
held within MID's corporate entity, which has a Canadian functional
currency.
Write-down of Long-Lived and Intangible
Assets
In the fourth quarter of 2010, the Real Estate
Business recorded impairment charges totalling $40.6 million
relating to parcels of land held for development located in
California, Florida, Michigan and Ilz, Austria. Pursuant to
the reorganization proposal (see "SIGNIFICANT MATTERS -
Reorganization Proposal"), lands held for development as
described in note 5(a) to the unaudited interim consolidated
financial statements, along with other assets, are transferred to
the Stronach Shareholder as consideration for the cancellation of
all 363,414 Class B Shares held by the Stronach Shareholder.
The votes represented by the Stronach Shareholder, the Initiating
Shareholders and the other holders of the Class B Shares who have
agreed to vote in favour of the Arrangement are sufficient to pass
the Arrangement Resolution. In connection with the
reorganization proposal, the Company obtained information related
to the above noted properties that indicated the existence of
potential impairments and inability to recover the carrying value.
The write-down represents the excess of the carrying value of the
lands held for development over the estimated fair value determined
by external real-estate appraisals. The write-down reduced the cost
of the land and was included in "write-down of long-lived and
intangible assets" on the consolidated statements of loss for the
three-month period ended December 31, 2010.
In the fourth quarter of 2009, as a result of
further weakening in the commercial office real estate market in
Michigan, the Real Estate Business recorded a $4.5 million
write-down of a revenue-producing commercial office building.
The write-down represents the excess of the carrying value of the
asset over the estimated fair value. Fair value was
determined based on the present value of the estimated future cash
flows from the leased property.
Impairment Provision Related to Loans
Receivable from MEC
During the fourth quarter of 2009, in connection
with developing the Plan (see "SIGNIFICANT MATTERS -
Participation in MEC's Bankruptcy - Chapter 11 Filing and Plan of
Reorganization"), the Company estimated the values and
resulting recoveries of loans receivable from MEC, net of any
related obligations, provided to the Company pursuant to the terms
of the Plan. In preparing the estimated resulting recoveries,
the Company: (i) reviewed certain historical financial information
of MEC for recent years and interim periods; (ii) communicated with
certain members of senior management of MEC to discuss the assets
and operations; (iii) considered certain economic and industry
information relevant to MEC's operating businesses; (iv) considered
various indications of interest received by the Debtors in
connection with the sales marketing efforts conducted by financial
advisors of MEC during the Chapter 11 proceedings for certain of
MEC's assets; (v) reviewed the analyses of other financial advisors
retained by MEC; (vi) relied on certain real estate appraisals
prepared by its real estate advisors; and (vii) conducted its own
analysis as it deemed appropriate. The Company relied on the
accuracy and completeness of financial and other information
furnished to it by MEC with respect to the Chapter 11
proceedings.
As a result of this analysis, the Company
estimated that it would be unable to realize on all amounts due in
accordance with the contractual terms of the MEC loans.
Accordingly, in the fourth quarter of 2009, the Real Estate
Business recorded a $90.8 million impairment provision related to
the loans receivable from MEC, which represented the excess of the
carrying amounts of the loans receivable and the estimated
recoverable value. Estimated recoverable value was determined
based on the future cash flows from expected proceeds to be
received from Court approved sales of MEC's assets, discounted at
the loans' effective interest rate, and the fair value of the
collateral based on third party appraisals or other valuation
techniques, such as discounted cash flows, for those MEC assets to
be transferred to the Company under the Plan or for which the Court
had yet to approve for sale under the Plan, net of expected
administrative, priority and allowed claims to be paid by the
Company under the Plan.
Loss on Disposal of Real Estate
In the third quarter of 2009, the Real Estate
Business sold land and a vacant building in the United States for
cash consideration of $0.8 million and realized a gain of $0.3
million. However, in the fourth quarter of 2009, the Real
Estate Business incurred additional transaction costs relating to
the sale of this property of $0.1 million.
Other Gains (Losses), Net
The "other gains (losses), net" during the
fourth quarter of 2009 represented a $7.8 million foreign currency
translation loss realized from a capital transaction that gave rise
to a reduction in the net investment in a foreign operation, which
was considered a substantially complete liquidation of that foreign
operation. The currency translation loss for 2009, which was
previously included in the "accumulated other comprehensive income"
component of shareholders' equity, was recognized in the
determination of net income as a result of the Real Estate Business
repatriating funds from a foreign operation. In the
fourth quarter of 2010, the Real Estate Business recorded a
currency translation gain of $0.1 million in "other gains (losses),
net" relating to the final liquidation of this foreign
operation.
Income Tax Expense (Recovery)
The Real Estate Business' income tax expense for
the fourth quarter of 2010 was $13.6 million compared to an income
tax recovery of $6.9 million in the prior year period. The
increase in the income tax expense is due to an internal
amalgamation that was undertaken with the unintended result of
causing the Company to incur $12.7 million of current tax
expense. The Company has retained legal counsel to apply to
the Ontario Superior Court of Justice to have the amalgamation set
aside and cancelled. The outcome of this process is uncertain.
Income tax expenses also increased due to interest and other income
earned from MEC in the fourth quarter of 2009, which was taxed in
jurisdictions that had lower rates of taxation than the Real Estate
Business' overall effective tax rate.
Net Loss
Net loss of $42.0 million for the fourth quarter
of 2010 decreased from a net loss of $72.8 million in the prior
year period. The $30.8 million improvement is primarily due
to the impairment provision relating to the loans receivable from
MEC of $90.8 million recorded in the fourth quarter of 2009,
partially offset with the increase in the write-down of long-lived
assets of $36.1 million, the decrease in interest and other income
from MEC of $13.3 million, the increase in income tax expense of
$20.5 million and the decrease of $7.8 million in currency
translation loss included in other gains (losses), net.
Funds From Operations
|
Three Months
Ended |
|
December 31, |
(in thousands, except per share information)
|
2010 |
2009 |
Change |
Net loss |
$ (42,016) |
$ (72,800) |
42% |
Add back depreciation and
amortization |
10,571 |
10,870 |
(3%) |
Add back loss on disposal of real
estate |
— |
57 |
(100%) |
Funds from
operations |
$ (31,445) |
$ (61,873) |
49% |
Basic and diluted funds from operations per share |
$ (0.67) |
$ (1.32) |
49% |
Basic and diluted number of shares outstanding
|
46,708 |
46,708 |
|
The Company determines FFO using the definition
prescribed in the U.S. by the National Association of Real Estate
Investment Trusts ("NAREIT"). Under the definition of FFO
prescribed by NAREIT, the impact of future income taxes and any
asset impairments are included in the calculation of FFO.
The $30.4 million increase in FFO compared to
the prior year period is due to decreased net loss (see "RESULTS
OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED DECEMBER 31,
2010 - REAL ESTATE BUSINESS - Net Income") as
well as the decrease in depreciation and the loss on disposal of
real estate as compared to the prior year period.
RACING & GAMING BUSINESS
The following discussion is based on our Racing & Gaming
operations for the three-months ended December 31, 2010.
Seasonality
Most of our racetracks operate for prescribed
periods each year. As a result, our racing revenues and
operating results for any quarter will not be indicative of our
racing revenues and operating results for any other quarter or for
the year as a whole. Since three of our largest racetracks,
Santa Anita Park, Gulfstream Park, and Golden Gate Fields, run live
race meets principally during the first half of the year, the
Racing & Gaming operations have historically operated at a loss
in the second half of the year, with the third quarter generating
the largest operating loss. This seasonality is expected to result
in large quarterly fluctuations in revenue and operating
results.
Racing, Gaming and Other Revenue
Live race days are a significant factor in the
operating and financial performance of our racing business. Another
significant factor is the level of wagering per customer on our
racing content on-track, at inter-track simulcast locations and at
OTB facilities. There are also many other factors that have a
significant impact on our racetrack revenues. Such factors
include, but are not limited to: attendance at our racetracks,
inter-track simulcast locations and OTB facilities; activity
through our XpressBet® system; the number of races conducted at our
racetracks and at racetracks whose signals we import and the
average field size per race; our ability to attract the industry's
top horses and trainers; inclement weather; and changes in the
economy.
During the fourth quarter of 2010 our racetracks
hosted a total of 89 live race days as follows: Golden Gate Fields
(49 live race days), Santa Anita Park (5 live race days), and
Portland Meadows (35 live race days). Gulfstream Park did not
host any live race days during the fourth quarter of 2010 but
operated as a simulcast facility with a slots and poker operation.
Laurel Park hosted 46 live race days during the fourth quarter of
2010, however, as a consequence of our entering into joint venture
agreements with respect to the operations of MJC on July 1, 2010,
the Maryland operations are accounted for using the equity method
of accounting as of July 1, 2010.
During the fourth quarter of 2010, racing,
gaming and other revenues were $65.8 million, with no comparable
figures as a result of MID's acquisition of the Transferred Assets
effective April 30, 2010. Our operations which generated the
most significant revenues were as follows:
- California operations had revenues of $27.1 million during the
fourth quarter of 2010 which reflected revenues generated by Golden
Gate Fields of $17.7 million and Santa Anita Park of $9.3 million.
Average daily revenues at Golden Gate Fields were reflective of
recent national trends in the horse racing industry (Source
Equibase Company LLC; The Jockey Club). Santa Anita Park operated
as a simulcast venue for the majority of the fourth quarter of
2010, but hosted 5 live race days in late December 2010.
- Florida operations had revenues of $18.7 million during the
fourth quarter of 2010. Gulfstream Park did not host live racing
but operated as a simulcast facility with a slots and poker
operation. The slots and poker operations at Gulfstream Park
generated revenues of $13.4 million, pari-mutuel operations
generated revenues of $3.7 million and the food and beverage
operations generated revenues of $0.5 million. The Palm
Meadows Training Center operation was open for training during the
fourth quarter of 2010 and generated stable rental and other
revenue of $1.0 million.
- Oregon operations had revenues of $3.5 million during the
fourth quarter of 2010 as Portland Meadows hosted 35 live race days
and operated as a simulcast venue.
- Revenues from our account wagering and totalisator operations
had revenues of $17.2 million during the fourth quarter of 2010.
Account wagering revenues were negatively impacted by (i) certain
credit card companies and financial institutions choosing to block
otherwise exempt internet gambling related transactions at
XpressBet® primarily during the second half of 2010 (see "RACING
& GAMING BUSINESS - GOVERNMENT REGULATION IMPACTING THE RACING
& GAMING BUSINESS - XpressBet®"), (ii) national
wagering trends and (iii) horse inventory supply issues which
resulted in many racetracks reducing live race days or experiencing
lower average field size per race. Our totalisator operations were
similarly impacted by these recent trends.
- The above revenues were reduced by $0.7 million as a result of
intercompany eliminations related to transactions between our
racetracks, account wagering operations and separate OTB
facilities.
Purses, Awards and Other
Purses, awards and other were $37.1 million in
the fourth quarter of 2010, which reflects direct variable costs
associated with our pari-mutuel, gaming, and totalisator
operations. As a percentage of pari-mutuel revenues, pari-mutuel
purses, awards and other costs were 61.2%, while gaming costs of
sales were 57.6% of gaming revenues. These percentages were
generally consistent with management's expectations.
Operating Costs
Operating costs were $35.2 million in fourth
quarter of 2010 with no comparable figures as a result of MID's
acquisition of the Transferred Assets effective April 30,
2010. Included in operating costs are $3.3 million of costs
primarily incurred to construct an all natural dirt surface at
Santa Anita Park, including demolition costs of the previous
synthetic racing surface. These costs have been expensed
rather than being capitalized as the expenditure cannot be
recovered through estimated undiscounted cash flows at the
respective racetrack.
As a percentage of total racing, gaming and
other revenues, operating costs were 48.5% excluding the capital
expenditures that were expensed, which was generally consistent
with management's expectations. The operating costs percentage
reflects reduced operating costs at Santa Anita Park primarily as a
result of not hosting the Oak Tree Racing Association's race meet
during the fourth quarter of 2010, however, operating costs were
also impacted by additional marketing costs incurred at Gulfstream
Park as well as lower daily handle at many of our racetracks which
negatively impacted the operating cost percentage given that many
of our operating expenses are fixed.
General and Administrative
General administrative expenses were $10.5
million in the fourth quarter of 2010 with no comparable figures as
a result of MID's acquisition of the Transferred Assets effective
April 30, 2010.
Depreciation and Amortization
Depreciation and amortization was $1.9 million and $1.6 million,
respectively, for the fourth quarter of 2010. Depreciation
and amortization expense commenced from the date the Transferred
Assets were acquired.
Interest Expense, Net
Net interest expense was nominal for the fourth
quarter of 2010 as the outstanding term loan facility that was
assumed by MID in connection with the acquisition was fully repaid
on July 7, 2010.
Foreign exchange gain
Foreign exchange gain of $0.2 million represents
a gain recorded on the re-measurement of certain foreign
denominated intercompany loans of a Racing & Gaming
subsidiary.
Equity Loss (Income)
Equity loss for the fourth quarter of 2010 of
$23.6 million represents the Company's proportionate share of
losses incurred on our investments in Maryland RE & R LLC and
Laurel Gaming LLC of $20.2 million (see "SIGNIFICANT MATTERS -
TRANSACTION WITH PENN NATIONAL GAMING, INC."), The Village at
Gulfstream ParkTM of $2.9 million, HRTV, LLC of $0.5
million and TrackNet Media Group LLC. The TrackNet Media Group LLC
joint venture with Churchill Downs Incorporated is in the process
of being dissolved.
The equity loss for the fourth quarter of 2010,
from the Maryland RE & R LLC and Laurel Gaming LLC investments,
reflects the Company's share of $5.2 million of costs incurred by
the Maryland operations relating to pursuing alternative gaming
opportunities, operating losses incurred during the fourth quarter,
and a write-down of goodwill of $29.2 million. The write-down of
goodwill is primarily a result of reduced expectations of achieving
alternative gaming at Laurel Park due to the November 2010
referendum whereby the Anne Arundel electorate voted in favour of a
bill permitting the zoning of a video lottery terminal facility at
Anne Arundel Mills Mall. The unfavourable decision represents an
impediment to our efforts to pursue alternative gaming
opportunities.
Write-down of Long-lived and Intangible Assets
Write-down of long-lived and intangible assets
of $3.5 million relates to a write-down of goodwill and trademark
at XpressBet® which was adversely impacted by certain credit card
companies and financial institutions choosing to block otherwise
exempt internet gambling related transactions primarily during the
second half of 2010. Consequently, future expectations for growth
and profitability have been impacted as it is anticipated that it
will require additional time and investment to re-acquire customers
that have either reduced or ceased their account wagering activity
through XpressBet®.
Income Tax Expense
Income tax expense for 2010 was a recovery of
$67 thousand which is reflective of the operating losses generated
by the Racing & Gaming Business which have generally not been
benefited.
Net Loss
Net loss for the fourth quarter of 2010 was
$47.3 million. Overall, the loss is generally reflective of
the Company's share of losses incurred on our investment in
Maryland RE & R LLC resulting from a goodwill impairment charge
and at Laurel Gaming LLC related to costs incurred to pursue
alternative gaming. The seasonal nature of our Racing & Gaming
Business and the national trend of declining pari-mutuel wagering
activity also contributed to the loss incurred during the fourth
quarter of 2010.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
2010
The Racing & Gaming Business includes the
results of operations since April 30, 2010, the acquisition date of
the Transferred Assets in the year ended December 31, 2010.
The results of operations for the year ended December 31, 2009
include the results of MEC for the period up to March 5, 2009, the
Petition Date. The deconsolidation of MEC as at March 5, 2009 and
the acquisition of the Transferred Assets on April 30, 2010 affects
virtually all of the Company's reported revenue, expense, asset and
liability balances, thus significantly limiting the comparability
from period to period of the Company's consolidated statements of
loss, consolidated statements of cash flows and consolidated
balance sheets. Transactions and balances between the "Real
Estate Business" and "Racing & Gaming Business" 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 are eliminated in the
consolidated results of operations and financial position of the
Company for periods subsequent to the transfer of the Transferred
Assets and prior to the deconsolidation of MEC on the Petition
Date.
(U.S. dollars in thousands)
|
Consolidated |
Real
Estate Business |
Racing & Gaming
Business |
Years Ended December 31, |
2010 |
2009 |
2010 |
2009 |
2010 |
2009 |
Revenues |
|
|
|
|
|
|
Rental revenue |
$ 172,656 |
$ 170,929 |
$ 172,656 |
$ 170,929 |
$ — |
$ — |
Interest and other income from MEC |
1,824 |
43,469 |
1,824 |
53,105 |
— |
— |
Racing, gaming and other revenue |
183,880 |
152,935 |
— |
— |
183,880 |
152,935 |
|
358,360 |
367,333 |
174,480 |
224,034 |
183,880 |
152,935 |
Operating costs, expenses and income |
|
|
|
|
|
|
Purses, awards and other |
100,945 |
82,150 |
— |
— |
100,945 |
82,150 |
Operating costs |
90,655 |
55,274 |
— |
— |
90,655 |
55,274 |
General and administrative |
76,524 |
53,071 |
49,687 |
52,904 |
26,837 |
157 |
Depreciation and amortization |
50,437 |
48,334 |
41,560 |
41,349 |
8,877 |
7,014 |
Interest expense, net |
16,447 |
18,985 |
16,197 |
13,535 |
250 |
14,960 |
Foreign exchange losses (gains) |
(16) |
8,104 |
86 |
(543) |
(102) |
8,647 |
Equity loss (income) |
29,501 |
(65) |
— |
— |
29,501 |
(65) |
Write-down of long-lived and
intangible assets |
44,159 |
4,498 |
40,646 |
4,498 |
3,513 |
— |
Impairment provision (recovery) related to loans
receivable from MEC |
(9,987) |
90,800 |
(9,987) |
90,800 |
— |
— |
Operating income (loss) |
(40,305) |
6,182 |
36,291 |
21,491 |
(76,596) |
(15,202) |
Deconsolidation adjustment to the carrying values
of MID's investment in, and amounts due from, MEC |
— |
(46,677) |
— |
(504) |
— |
(46,173) |
Gain (loss) on disposal of real estate |
(1,205) |
206 |
(1,205) |
206 |
— |
— |
Other gains (losses), net |
1,913 |
(7,798) |
1,971 |
(7,798) |
(58) |
— |
Purchase price consideration adjustment |
21,027 |
— |
21,027 |
— |
— |
— |
Income (loss) before income taxes |
(18,570) |
(48,087) |
58,084 |
13,395 |
(76,654) |
(61,375) |
Income tax expense |
33,442 |
1,737 |
33,413 |
1,678 |
29 |
59 |
Income (loss) from continuing
operations |
(52,012) |
(49,824) |
24,671 |
11,717 |
(76,683) |
(61,434) |
Income from discontinued operations
|
— |
1,227 |
— |
— |
— |
784 |
Net income (loss) |
(52,012) |
(48,597) |
24,671 |
11,717 |
(76,683) |
(60,650) |
Add net loss attributable to the non-controlling
interest |
— |
6,308 |
— |
— |
— |
6,308 |
Net income (loss) attributable to MID
|
$ (52,012) |
$ (42,289) |
$ 24,671 |
$ 11,717 |
$ (76,683) |
$ (54,342) |
Income (loss) attributable to MID from |
|
|
|
|
|
|
─ continuing
operations |
$ (52,012) |
$ (43,153) |
$ 24,671 |
$ 11,717 |
$ (76,683) |
$ (54,763) |
─ discontinued
operations |
— |
864 |
— |
— |
— |
421 |
Net income (loss) attributable to
MID |
$ (52,012) |
$ (42,289) |
$ 24,671 |
$ 11,717 |
$ (76,683) |
$ (54,342) |
REAL ESTATE BUSINESS
Rental revenues for the year ended December 31,
2010 increased $1.7 million to $172.7 million from $170.9 million
in the prior year. The additional rent earned from
contractual rent increases, completed projects on-stream and the
effect of changes in foreign exchange rates was partially offset by
the negative impact of vacancies, renewals and re-leasing,
straight-line rent and other adjustments.
Rental Revenue
Rental revenue, year ended December 31,
2009 |
$ 170.9 |
Contractual rent
increases |
1.5 |
Completed projects
on-stream |
0.9 |
Vacancies of income-producing
properties |
(1.3) |
Renewals and re-leasing of income-producing
properties |
(0.9) |
Effect of changes in foreign currency exchange
rates |
2.0 |
Straight-line
adjustment |
(0.1) |
Other
|
(0.3) |
Rental revenue, year ended December 31,
2010 |
$ 172.7 |
The $1.5 million increase in revenue from
contractual rent adjustments includes (i) $0.5 million from
cumulative CPI-based increases (being increases that occur every
five years or once a specified cumulative increase in CPI has
occurred) implemented in 2009 and 2010 on properties representing
6.5 million square feet of leaseable area, (ii) $0.9 million from
annual CPI-based increases implemented in 2010 on properties
representing 6.5 million square feet of leaseable area and (iii)
$0.1 million from fixed contractual adjustments on properties
representing 0.5 million square feet of leaseable area.
Completed projects on-stream contributed $0.9
million to rental revenue for the year ended December 31,
2010. The completion of six minor Magna-related projects and
two non-Magna projects in 2009 increased revenue by $0.3 million
over the prior year. Late in December 2009, the Company
acquired a 61 thousand square foot facility located in Shelby
Township, Michigan, which has been leased to a subsidiary of Magna
for six years, with the option to renew for two additional periods
of five years. The rental of this property increased revenue
by $0.3 million over the prior year. The completion of a
Magna-related expansion project in Austria in 2010 added six
thousand square feet of leaseable area and marginally increased
revenue in the year ended December 31, 2010 over the prior
year. The completion of Phase I and Phase II of a
Magna-related expansion project in Mexico in May 2010 and August
2010 added 103 thousand and 19 thousand square feet of leaseable
area, respectively, and increased revenue in the year ended
December 31, 2010 by $0.3 million. The completion of a minor
Magna-related project in the fourth quarter of 2010 marginally
increased revenue in the year ended December 31, 2010 over the
prior year.
One property became vacant in the first quarter
of 2010 and two properties became vacant in 2009 upon the expiry of
the lease agreements pertaining to 358 thousand square feet of
aggregate leaseable area, resulting in a $1.3 million reduction in
revenues over the prior year.
Renewals and re-leasing had a $0.9 million
negative impact on revenues compared to the prior year. The
renewal of two Magna leases in 2009, a non-Magna tenant lease and
two Magna leases in 2010, at lower negotiated market rental rates
than the expiring lease rates, relating to an aggregate of 456
thousand square feet of leaseable area, as well as the re-lease of
a 182 thousand square foot facility in Germany to a non-Magna
tenant in 2009, reduced revenues by $0.3 million in the year ended
December 31, 2010. As a result of Magna's plant
rationalization strategy (see "REAL ESTATE BUSINESS - Automotive
Industry and Magna Plant Rationalization Strategy"), the Real
Estate Business terminated a lease with Magna in May 2010 for 246
thousand square feet of leaseable area that had been vacated in
2009. This property was subsequently re-leased to a third
party for 12.5 years. The vacancy and re-leasing of this
property resulted in a $0.5 million decrease in revenues.
During the year ended December 31, 2010, revenues were reduced by
$0.2 million due to a lease negotiation with a Magna tenant
relating to a 298 thousand square foot facility in Mexico that was
finalized in June 2010. The re-lease of a 41 thousand square
foot facility in Canada to a non-Magna tenant in 2009 increased
revenues by $0.1 million over the prior year.
For the year ended December 31, 2010,
approximately 75% of the Real Estate Business' rental revenues are
denominated in currencies other than the U.S. dollar (primarily the
euro and Canadian dollar). Foreign exchange had a $2.0
million positive impact on reported rental revenues, as the average
foreign exchange rate during the year ended December 31, 2010
relating to the Canadian dollar strengthened against the U.S.
dollar as compared to the prior year period, which was partially
offset by the negative impact on reported rental revenues as the
average foreign exchange rate relating to the euro weakened against
the U.S. dollar as compared to the prior year.
Interest and Other Income from MEC
Interest and other income from MEC, consisting
of interest and fees earned in relation to loan facilities between
the MID Lender and MEC and certain of its subsidiaries, decreased
by $51.3 million, from $53.1 million in the year ended December 31,
2009 to $1.8 million in the year ended December 31, 2010.
During the fourth quarter of 2009, the Company
estimated that it would be unable to realize on all amounts due in
accordance with the contractual terms of the loan agreements with
MEC and, accordingly, the Real Estate Business recorded an
impairment provision relating to the loans receivable from
MEC. Given the impairment, the Company discontinued accruing
interest income and fees on the loans receivable from MEC, however,
interest income and fees were recognized under the DIP Loan to the
extent income was earned in the period and cash had been either
collected as at or subsequent to the balance sheet date. In
the year ended December 31, 2010, $1.8 million of interest and
other income from MEC represents interest and fees relating to the
DIP Loan. For further details of these loan facilities, see
"LOANS RECEIVABLE FROM MEC". As a result of the
conclusion of the Debtors' Chapter 11 process following the close
of business on April 30, 2010, the effective date of the Plan, the
Company no longer received interest and other income from
MEC.
General and Administrative Expenses
General and administrative expenses decreased by
$3.2 million to $49.7 million in 2010 from $52.9 million in
2009. General and administrative expenses for 2009 include
$22.6 million of advisory and other related costs incurred in
connection with a reorganization proposal announced in November
2008, which did not proceed, MID's involvement in the Debtors'
Chapter 11 process (see "SIGNIFICANT MATTERS - MEC'S Bankruptcy
- Chapter 11 Filing and Plan of Reorganization") and matters
heard by the Ontario Securities Commission ("OSC"). Expenses for
2010 include $9.5 million of advisory and other related costs
incurred with respect to the continued involvement in MEC's
Debtors' Chapter 11 process, including costs associated with the
acquisition of the Transferred Assets, and costs incurred relating
to ST Acquisition Corp.'s intention to acquire MID shares (see
"SIGNIFICANT MATTERS - ST Acquisition Corp. Offer for MID
Shares"). Excluding advisory and other costs, general and
administrative expenses increased $9.9 million in the 2010 year
primarily due to:
(i) increased
insurance expense of $3.3 million primarily related to increased
premiums in connection with the Company's Directors' and Officers'
liability insurance. The Directors' and Officers' liability
insurance includes premiums paid for run-off insurance related to
the MEC bankruptcy which expires in June 2016 and covers claims
arising from prior years to June 30, 2010;
(ii) increased
termination costs of $2.3 million relating to the resignations of
members of senior management in 2010;
(iii) increased
compensation expense of $1.9 million primarily pertaining to the
Company's Non-Employee Director Share-Based Compensation Plan
resulting from the increase in the Company's share price during
2010 as compared to 2009, primarily in the fourth quarter as well
as increased incentive plan compensation paid to directors in
2010;
(iv) increased
professional fees of $1.6 million relating to both legal costs for
various real estate and corporate matters as well as increased
audit fees in connection with the Transferred Assets;
(v) increased costs
of $1.0 million primarily associated with other costs associated
with the MEC bankruptcy process;
(vi) increased
property taxes and utilities expense of $0.9 million as a result of
the increased number of vacant properties in comparison to the
prior year that would have otherwise been paid by the tenant;
and
(vii) increased
consulting costs of $0.8 million associated with the continued
evaluation of various real estate projects that the Company
investigates on a regular basis and advisory costs incurred to
settle allowed administrative, priority and other claims concerning
MEC's bankruptcy.
Partially offsetting these increases in general
and administrative expenses is a reduction in stock-based
compensation expense of $1.1 million due to the issuance of a
greater number of stock options to purchase the Company's Class A
Subordinate Voting Shares in 2009 as compared to 2010 and decreased
capital tax expense of $0.5 million due to the elimination of
capital tax in the province of Ontario, Canada effective July 1,
2010.
Depreciation and Amortization Expense
Depreciation and amortization expense increased
by $0.3 million to $41.6 million in 2010 compared to $41.3 million
in the prior year, primarily due to foreign exchange (see "
FOREIGN CURRENCIES").
Interest Expense, Net
Net interest expense was $16.2 million in 2010
($16.5 million of interest expense less $0.3 million of interest
income) compared to $13.5 million in the prior year ($13.9 million
of interest expense less $0.4 million of interest income).
The increased net interest expense is primarily due to $1.6 million
of increased interest expense associated with foreign exchange
relating to the Company's Debentures as they are denominated in
Canadian dollars, $1.1 million associated with increased borrowings
on the revolving credit facility and $0.1 million due to having
less cash available for short-term investment and a general
reduction in the interest rates available on short-term investments
partially offset with $0.1 million of increased interest
capitalized for properties under development.
Foreign Exchange Losses (Gains)
The Real Estate Business recognized net foreign
exchange losses of $0.1 million for 2010 compared to net foreign
exchange gains of $0.5 million in the prior year. The drivers
of such foreign exchange losses and gains are primarily the
re-measurement of certain net current and future tax balances of an
MID subsidiary that has a functional currency other than that in
which income taxes are required to be paid and the re-measurement
of U.S. dollar denominated net assets held within MID's corporate
entity, which has a Canadian functional currency.
Write-down of Long-Lived and Intangible
Assets
In the fourth quarter of 2010, the Real Estate
Business recorded impairment charges totalling $40.6 million
relating to parcels of land held for development located in
California, Florida, Michigan and Ilz, Austria. Pursuant to
the reorganization proposal (see "SIGNIFICANT MATTERS -
Reorganization Proposal"), lands held for development as
described in note 5(a) to the unaudited interim consolidated
financial statements, along with other assets, are transferred to
the Stronach Shareholder as consideration for the cancellation of
all 363,414 Class B Shares held by the Stronach Shareholder.
The votes represented by the Stronach Shareholder, the Initiating
Shareholders and the other holders of the Class B Shares who have
agreed to vote in favour of the Arrangement are sufficient to pass
the Arrangement Resolution. In connection with the
reorganization proposal, the Company obtained information related
to the above noted properties that indicated the existence of
potential impairments and inability to recover the carrying
value. The write-down represents the excess of the carrying
value of the lands held for development over the estimated fair
value determined by external real-estate appraisals. The write-down
reduced the cost of the land and was included in "write-down of
long-lived and intangible assets" on the consolidated statements of
loss for the year ended December 31, 2010.
In the fourth quarter of 2009, as a result of
further weakening in the commercial office real estate market in
Michigan, the Real Estate Business recorded a $4.5 million
write-down of a revenue-producing commercial office building.
The write-down represents the excess of the carrying value of the
asset over the estimated fair value. Fair value was
determined based on the present value of the estimated future cash
flows from the leased property.
Impairment Provision (Recovery) Related to
Loans Receivable from MEC
During the year ended December 31, 2009, in
connection with developing the Plan (see "SIGNIFICANT MATTERS -
Participation in MEC's Bankruptcy - Chapter 11 Filing and Plan of
Reorganization"), the Company estimated the values and
resulting recoveries of loans receivable from MEC, net of any
related obligations, provided to the Company pursuant to the terms
of the Plan. In preparing the estimated resulting recoveries,
the Company: (i) reviewed certain historical financial information
of MEC for recent years and interim periods; (ii) communicated with
certain members of senior management of MEC to discuss the assets
and operations; (iii) considered certain economic and industry
information relevant to MEC's operating businesses; (iv) considered
various indications of interest received by the Debtors in
connection with the sales marketing efforts conducted by financial
advisors of MEC during the Chapter 11 proceedings for certain of
MEC's assets; (v) reviewed the analyses of other financial advisors
retained by MEC; (vi) relied on certain real estate appraisals
prepared by its real estate advisors; and (vii) conducted its own
analysis as it deemed appropriate. The Company relied on the
accuracy and completeness of financial and other information
furnished to it by MEC with respect to the Chapter 11
proceedings.
As a result of this analysis, the Company
estimated that it would be unable to realize on all amounts due in
accordance with the contractual terms of the MEC loans.
Accordingly, for the year ended December 31, 2009, the Real Estate
Business recorded a $90.8 million impairment provision related to
the loans receivable from MEC, which represented the excess of the
carrying amounts of the loans receivable and the estimated
recoverable value. Estimated recoverable value was determined
based on the future cash flows from expected proceeds to be
received from Court approved sales of MEC's assets, discounted at
the loans' effective interest rate, and the fair value of the
collateral based on third party appraisals or other valuation
techniques, such as discounted cash flows, for those MEC assets to
be transferred to the Company under the Plan or for which the Court
had yet to approve for sale under the Plan, net of expected
administrative, priority and allowed claims to be paid by the
Company under the Plan.
During the year ended December 31, 2010, an
impairment recovery of $10.0 million relating to loans receivable
from MEC was recorded as a result of additional information and
changes in facts and circumstances arising as at the acquisition
date of April 30, 2010 relating to the settlement of the loans
receivable from MEC in exchange for the Transferred Assets.
The significant changes in facts or circumstances that resulted in
the recognition of the $10.0 million reduction in the impairment
provision in the year ended December 31, 2010 are primarily as
follows:
(a) Directors' and
Officers' Insurance Proceeds
Under the Plan, rights of MID and MEC against
MEC's directors' and officers' insurers were preserved with regard
to the settlement in order to seek appropriate compensation for the
release of all current and former officers and directors of MID and
MEC and their respective affiliates. MID was entitled to
receive such compensation, if any, from MEC's directors' and
officers' insurers. At December 31, 2009, when the $90.8
million impairment provision relating to loans receivable from MEC
was initially determined, MID was in discussions with the insurers
regarding its claim. Given the complex nature of the claim
and related discussions, the expected proceeds could not be
reasonably estimated. A settlement agreement with one of the
insurers was subsequently entered into in July 2010 resulting in
MID receiving compensation of $13.0 million. Given that these
events confirmed facts and circumstances that existed at April 30,
2010, the Company recognized an asset and reduced the impairment
provision by $13.0 million related to the Transferred Assets on
April 30, 2010 and is included in "impairment provision (recovery)
related to loans receivable from MEC" for the year ended December
31, 2010.
(b) Sale Proceeds
From Liquidated Assets Under the Plan
The estimates of sale proceeds from liquidated
assets under the Plan increased approximately $7.5 million
primarily as a result of the sale of Thistledown. Thistledown
was initially approved for sale in an auction on September 30,
2009; however, the purchaser had the right to terminate the
agreement, which it exercised. The sale of Thistledown went
back to auction on May 25, 2010 and the Bankruptcy Court approved
the sale of Thistledown to a third party which subsequently closed
on July 27, 2010. Given that the completion of the sale of
Thistledown confirmed facts and circumstances that existed at April
30, 2010, the Company used such information to establish the fair
value of Thistledown when assessing the fair value of the
underlying collateral of the loans. Accordingly, the Company
reduced the impairment provision by $7.5 million related to the
Transferred Assets on April 30, 2010 and is included in "impairment
provision (recovery) related to loans receivable from MEC" for the
year ended December 31, 2010.
(c) Bankruptcy
Claims
The settlement of allowed administrative,
priority and other claims which the Company assumed under the Plan
is on-going and subject to Bankruptcy Court approval.
Consequently, at each reporting date, the Company makes estimates
of such settlements based on claims that have been resolved,
continue to be objected to and/or negotiated and claims which are
still pending Bankruptcy Court approval. As a result, the
Company revised the estimates related to expected allowed
administrative, priority and other claims assumed by the Company
under the Plan by approximately $15.9 million as a result of
additional information received and/or the settlement of allowed
administrative, priority and other claims previously
outstanding. Accordingly, the Company increased the
impairment provision by $15.9 million related to the Transferred
Assets on April 30, 2010 and is included in "impairment provision
(recovery) related to loans receivable from MEC" for the year ended
December 31, 2010.
(d) Changes in Fair Value of Net Assets
Retained Under the Plan
At each reporting date, the Company estimated
the working capital of the Transferred Assets under the Plan based
on available unaudited internally prepared results and operating
projections. On the effective date of the Plan, the fair
value of the working capital differed from the original estimates
as a result of actual operating results and events related to the
bankruptcy process. The Company also estimated the fair value
of the real estate of the Transferred Assets taking into
consideration: (i) certain economic and industry information
relevant to the Transferred Assets' operating business; (ii)
various indications of interest received by MEC in connection with
the sales marketing efforts conducted by financial advisors of MEC
during the Chapter 11 proceedings; and (iii) third-party real
estate appraisals. Throughout the bankruptcy process and to the
effective date of the Plan, the Company continually updated such
information related to market conditions and assumptions related to
the real estate values based on the premise of highest and best
use. The appraisals included additional information related
to assumptions regarding potential uses, costs related to obtaining
appropriate entitlements and demolition costs, and comparable sales
data for real estate transactions in each jurisdiction. As a result
of changes in fair value of the Transferred Assets under the Plan,
there was a corresponding change in the determination of future tax
balances associated with differences between estimated fair value
and tax bases of assets acquired and liabilities assumed.
Accordingly, the Company reduced the impairment provision by $5.4
million related to the Transferred Assets on April 30, 2010 and is
included in "impairment provision (recovery) related to loans
receivable from MEC" for the year ended December 31, 2010.
Gain (Loss) on Disposal of Real
Estate
During the year ended December 31, 2010, the
Real Estate Business recorded a loss of $1.2 million resulting from
the disposition of 8.72 acres of land held for development in the
U.S. In 2004, a wholly-owned subsidiary of the Company
entered into an agreement with the municipality in which the land
is located that if certain development did not occur within a
specified period of time, then the land would convey to the
municipality. Such development did not occur resulting in the
conveyance of the land to the municipality. In the year ended
December 31, 2009, the Real Estate Business sold land and a vacant
building in the U.S. for cash consideration of $0.8 million and
realized a gain on disposal of $0.2 million.
Other Gains (Losses), Net
The Real Estate Business' "other gains (losses),
net" during 2010 primarily relates to a termination fee on a
property in the U.S. that was leased to Magna. In
conjunction with the lease termination, Magna agreed to pay the
Company a fee of $1.9 million. The amount will be collected based
on a repayment schedule over the remaining term of the original
lease, which was scheduled to expire in September 2013.
The "other gains (losses), net" during 2009
represented a $7.8 million foreign currency translation loss
realized from a capital transaction that gave rise to a reduction
in the net investment in a foreign operation, which was considered
a substantially complete liquidation of that foreign
operation. The currency translation loss for 2009, which was
previously included in the "accumulated other comprehensive income"
component of shareholders' equity, was recognized in the
determination of net income as a result of the Real Estate Business
repatriating funds from a foreign operation. In 2010,
the Real Estate Business recorded a currency translation gain of
$0.1 million in "other gains (losses), net" relating to the final
liquidation of this foreign operation.
Purchase Price Consideration
Adjustment
In satisfaction of MID's claims relating to the
2007 MEC Bridge Loan, the 2008 MEC Loan and the MEC Project
Financing Facilities, the Company received the Transferred Assets
on April 30, 2010. The fair values of the assets acquired and
liabilities assumed were initially determined as at April 30, 2010
resulting in a $10.0 million impairment recovery related to the
loans receivable from MEC being recognized (see "RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010 - REAL
ESTATE BUSINESS - Impairment Provision (Recovery) Related to
Loans Receivable from MEC"). However, certain of the fair
values assigned to the Transferred Assets as at April 30, 2010 were
preliminary in nature and subject to change in future reporting
periods. As the loans were considered settled on April 30,
2010, any further changes to fair value are no longer considered an
adjustment to the previously recognized impairment provision
relating to the loans receivable from MEC, but rather are
considered an adjustment to the fair values of the purchase price
consideration and has been presented as a "purchase price
consideration adjustment" in the consolidated statements of
loss. Accordingly, the changes in the fair values of the
Transferred Assets in the year ended December 30, 2010 of $21.0
million are comprised of the following items:
Directors' and officers' insurance
proceeds(a) |
$ 8,400 |
Bankruptcy
claims(b) |
11,229 |
Changes in fair value of net assets retained under
the Plan(c) |
1,398 |
Purchase price consideration adjustment
|
$ 21,027 |
(a) Directors' and
Officers' Insurance Proceeds
Under the Plan, rights of MID and MEC against
MEC's directors' and officers' insurers are preserved with regard
to the settlement in order to seek appropriate compensation for the
release of all current and former officers and directors of MID and
MEC and their respective affiliates. MID is entitled to
receive such compensation, if any, from MEC's directors' and
officers' insurers. At April 30, 2010, MID was in continued
discussions with the insurers regarding its claim. Given the
complex nature of the claim and related discussions, the expected
proceeds could not be reasonably estimated. During the
measurement period, settlement agreements were subsequently entered
into in September 2010 and October 2010 with the insurers,
resulting in MID receiving compensation of $5.9 million and $2.5
million, respectively. Given that these events confirmed
facts and circumstances that existed at April 30, 2010, the Company
recognized an adjustment of $8.4 million to the purchase price
consideration and related allocations to the Transferred Assets on
April 30, 2010 and is included in "purchase price consideration
adjustment" for the year ended December 31, 2010.
(b) Bankruptcy
Claims
At April 30, 2010, the settlement of allowed
administrative, priority and other claims which the Company assumed
under the Plan were ongoing and subject to Bankruptcy Court
approval. Consequently, at each reporting date during the
measurement period, the Company makes estimates of such settlements
based on claims that have been resolved, continue to be objected to
and/or negotiated and claims which are still pending Bankruptcy
Court approval. As a result, the Company revised the
estimates related to expected allowed administrative, priority and
other claims assumed by the Company under the Plan by approximately
$11.2 million as a result of information received and/or the cash
settlement of certain allowed administrative, priority and other
claims previously outstanding. Accordingly, the Company
recognized an adjustment of $11.2 million to the purchase price
consideration and related allocations to the Transferred Assets on
April 30, 2010 and is included in "purchase price consideration
adjustment" for the year ended December 31, 2010.
(c) Changes in Fair
Value of Net Assets Retained Under the Plan
At April 30, 2010, the Company estimated the
working capital, including pre-petition accounts receivable on
account of track wagering and litigation and other accruals, of the
Transferred Assets under the Plan. During the measurement
period, the Company revised its estimates relating to pre-petition
accounts receivable relating to track wagering and litigation
accruals and other liabilities as a result of information obtained
relating to the estimated and/or actual settlement of such amounts.
As a result of changes in fair value of the Transferred Assets,
there was a corresponding change in the determination of future tax
balances associated with differences between estimated fair value
and tax bases of assets acquired and liabilities assumed.
Accordingly, the Company recognized an adjustment of $1.4 million
to the purchase price consideration and related allocations to the
Transferred Assets on April 30, 2010 and is included in "purchase
price consideration adjustment" for the year ended December 31,
2010.
Income Tax Expense
The Real Estate Business' income tax expense for
2010 was $33.4 million, representing an effective tax rate of
57.5%, compared to an income tax expense of $1.7 million in the
prior year, representing an effective tax rate of 12.5%.
During 2010, an internal amalgamation was
undertaken with the unintended result of causing the Company to
incur $12.7 million of current tax expense. The Company has
retained legal counsel to apply to the Ontario Superior Court of
Justice to have the amalgamation set aside and cancelled. The
outcome of this process is uncertain.
The Real Estate Business' income before income
taxes in 2010 includes a write-down of long-lived assets of $40.6
million, partially offset by an impairment recovery related to the
loans receivable from MEC of $10.0 million and a purchase price
consideration adjustment of $21.0 million. Excluding these
items and the additional unintended income tax expense of $12.7
million relating to the internal amalgamation, the Real Estate
Business' effective tax rate was 31.0% In 2009, excluding the
$90.8 million impairment provision relating to loans receivable
from MEC, the $7.8 million currency translation loss included in
"other gains (losses), net" and the $22.6 million of advisory and
other costs incurred in 2009 incurred in connection with a
reorganization proposal announced in November 2008 and evaluating
MID's relationship with MEC, including MID's involvement in the
Debtors' Chapter 11 process and matters heard by the OSC, and the
related tax impact of these items, the Real Estate Business'
effective tax rate was 10.5%. This increase in the effective tax
rate is primarily due to changes in the mix of taxable income
earned in the various countries in which the Real Estate Business
operates as the jurisdictions in which the Real Estate Business
operates have different rates of taxation and therefore income tax
expense is influenced by the proportion of income earned in each
particular country, as well as the decrease in interest and other
income from MEC, which is taxed in jurisdictions that had lower
rates of taxation than the Real Estate Business' overall effective
tax rate. In addition, the Real Estate Business could
not tax benefit from MEC Chapter 11 related expenses in 2010.
Net Income (Loss)
Net income of $24.7 million for 2010 increased
from net income of $11.7 million in the prior year. The $13.0
million increase is primarily due to the impairment provision
relating to the loans receivable from MEC of $90.8 million recorded
in 2009, as well as the impairment recovery relating to loans
receivable from MEC of $10.0 million and the $21.0 million purchase
price consideration adjustment related to the Transferred Assets
recorded in 2010 partially offset by the increase in the write-down
of long-lived assets of $36.1 million, the decrease in interest and
other income from MEC of $51.3 million and the increase in income
tax expense of $31.7 million in 2010.
Funds From Operations
|
Years
Ended
December 31, |
(in thousands, except per share information) |
2010 |
2009 |
Change |
Net income
|
$ 24,671 |
$ 11,717 |
111% |
Add back depreciation and
amortization |
41,560 |
41,349 |
1% |
Add back (deduct) loss (gain) on disposal of real
estate |
1,205 |
(206) |
(685%) |
Funds from
operations |
$ 67,436 |
$ 52,860 |
28% |
Basic and diluted funds from operations per
share |
$ 1.44 |
$ 1.13 |
27% |
Basic and diluted number of shares outstanding
|
46,708 |
46,708 |
|
The Company determines FFO using the definition
prescribed in the U.S. by the National Association of Real Estate
Investment Trusts ("NAREIT"). Under the definition of FFO
prescribed by NAREIT, the impact of future income taxes and any
asset impairments are included in the calculation of FFO.
The $14.6 million increase in FFO compared to
the prior year is due to increased net income (see "RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010 -
REAL ESTATE BUSINESS - Net Income") as well as the increase
in depreciation and the loss on disposal of real estate as compared
to the prior year.
Annualized Lease Payments
Annualized lease payments, as at December 31,
2009 |
$ 178.0 |
Contractual rent adjustments |
1.4 |
Completed projects on-stream |
0.7 |
Vacancies of income-producing
properties |
(0.7) |
Renewals and re-leasing of income-producing
properties |
(0.4) |
Effect of changes in foreign currency exchange
rates |
(2.0) |
Other |
(0.2) |
Annualized lease payments, as at
December 31, 2010 |
$ 176.8 |
Annualized lease payments represent the total
annual rent of the Real Estate Business assuming the contractual
lease payments as at the last day of the reporting period were in
place for an entire year, with rents denominated in foreign
currencies being converted to U.S. dollars based on exchange rates
in effect at the last day of the reporting period (see "REAL
ESTATE BUSINESS - Foreign Currencies").
During 2010, annualized lease payments decreased
by $1.2 million, or 0.7%, from $178.0 million at December 31, 2009
to $176.8 million at December 31, 2010. The strengthening of
the U.S. dollar against the euro partially offset by the weakening
of the U.S. dollar against the Canadian dollar led to a $2.0
million decrease in annualized lease payments.
In addition, increases in contractual rent
adjustments increased annualized lease payments by $1.4 million,
including $1.3 million from CPI-based increases on properties
representing 16.2 million square feet of leaseable area and $0.1
million from fixed contractual adjustments on properties
representing 0.2 million square feet of leaseable area.
Completed projects related to the expansion
projects in Austria and Mexico and a minor project in Spain
relating to an air cooling system, which all came on-stream during
2010, also increased annualized lease payments by $0.7 million. The
completion of the Phase I and II of an expansion facility in Mexico
contributed $0.6 million of the $0.7 million increase in annualized
lease payments in 2010.
Annualized lease payments decreased by $0.7
million resulting from the vacancy of a 131 thousand square foot
facility by a Magna tenant in the first quarter of
2010. There was also a $0.4 million net reduction in
renewals and re-leasing of income producing properties. A
reduction of $0.7 million relating to four properties, two in
Mexico, one in the U.S. and one in Canada, representing an
aggregate of 599 thousand square feet of leaseable area, that were
re-leased at lower negotiated market rental rates than the expiring
lease rate. Partially offsetting the reduction in renewals and
re-leasing is the leasing of a 58 thousand square foot facility to
a non-Magna tenant in Canada which increased annualized lease
payments by $0.2 million. In addition, the renewal of a
non-Magna tenant lease at higher negotiated market rental rates
than the expiring rate, representing 85 thousand square feet of
leaseable area also increased annualized lease payments by $0.1
million.
The annualized lease payments by currency at
December 31, 2010 and 2009 were as follows:
|
December
31, |
December 31, |
|
2010 |
2009 |
euro |
$ 70.9 |
40% |
$ 75.8 |
43% |
Canadian dollar |
60.5 |
34 |
57.3 |
32 |
U.S. dollar |
43.8 |
25 |
43.2 |
24 |
Other |
1.6 |
1 |
1.7 |
1 |
|
$ 176.8 |
100% |
$ 178.0 |
100% |
Lease Rollover Risk
Lease rollover risk arises from the possibility
that the Company may experience difficulty renewing leases as they
expire or replacing tenants.
The following table sets out lease expiries, by
square footage, for our portfolio at December 31, 2010.
|
|
2018 & |
|
|
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
Beyond |
Total |
Canada
|
371 |
374 |
1,146 |
— |
643 |
— |
3,299 |
2,234 |
8,067 |
U.S. |
— |
171 |
1,683 |
72 |
213 |
— |
1,576 |
1,759 |
5,474 |
Mexico |
— |
— |
856 |
— |
68 |
— |
1,097 |
374 |
2,395 |
Austria
|
— |
— |
73 |
— |
— |
1,264 |
5,639 |
891 |
7,867 |
Germany
|
— |
— |
1,835 |
— |
— |
29 |
— |
1,166 |
3,030 |
Other |
— |
— |
373 |
75 |
— |
— |
33 |
184 |
665 |
Total
|
371 |
545 |
5,966 |
147 |
924 |
1,293 |
11,644 |
6,608 |
27,498 |
Real Estate Properties
The Real Estate Business' real estate assets are
comprised of income-producing properties, properties under
development and properties held for development.
The net book values of the Real Estate Business'
real estate assets are as follows:
|
December 31, |
December 31, |
|
2010 |
2009 |
Income-producing real estate properties |
$ 1,172.5 |
$ 1,220.0 |
Properties held for development |
132.3 |
169.8 |
Properties under
development |
10.3 |
— |
Real estate properties, net |
$ 1,315.1 |
$ 1,389.8 |
Income-Producing Properties
At December 31, 2010, the Real Estate Business
had 106 income-producing properties, representing 27.5 million
square feet of rentable space. The income-producing
properties are comprised predominantly of industrial plants
strategically located and used by Magna primarily to provide
automotive parts and modules to the world's manufacturers of cars
and light trucks for their assembly plants throughout North America
and Europe. The portfolio also includes several office
buildings that comprise 8% of the total square footage of
income-producing properties, including the head offices of Magna in
Canada and Austria.
The book value of the income-producing portfolio
by country as at December 31, 2010 was as follows:
|
Book
Value |
Percent
of Total |
Canada |
$ 422.2 |
36% |
Austria |
318.7 |
27 |
U.S. |
220.0 |
19 |
Germany |
111.2 |
9 |
Mexico |
69.6 |
6 |
Other countries |
30.8 |
3 |
|
$ 1,172.5 |
100% |
Properties Held for Development
Properties held for development consist of (i)
lands held for future industrial expansion, (ii) lands that were
originally banked for industrial use but for which the current
industrial use is not the highest and best use and (iii)
development lands acquired previously from MEC in 2007 and for
which the Real Estate Business was seeking planning and zoning
changes in order to develop mixed-use and residential
projects. The Real Estate Business has approximately 1,400
acres of land held for development at December 31, 2010 and
December 31, 2009, including approximately 900 acres in the U.S.,
300 acres in Canada, 100 acres in Mexico and 100 acres in
Europe.
Properties held for development are intended to
be rezoned, developed and/or redeveloped over the medium or
long-term for the Company's account or with joint venture
partners. For example, MID has had intentions to
develop the Aurora, Canada, Palm Beach County, Florida and Bonsall,
California properties for residential and/or commercial uses and
the Howard County, Maryland property for mixed-use, including
office, retail and residential. Planning and zoning approvals
are in place for a 288 unit residential development in Palm Beach
County, Florida. Significant progress has also been made in
the mixed-use land entitlement approval process relating to the
Howard County lands in Maryland as MID received preliminary site
plan approval on August 3, 2010. The property in Bonsall,
California currently houses the San Luis Rey Downs Thoroughbred
Training Facility operated by San Luis Rey Racing, Inc., and which
entered into a lease agreement with MID on March 16, 2010 on a
triple-net basis for nominal rent while MID pursued the necessary
development entitlements and other approvals. The San Diego
County general plan covering the Bonsall lands is expected to
accommodate MID's residential development plans.
As a result of the reorganization proposal
received December 22, 2010 (see "SIGNIFICANT MATTERS -
Reorganization Proposal"), lands held for development as
described in note 5(a) to the unaudited interim financial
statements, along with other assets, will transfer to the Stronach
Shareholder as consideration for the cancellation of all 363,414
Class B Shares held by the Stronach Shareholder. The proposed
reorganization will be implemented pursuant to a court-approved
plan of arrangement under the Business Corporations Act
(Ontario) and will be subject to approval by shareholders at the
annual and general meeting of the shareholders of MID to be held on
March 29, 2011 and the Ontario Superior Court of Justice
thereafter. In connection with this Arrangement, the Company
obtained information related to parcels of land held for
development located in California, Florida, Michigan and Ilz,
Austria that indicated the existence of potential impairments and
inability to recover the carrying value. In this respect, during
the fourth quarter of 2010, the Real Estate Business recorded an
impairment charge of $40.6 million relating to certain lands held
for development. The write-down represents the excess of the
carrying value of the assets over the estimated fair values
determined by external real-estate appraisals.
During 2007, MID acquired all of MEC's interests
and rights in four 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; a 157-acre parcel (together with certain
development rights) in Palm Beach County, Florida adjacent to MEC's
Palm Meadows Training Center; and a 205-acre parcel of land located
in Bonsall, California. Prior to the Petition Date (see
"SIGNIFICANT MATTERS - MEC'S BANKRUPTCY - Chapter 11 Filing and
Plan of Reorganization"), the Real Estate Business had recorded
the cost of the lands acquired from MEC at the exchange amount of
the consideration paid (including transaction costs) and the excess
of such exchange amount over MEC's carrying values of such
properties was eliminated in determining the consolidated carrying
values of such properties. Subsequent to the Petition Date,
such excess amount of $50.5 million has been netted against the
Real Estate Business' carrying values of such properties.
Properties Under Development
At December 31, 2010, the Real Estate Business
had four projects under development consisting of: (i) an 87
thousand square foot expansion of a facility in Germany leased to
Magna with a total anticipated cost of $10.5 million (euro 7.8
million) of which $5.2 million was spent at December 31, 2010, (ii)
a 109 thousand square foot construction of a facility in Germany
leased to Magna with a total anticipated cost of $10.6
million (euro 7.9 million) of which $3.2 million was spent at
December 31, 2010, (iii) a 32 thousand square foot construction of
a facility in Austria leased to Magna with a total anticipated cost
of $2.6 million (euro 2.0 million) of which $1.6 million was
spent at December 31, 2010, and (iv) improvements to a facility in
Canada leased to a third-party tenant with a total anticipated cost
of $11.0 million (Cdn.$11.0 million) of which $0.3 million
was spent at December 31, 2010. During 2010, the Real Estate
Business completed a project under development in Mexico
representing an aggregate of 122 thousand square foot expansion of
a facility leased to Magna. The total cost of the project in Mexico
was approximately $5.0 million.
RACING & GAMING BUSINESS
The Racing & Gaming Business' results for the year ended
December 31, 2010 include the results of the Transferred Assets
from the date of transfer of April 30, 2010.
Racing, Gaming and Other Revenue
During the period from the date the Transferred
Assets were transferred to MID to December 31, 2010, our racetracks
hosted a total of 155 live race days as follows: Golden Gate Fields
(102 live race days), Santa Anita Park (5 live race days), Pimlico
Race Course (12 live race days) and Portland Meadows (36 live race
days). Gulfstream Park did not host any live race days during
this period but operated as a simulcast facility with a slots and
poker operation.
During 2010, racing, gaming and other revenues
were $183.9 million, with no comparable figures as a result of
MID's acquisition of the Transferred Assets effective April 30,
2010. Our operations which generated the most significant
revenues were as follows:
- California operations had revenues of $56.3 million during 2010
which reflected revenues generated by Golden Gate Fields of $40.3
million and Santa Anita Park of $16.0 million. Average daily
revenues at Golden Gate Fields were reflective of recent national
trends in the horse racing industry (Source Equibase Company LLC;
The Jockey Club). Santa Anita Park operated as a simulcast venue
for the majority of the period since April 30, 2010, but hosted 5
live race days in the fourth quarter of 2010.
- Florida operations had revenues of $47.5 million during 2010.
Gulfstream Park did not host live racing but operated as a
simulcast facility with a slots and poker operation. The slots and
poker operations generated revenues of $34.4 million, pari-mutuel
operations generated revenues of $9.7 million and the food and
beverage operations at Gulfstream Park generated revenues of $2.4
million. The Palm Meadows Training Center operation was open
for training during the fourth quarter of 2010 and generated stable
rental and other revenue of $1.0 million.
- Prior to entering into joint venture agreements with respect to
the operations of MJC on July 1, 2010, Maryland operations had
revenues of $27.0 million. Pimlico Race Course hosted 12 live
race days during the second quarter of 2010 including the
135th Preakness Stakes, the second race of the Triple
Crown of races.
- Oregon operations had revenues of $7.9 million during 2010 as
Portland Meadows hosted 36 live race days and operated as a
simulcast venue.
- Revenues from our account wagering and totalisator operations
had revenues of $47.0 million during 2010. Account wagering
revenues were negatively impacted by (i) certain credit card
companies and financial institutions choosing to block otherwise
exempt internet gambling related transactions at XpressBet®
primarily during the second half of 2010 (see "RACING &
GAMING BUSINESS - GOVERNMENT REGULATION IMPACTING THE RACING &
GAMING BUSINESS - XpressBet®"), (ii) national wagering
trends and (iii) horse inventory supply issues which resulted in
many racetracks reducing live race days or experiencing lower
average field size per race. Our totalisator operations were
similarly impacted by these recent trends.
- The above revenues were reduced by $1.8 million as a result of
intercompany eliminations related to transactions between our
racetracks, account wagering operations and separate OTB
facilities.
Purses, Awards and Other
Purses, awards and other were $100.9 million in
2010, which reflects direct variable costs associated with our
pari-mutuel, gaming, and totalisator operations. As a percentage of
pari-mutuel revenues, pari-mutuel purses, awards and other costs
were 61.8%, while gaming costs of sales were 60.3% of gaming
revenues. These percentages were generally consistent with
management's expectations.
Operating Costs
Operating costs were $90.7 million in 2010 with
no comparable figures as a result of MID's acquisition of the
Transferred Assets effective April 30, 2010. Included in
operating costs are $3.4 million of costs primarily incurred to
construct an all natural dirt surface at Santa Anita Park,
including demolition costs of the previous synthetic racing
surface. These costs have been expensed rather than being
capitalized as the expenditure cannot be recovered through
estimated undiscounted cash flows at the respective racetrack.
As a percentage of total racing, gaming and
other revenues, operating costs were 47.4% excluding the capital
expenditures that were expensed, which exceeded management's
expectations but reflected additional marketing costs incurred at
Gulfstream Park and XpressBet® and at Pimlico Race Course relating
to the Preakness Stakes, as well as lower daily handle at many of
our racetracks which had a negative impact on the operating cost
percentage given that many of our operating expenses are fixed.
General and Administrative
General administrative expenses were $26.8
million for 2010 with no comparable figures as a result of MID's
acquisition of the Transferred Assets effective April 30, 2010.
Depreciation and Amortization
Depreciation and amortization was $4.7 million and $4.2 million,
respectively, for 2010. Depreciation and amortization expense
commenced from the date the Transferred Assets were acquired.
Interest Expense, Net
Net interest expense was $0.3 million for 2010
and was attributable primarily to the outstanding term loan
facility that was assumed by MID in connection with the acquisition
of the Transferred Assets. The term loan facility was fully
repaid on July 7, 2010.
Equity Loss (Income)
Equity loss for 2010 of $29.5 million represents
the Company's proportionate share of losses incurred on our
investments in Maryland RE & R LLC and Laurel Gaming LLC of
$24.4 million (see "SIGNIFICANT MATTERS - TRANSACTION WITH PENN
NATIONAL GAMING, INC."), The Village at Gulfstream
ParkTM of $3.7 million, HRTV, LLC of $1.3 million and
TrackNet Media Group LLC. The TrackNet Media Group LLC joint
venture with Churchill Downs Incorporated is in the process of
being dissolved.
The equity loss for 2010, from the Laurel Gaming
LLC investment, reflects the Company's share of $9.2 million of
costs incurred by the Maryland operations relating to pursuing
alternative gaming opportunities and at Maryland RE & R LLC
relating to operating losses incurred during the third and fourth
quarters, and a write-down of goodwill of $29.2 million. The
write-down of goodwill is primarily a result of reduced
expectations of achieving alternative gaming at Laurel Park due to
the November 2010 referendum whereby the Anne Arundel electorate
voted in favour of a bill permitting the zoning of a video lottery
terminal facility at Anne Arundel Mills Mall. The unfavourable
decision represents an impediment to our efforts to pursue
alternative gaming opportunities.
Write-down of Long-lived and Intangible Assets
Write-down of long-lived and intangible assets
of $3.5 million relates to a write-down of goodwill and trademark
at XpressBet® which was adversely impacted by certain credit card
companies and financial institutions choosing to block otherwise
exempt internet gambling related transactions primarily during the
second half of 2010. Consequently, future expectations for growth
and profitability have been impacted as it is anticipated that it
will require additional time and investment to re-acquire customers
that have either reduced or ceased their account wagering activity
through XpressBet®.
Other Gains (Losses), Net
Other losses for 2010 of $0.1 million represents
the loss on deconsolidation as a result of the sale of a 49%
interest in the Maryland Real Estate and Racing Venture and 51%
interest in the Maryland Gaming Venture on July 1, 2010 (see
"SIGNIFICANT MATTERS - TRANSACTION WITH PENN NATIONAL
GAMING, INC.").
Income Tax Expense
Income tax expense for 2010 was nominal which is
reflective of the operating losses generated by the Racing &
Gaming Business which have not been benefited.
Net Loss
Net loss for 2010 was $76.7 million.
Overall, the loss is generally reflective of the Company's share of
losses incurred on our investment in Maryland RE & R LLC
resulting from a goodwill impairment charge and at Laurel Gaming
LLC related to costs incurred to pursue alternative gaming, as well
as the seasonal nature of our Racing & Gaming Business as the
Transferred Assets were acquired on April 30, 2010. The
racing operations historically operate at a loss in the second half
of the year, with the third quarter typically generating the
largest operating loss. The net loss is also attributable to
the declining national trend of pari-mutuel wagering activity.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flows from operations
of $88.8 million in 2010 and at December 31, 2010 had cash and cash
equivalents of $85.4 million and shareholders' equity of $1.5
billion.
Cash Flow
Operating Activities
The Company generated cash flow from operations
before changes in non-cash working capital balances of $58.7
million in 2010 compared to $99.8 million in the prior year.
The increase in loss from continuing operations of $2.2 million and
the $39.0 million decrease in non-cash items (see note 22(a) to the
consolidated financial statements) primarily relates to the
impairment provision relating to the loans receivable from MEC, the
deconsolidation adjustment to the carrying value of the investment
in MEC and the currency translation loss included in other gains
(losses) recorded in 2009, partially offset by the impairment
recovery related to the loans receivable from MEC and the purchase
price consideration adjustment, the increase in future tax expense,
the increase in the equity loss and the increase in the write-down
of long-lived and intangible assets recorded in 2010.
The change in non-cash balances was a source of
cash of $30.1 million in 2010 compared to a source of cash of $3.4
million in 2009 (see note 22(b) to the consolidated financial
statements). The increase in source of cash is primarily due
to the decrease in accounts receivable and receivable from
reorganized MEC offset with the decrease in accounts payable and
accrued liabilities arising from the Transferred Assets. At
April 30, 2010, the date of transfer of the Transferred Assets, the
racetracks had a significant amount of accounts receivable from
prior race dates that were subsequently collected during the year
ended December 31, 2010. In addition, the decrease in
receivable from reorganized MEC of $41.3 million related to $19.9
million of proceeds received from the Debtors sale of Thistledown
and $21.4 million from the receipt of directors' and officers'
insurance proceeds. Offsetting these increases is a
decrease in accounts payable and accrued liabilities resulting from
the payments of allowed administrative, priority and other claims
under the Plan relating to the Transferred Assets and the payment
in 2010 of advisory and other costs relating primarily to MID's
involvement in the Debtors' Chapter 11 process incurred in
2009.
Investing Activities
Cash used in investing activities for 2010 was
$10.9 million, which includes a use of cash of $50.5 million for
the acquisition of the Transferred Assets, loan advances of $13.8
million to MEC under the DIP Loan, capital expenditures of $15.3
million on property and fixed asset additions and $14.8 million on
other asset additions, which consist primarily of funding to the
Company's unconsolidated joint ventures. Offsetting these uses of
cash in 2010 were loan repayments from MEC of $60.8 million (see
"LOANS RECEIVABLE FROM MEC") and $22.7 million relating to
the proceeds from the disposition of the Company's 49% interest in
MJC.
Financing Activities
Cash used in financing activities in 2010 was
$126.6 million. Borrowings on the Company's unsecured revolving
credit facility of $77.1 million were offset with $64.2 million of
repayments. In addition, bank indebtedness of $41.9 million
and long-term debt of $74.0 million relating to the Transferred
Assets were repaid. Repayments of $0.3 million were made
relating to the mortgage payable due in January 2011.
Dividends of $23.4 million were also paid in 2010.
Bank Financing
The Company has an unsecured senior revolving
credit facility in the amount of $50.0 million that is available by
way of U.S. or Canadian dollar loans or letters of credit (the "MID
Credit Facility") and matures on December 22, 2011, unless further
extended with the consent of both parties. Interest on drawn
amounts is calculated based on an applicable margin determined by
the ratio of funded debt to earnings before interest, income tax
expense, depreciation and amortization. The Company is
subject to interest at LIBOR or bankers' acceptance rates, in each
case plus 3.25%, or the U.S. base or Canadian prime rate, in each
case plus 2.25%. At December 31, 2010, the Company had Cdn.
$13.0 million ($13.1 million) drawn under the MID Credit Facility
(December 31, 2009 - no borrowings) and had issued letters of
credit totalling $2.9 million (December 31, 2009 - $0.2
million). The weighted average interest on the loans
outstanding under the MID Credit Facility at December 31, 2010 was
5.83%.
In December 2004, MID issued Cdn. $265.0 million
of 6.05% senior unsecured debentures (the "Debentures") due
December 22, 2016, at a price of Cdn. $995.70 per Cdn. $1,000.00 of
principal amount. The Debentures rank equally with all of
MID's existing and future senior unsecured indebtedness. At
December 31, 2010, all of the Debentures remained
outstanding. The total outstanding at December 31, 2010 was
$264.3 million. On April 27, 2010, Dominion Bond Rating
Service ("DBRS") downgraded the Company's investment grade rated
Debentures from BBB (high) to BBB.
At December 31, 2010, the Company also had a
mortgage payable in the amount of $2.3 million which was fully
repaid on its maturity date in January 2011.
A wholly-owned subsidiary of the Company that
owns and operates Santa Anita Park had a $7.5 million revolving
loan facility under an existing credit facility with a U.S.
financial institution that required that the aggregate outstanding
principal be fully repaid over a period of 60 consecutive days
during each year. The revolving loan facility was scheduled
to mature on October 31, 2012. However, this facility was due on
demand as a result of MEC filing Chapter 11 petitions on March 5,
2009. The revolving loan facility was secured by a first deed
of trust on Santa Anita Park and the surrounding real
property. In July 2010, the Company fully repaid the $3.9
million outstanding under the revolving loan facility. This
facility is no longer available to the Company. Borrowings
under the revolving loan facility bore interest at the U.S. prime
rate.
The wholly-owned subsidiary of the Company that
owns and operates Santa Anita Park also had $61.1 million
outstanding under its term loan facility at April 30, 2010, the
date of acquisition of the Transferred Assets, which bore interest
at LIBOR plus 2.0%. In the second and third quarters of 2010,
the Company fully repaid the $61.1 million outstanding under the
term loan facility. This facility is no longer available to the
Company. The term loan facility was repayable in monthly
principal payments of $375 thousand until maturity. The term
loan facility was scheduled to mature on October 31, 2012. However,
this facility was due on demand as a result of MEC filing Chapter
11 petitions on March 5, 2009. The term loan was
collateralized by a first deed of trust on Santa Anita Park and the
surrounding real property.
The Company's wholly-owned subsidiaries that
owned and operated 100% of MJC also had an aggregate of $12.9
million outstanding under three term loan facilities at April 30,
2010, the date of acquisition of the Transferred Assets. In
the second quarter of 2010, the Company fully repaid the $12.9
million outstanding under the term loans facilities. The term loans
were scheduled to mature on December 1, 2013 or June 7, 2017.
However, these facilities were due on demand as a result of MEC
filing Chapter 11 petitions on March 5, 2009. The term loans
bore interest at LIBOR plus 2.6% per annum or 7.7% per annum and
were collateralized by deeds of trust on MJC's land, buildings and
improvements. These facilities are no longer available to the
Company.
At December 31, 2010, the Company's debt to
total capitalization ratio was 16%. Management believes that
the Company's cash resources, cash flow from operations and
available third-party borrowings will be sufficient to finance its
operations and capital expenditures program over the next
year. Additional acquisition and development activity will
depend on the availability of suitable investment opportunities and
related financing.
At December 31, 2010, the Company was in
compliance with all of its debt agreements and related
covenants. The Company intends to amend the MID Credit
Facility to allow for the change in control of the Company should
the reorganization proposal close. The Company expects to
receive this amendment.
LOANS RECEIVABLE FROM MEC
On April 30, 2010, the outstanding balance of
the loans receivable from MEC was settled as part of the
Plan. These loans were comprised of: a bridge loan of
up to $80.0 million (subsequently increased to $125.0 million)
through a non-revolving facility (the "2007 MEC Bridge Loan");
project financing facilities made available to Gulfstream Park
Racing Association, Inc. and Remington Park, Inc., the wholly-owned
subsidiaries of MEC that owned and/or operated Gulfstream Park and
Remington Park, respectively, in the amounts of $162.3 million and
$34.2 million, respectively, plus costs and capitalized interest
(together, the "MEC Project Financing Facilities"); a loan of up to
a maximum commitment, subject to certain conditions being met, of
$125.0 million (plus costs and fees) (the "2008 MEC Loan"); and the
DIP Loan. The details of the loans are discussed in note 3(a)
of the audited consolidated financial statements in respect of the
year ended December 31, 2010.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Chief Executive Officer and the Interim
Chief Financial Officer of MID have evaluated the effectiveness of
MID's disclosure controls and procedures, as defined in National
Instrument 52-109 - Certification of Disclosure in Issuers'
Annual and Interim Filings ("NI 52-109"), as of the end of the
period covered by the annual filings (as defined in NI 52-109) (the
"Evaluation Date"). They have concluded that, as of the
Evaluation Date, MID's disclosure controls and procedures were
effective to ensure that material information relating to MID and
its consolidated subsidiaries would be made known to them by others
within those entities and would be disclosed on a timely
basis. However, as recommended by Canadian and United States
securities regulators, MID will continue to periodically evaluate
its disclosure controls and procedures and will make modifications
from time to time as deemed necessary to ensure that information is
recorded, processed, summarized and reported within the time
periods specified in the applicable rules.
Report on Internal Control Over Financial Reporting
MID's management is responsible for establishing
and maintaining adequate internal control over financial reporting
(as such term is defined in NI 52-109 and Rules 13a-15(f) and
15d-15(f) under the United States Securities Exchange Act of 1934)
for MID. Under the supervision and with the participation of
MID's Chief Executive Officer and Interim Chief Financial Officer,
management conducted an evaluation of the effectiveness of MID's
internal control over financial reporting, as of the Evaluation
Date, based on the framework set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on its
evaluation under this framework, management concluded that MID's
internal control over financial reporting was effective as of the
Evaluation Date.
Ernst & Young LLP, an independent licensed
public accounting firm, who audited and reported on MID's
consolidated financial statements for the year ended December 31,
2010 included in MID's annual report for fiscal 2010, has also
issued an attestation report under standards of the Public Company
Accounting Oversight Board (United States) on MID's internal
control over financial reporting as of the Evaluation Date.
The attestation report is at the front of the financial statements
included in MID's annual report for fiscal 2010.
Limitation of Scope of Design of Disclosure
Controls and Procedures and Internal Control Over Financial
Reporting
The Chief Executive Officer and Interim Chief
Financial Officer of MID have limited the scope of their design of
MID's disclosure controls and procedures and internal control over
financial reporting to exclude controls, policies and procedures of
the Racing & Gaming Business acquired under the Plan commencing
on April 30, 2010 and joint venture entities in which the Company
holds an interest. For further details relating to the Racing
& Gaming Business acquired and such joint venture entities,
please refer to notes 2(c) and 7 to the consolidated financial
statements included in MID's annual report for fiscal 2010.
As a result of our acquisition of the Racing & Gaming Business
under the Plan on April 30, 2010, the consolidated operating
results, financial condition and cash flows were materially
impacted from the date of transfer through December 31, 2010.
The internal controls and procedures of the Racing & Gaming
Business have a material effect on our internal control over
financial reporting. As at and for the year ended December 31,
2010, total assets and total revenues of the Racing & Gaming
Business represent 28.8% and 48.2% of the Company's consolidated
assets and revenues.
MID's management, including the Chief Executive
Officer and Interim Chief Financial Officer, continue to evaluate
the internal controls and procedures surrounding the Transferred
Assets.
Changes in Internal Control Over Financial
Reporting
As of the Evaluation Date, there were no changes
in MID's internal control over financial reporting that occurred
during the period beginning on the date immediately following the
end of the period in respect of which MID made its most recent
previous interim filing and ended on December 31, 2010 that have
materially affected, or are reasonably likely to materially affect,
MID's internal control over financial reporting.
Limitation on the Effectiveness of Controls
and Procedures
MID's management, including the Chief Executive
Officer and the Interim Chief Financial Officer, does not expect
that MID's controls and procedures will prevent all potential error
and fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND
CONTINGENCIES
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.
The Company has made commitments for future
payment of long-term debt and construction commitments. At
December 31, 2010, future payments, including interest payments,
under these contractual obligations were as follows:
(in thousands) |
2011 |
2012 |
2013 |
2014 |
2015 |
Thereafter |
Total |
Mortgage obligations |
$ 2,254 |
$ — |
$ — |
$ — |
$ — |
$ — |
$ 2,254 |
Debentures |
16,120 |
16,120 |
16,120 |
16,120 |
16,120 |
282,168 |
362,768 |
Operating leases |
1,924 |
1,434 |
1,177 |
989 |
834 |
— |
6,358 |
Pension and postretirement
contributions |
614 |
— |
— |
— |
— |
— |
614 |
Construction and development project
commitments |
8,705 |
— |
— |
— |
— |
— |
8,705 |
Total |
$ 29,617 |
$ 17,554 |
$ 17,297 |
$ 17,109 |
$ 16,954 |
$ 282,168 |
$ 380,699 |
In addition to the letters of credit issued
under the MID Credit Facility, the Company had $2.3 million of
letters of credit issued with various financial institutions at
December 31, 2010 to guarantee various of its construction
projects. These letters of credit are secured by cash
deposits of the Company.
For further discussion of commitments,
contractual obligations and contingencies, refer to notes 1, 2, 3,
11 and 22 to the unaudited interim consolidated financial
statements and "LIQUIDITY AND CAPITAL RESOURCES".
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements consist of
letters of credit, construction and development project commitments
and certain operating agreements. On April 30, 2010, as a
result of the acquisition of the Transferred Assets, additional
off-balance sheet arrangements were assumed or subsequently
incurred. For a further understanding of these arrangements,
refer to note 22 to the unaudited interim consolidated financial
statements.
RELATED PARTY TRANSACTIONS
For a discussion of the Company's transactions
with related parties, please refer to notes 1, 2 and 3 to the
unaudited interim consolidated financial statements and the
sections in this MD&A entitled "SIGNIFICANT MATTERS",
"REAL ESTATE BUSINESS" and "LOANS RECEIVABLE FROM
MEC".
FOURTH QUARTER
See the section entitled "SELECTED ANNUAL AND
QUARTERLY FINANCIAL DATA (UNAUDITED)" for details of items
occurring in the fourth quarter that had a significant impact on
the consolidated results of the Company.
OUTSTANDING SHARES
As at the date of this MD&A, the Company had
46,160,564 Class A Subordinate Voting Shares and 547,413 Class B
Shares outstanding. For further details, refer to note 15 to
the consolidated financial statements.
DIVIDENDS
In 2010, the Company declared a quarterly
dividend with respect to each of the three-month periods ended
December 31, 2009 and March 31, 2010 in the amount of $0.15 per
Class A Subordinate Voting Share and Class B Share. In
addition, the Company declared a quarterly dividend with respect to
each of the three-month periods ended June 30, 2010 and September
30, 2010 in the amount of $0.10 per Class A Subordinate Voting
Share and Class B Share. Subsequent to December 31, 2010, the
Board declared a dividend of $0.10 per Class A Subordinate Voting
Share and Class B Share in respect of the three-month period ended
December 31, 2010, which will be paid on or about April 15, 2011 to
shareholders of record at the close of business on April 8,
2011.
RISKS AND UNCERTAINTIES
The following are some of the more significant risks that could
affect our ability to achieve our desired results:
REAL ESTATE BUSINESS
At December 31, 2010, all but 14 of our
income-producing properties are leased to the Magna group.
The tenants for the majority of the properties are non-public
subsidiaries within the Magna group and Magna typically does not
guarantee the obligations of its subsidiaries under their leases
with us. As a result, our operating and net income and the value of
our property portfolio would be materially adversely affected if
the members of the Magna group became unable to meet their
respective financial obligations under their leases.
Since the Magna group operates in the automotive
parts industry, our business is, and for the foreseeable future
will be, subject to conditions affecting the automotive industry
generally. A decrease in the long-term profitability or viability
of the automotive parts sector would have a material adverse impact
on the financial condition of our tenants and could therefore
adversely impact the value of our properties and our operating
results. The industry in which Magna competes and the business it
conducts are subject to a number of risks and uncertainties,
including the following factors that may adversely affect the Magna
group's operations in the automotive parts sector:
- a slower than anticipated economic recovery or deterioration of
economic conditions could have a material adverse effect on Magna's
profitability and financial condition;
- the continuation of current levels of, or declines in,
automobile sales and production could have a material adverse
effect on Magna's profitability;
- the bankruptcy of any of Magna's major customers, and the
potential corresponding disruption of the automotive supply chain,
could have a material adverse effect on Magna's profitability and
financial condition;
- the deterioration of the financial condition of some of Magna's
suppliers as a result of current economic conditions and other
factors could lead to significant supply chain disruptions and
supplier bankruptcies or financial restructurings, which could have
a material adverse effect on Magna's profitability or other
significant, non-recurring costs;
- Magna's short-term profitability could be adversely affected by
the costs associated with rationalization and downsizing of some of
its operations;
- Magna recorded significant impairment charges in recent years
and could record additional impairment charges in the future, which
could have a material adverse effect on its profitability;
- Magna's failure to identify and develop new technologies and to
successfully apply such technologies to create new products could
have a material adverse effect on its profitability and financial
condition;
- Magna's inability to diversify its sales could have a material
adverse effect on its profitability; and
- the consequences of shifting market shares among vehicles could
have a material adverse effect on Magna's profitability.
Although we intend to lease additional
properties to tenants other than the Magna group, it is unlikely
that our dependence on the Magna group, and therefore the
automotive industry, will be reduced significantly in the
foreseeable future.
Virtually all the growth of our rental portfolio
has been dependent on our relationship with the members of the
Magna group as the tenants of our income-producing properties, as
the customers for our development projects and as the source of our
acquired properties. Although we have acted as the developer,
real estate advisor, property manager and owner of a significant
number of the industrial facilities of the Magna group since our
inception, we have no assurance that we will continue to do so, and
the level of business we have received from the Magna group has
declined significantly over the past five years. We will be
required to compete for any future business with the Magna group
without any contractual preferential treatment.
Members of the Magna group have determined on
occasion in the past and may increasingly in the future determine
not to lease certain properties from us and not to renew certain
leases on terms comparable to (or more favourable to us than) our
existing arrangements with them, or at all. Moreover,
particularly in light of the pressures in the automotive industry
and Magna's current plant rationalization plan and our disputes
with certain of our shareholders, the level of business that we
have received from Magna has significantly declined over the past
five years and we may not continue to be able to acquire new
properties from the Magna group as we have done in the past.
Any adverse change in our business relationship
with the Magna group could have an adverse effect on the growth and
profitability of our business.
Virtually all of the growth of the Real Estate
Business has resulted from the growth of the automotive parts
business operated by the Magna group, including growth as a result
of acquisitions. We expect to derive a portion of our future
growth from continuing to build on our relationship with the Magna
group so as to benefit from the Magna group's future growth.
However, the Magna group may not be successful in maintaining its
historical growth rate and may not undertake acquisitions of new
facilities at the same rate as in the past. The Magna group's
inability to maintain its historical level of growth would likely
adversely affect our growth and the level of annualized lease
payments that we receive.
MID management expects that given Magna's
publicly disclosed strategy of continuously seeking to optimize its
global manufacturing footprint, Magna may continue to rationalize
facilities. Magna continues to be bound by the terms of the
lease agreements for leased properties regardless of its
plant rationalization strategy. However, in light of the
importance of the relationship with Magna to the success of the
Real Estate Business, MID management continues to evaluate
alternatives that provide Magna with the flexibility it requires to
operate its automotive business, including potentially releasing
Magna from its obligation to continue to pay rent under these
leases, and any additional leases that are or may become subject to
the Magna plant rationalization strategy in the future, under
certain circumstances. If the scope of Magna's
rationalization of plants owned by MID expands, MID is at risk of
having the credit rating of its debt downgraded. Should this
occur, our ability to access the capital markets would be adversely
affected and our borrowing costs would significantly increase.
On May 6, 2010, Magna had announced that it has
entered into a transaction agreement with the Stronach Trust, our
controlling shareholder, under which holders of Magna's Class A
Subordinate Voting Shares would be given the opportunity to decide
whether to eliminate the dual class share capital structure through
which the Stronach Trust has controlled Magna. Effective
August 31, 2010, Magna's dual class share capital structure
described above was eliminated pursuant to a court-approved plan of
arrangement and approval by Magna's shareholders and the Ontario
Superior Court resulting in the Stronach Trust no longer having a
controlling interest in Magna. As a result, MID and Magna
have ceased to be under common control for tax purposes and our
foreign earnings may be subject to a significantly higher rate of
tax which will adversely affect our after-tax results of operations
and FFO. In addition, there is uncertainty whether the
cessation of control of Magna by the Stronach Trust would have any
impact on our relationship with Magna.
We face a variety of risks in relation to the
land held by our Real Estate Business for purposes other than
industrial development. While Magna-related industrial
developments have a certain degree of predictability associated
with them in that we generally have a predefined use and tenant for
a given property, general development projects are more speculative
and there can be no assurance that we will be able to successfully
and profitably develop such properties if we undertake to do
so. In that respect, we are exposed to the standard real
estate development industry risks including the inability to obtain
approvals from the requisite authorities on a timely basis or at
all, development costs exceeding the economic value of the land,
cost overruns and development and construction delays due to
unforeseen factors such as the lack of municipal services or
traffic capacity. In addition, the general real estate
industry is subject to economic cycles that can result in
fluctuating land and property values that have an effect on
development projects.
From time to time, we may attempt to minimize or
hedge our exposure to the impact that changes in foreign currency
rates or interest rates may have on the Real Estate Business'
revenue and debt liabilities through the use of derivative
financial instruments. The use of derivative financial instruments,
including forwards, futures, swaps and options, in our risk
management strategy carries certain risks, including the risk that
losses on a hedge position will reduce our profits and the cash
available for development projects or dividends. A hedge may not be
effective in eliminating all the risks inherent in any particular
position. Our profitability may be adversely affected during any
period as a result of the use of derivatives.
A substantial majority of our current property
portfolio is located outside of the U.S. and generates lease
payments that are not denominated in U.S. dollars. Since
we report our financial results in U.S. dollars and do not
currently hedge our non-U.S. dollar rental revenues, we are subject
to foreign currency fluctuations that could, from time to time,
have an adverse impact on our financial position or operating
results.
Leases representing the majority of our total
leaseable area do not expire until 2013 or later. Our leases
generally provide for periodic rent escalations based on specified
percentage increases or a consumer price index adjustment, subject
in some cases to a cap. As a result, the long-term nature of these
leases limits our ability to increase rents contemporaneously with
increases in market rates and may therefore limit our revenue
growth and the market value of our income-producing property
portfolio.
The rights of first refusal that we have granted
to our tenants in most of our significant leases may deter third
parties from incurring the time and expense that would be necessary
for them to bid on our properties in the event that we desire to
sell those properties. Accordingly, these rights of first refusal
may adversely affect our ability to sell our properties or the
prices that we receive for them upon any sale. In addition, the
rights of first refusal may adversely affect the market value of
our income-producing property portfolio.
We compete for suitable real estate investments
with many other parties, including real estate investment trusts,
insurance companies and other investors (both Canadian and
foreign), which are currently seeking, or which may seek in the
future, real estate investments similar to those desired by us.
Some of our competitors may have greater financial and operational
resources, or lower required return thresholds, than we do.
Accordingly, we may not be able to compete successfully for these
investments. Increased competition for real estate investments
resulting, for example, from increases in the availability of
investment funds or reductions in financing costs would tend to
increase purchase prices and reduce the yields from the
investments.
Real Estate Industry
Because we own, lease and develop real property,
we are subject to the risks generally incident to investments in
real property. The investment returns available from
investments in real estate depend in large part on the amount of
income earned and capital appreciation generated by the properties,
as well as the expenses incurred. We may experience delays
and incur substantial costs in enforcing our rights as lessor under
defaulted leases, including costs associated with being unable to
rent unleased properties to new tenants on a timely basis or with
making improvements or repairs required by a new tenant. In
addition, a variety of other factors outside of our control affect
income from properties and real estate values, including
environmental laws and other governmental regulations, real estate,
zoning, tax and eminent domain laws, interest rate levels and the
availability of financing. For example, new or existing
environmental, real estate, zoning or tax laws can make it more
expensive or time consuming to develop real property or expand,
modify or renovate existing structures. When interest rates
increase, the cost of acquiring, developing, expanding or
renovating real property increases and real property values may
decrease as the number of potential buyers decreases. In addition,
real estate investments are often difficult to sell quickly.
Similarly, if financing becomes less available, it becomes more
difficult both to acquire and to sell real property.
Moreover, governments can, under eminent domain laws, take real
property. Sometimes this taking is for less compensation than
the owner believes the property is worth. Although we are
geographically diversified, any of these factors could have a
material adverse impact on our results of operations or financial
condition in a particular market.
We intend to develop properties as suitable
opportunities arise, taking into consideration the general economic
climate. Real estate development has a number of risks, including
risks associated with:
- construction delays or cost overruns that may increase project
costs;
- receipt of zoning, occupancy and other required governmental
permits and authorizations;
- development costs incurred for projects that are not pursued to
completion;
- natural disasters, such as earthquakes, hurricanes, floods or
fires that could adversely impact a project;
- ability to raise capital; and
- governmental restrictions on the nature or size of a
project.
Our development projects may not be completed on
time or within budget, and there may be no market for the new use
after we have completed development, either of which could
adversely affect our operating results.
We may be unable to lease a vacant property in
our portfolio (including those vacated as part of Magna's plant
rationalization strategy) on economically favourable terms,
particularly properties that were designed and built with unique
features or are located in secondary or rural markets. In
addition, we may not be able to renew an expiring lease or to find
a new tenant for the property for which the lease has expired, in
each case on terms at least as favourable as the expired
lease. Renewal options are generally based on changes in the
consumer price index or prevailing market rates. Market rates
may be lower at the time of the renewal options, and accordingly,
leases may be renewed at lower levels of rent than are currently in
place. Our tenants may fail to renew their leases if they
need to relocate their operations as a result of changes in
location of their customers' operations or if they choose to
discontinue operations as a result of the loss of business.
Many factors will affect our ability to lease
vacant properties, and we may incur significant costs in making
property modifications, improvements or repairs required by a new
tenant. In addition, we may incur substantial costs in
protecting our investments in leased properties, particularly if we
experience delays and limitations in enforcing our rights against
defaulting tenants. Furthermore, if one of our tenants
rejects or terminates a lease under the protection of bankruptcy,
insolvency or similar laws, our cash flow could be materially
adversely affected. The failure to maintain a significant
number of our income-producing properties under lease would have a
material adverse effect on our financial condition and operating
results.
Under various federal, state, provincial and
local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances
on, under or in an affected property. Such laws often impose
liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic
substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate properly, may materially
impair the value of our real property assets or adversely affect
our ability to borrow by using such real property as
collateral. Certain environmental laws and common law
principles could be used to impose liability for releases of
hazardous materials, including asbestos-containing materials, into
the environment, and third parties may seek recovery from owners or
operators of real properties for personal injury associated with
exposure to released asbestos-containing materials or other
hazardous materials. As an owner of properties, we are
subject to these potential liabilities.
Capital and operating expenditures necessary to
comply with environmental laws and regulations, to defend against
claims of liability or to remediate contaminated property may have
a material adverse effect on our results of operations and
financial condition. We may also become subject to more
stringent environmental standards as a result of changes to
environmental laws and regulations, compliance with which may have
a material adverse effect on our results of operations and
financial condition. Moreover, environmental laws may impose
restrictions on the manner in which a property may be used or
transferred or in which businesses may be operated, limiting
development or expansion of our property portfolio or requiring
significant expenditures.
Proceeds From Lone Star Park
The risks and uncertainties relating to the sale
of Lone Star LP pursuant to the Plan include,
among others:
- that the closing does not occur or is delayed;
- if closing does not occur, it is uncertain as to how long the
process for the marketing and sale of such asset will
take; and
- if closing does not occur, there is uncertainty as to whether
or at what price such asset will be sold or whether any bids by any
third party for such asset will materialize or
be successful.
RACING & GAMING BUSINESS
Government Regulations and Approvals
The passage of legislation permitting
alternative gaming at racetracks, such as slot machines, video
lottery terminals and other forms of non-pari-mutuel gaming, can be
a long and uncertain process. A decision to prohibit, delay or
remove alternative gaming rights at racetracks by the government or
the citizens of a state, or other jurisdiction, in which we own or
operate a racetrack, could adversely affect our business or
prospects.
- Florida currently allows alternative gaming to be conducted at
Gulfstream Park. Oregon permits a limited number of video lottery
terminal machines to be operated at our racetrack and our network
of off-track betting centers, as well as bars and taverns located
throughout the state. (For Maryland see "RACING &
GAMING BUSINESS - GOVERNMENT REGULATIONS IMPACTING THE RACING &
GAMING BUSINESS - Maryland").
- In the event that alternative gaming legislation is enacted in
additional jurisdictions, there can be no certainty as to the terms
of such legislation or regulations, including the timetable for
commencement, the conditions and feasibility of operation and
whether alternative gaming rights are to be limited to racetracks.
If we proceed to conduct alternative gaming at any of our
racetracks, there may be significant costs and other resources to
be expended, and there will be significant risks involved,
including the risk of changes in the enabling legislation, that may
have a material adverse effect on the relevant racetrack's
operations and profitability.
- Both our pari-mutuel gaming and alternative gaming activities
at racetracks are dependent on governmental regulation and
approvals. Amendments to such regulation or the failure to obtain
such approvals could adversely affect our business. In
addition, compliance with new requirements mandated by regulators
can represent a significant cost and, in the event those
requirements must be met quickly, could lead to operational
difficulties.
- All our pari-mutuel wagering and alternative gaming operations
at racetracks are contingent upon the continued governmental
approval of these operations as forms of legalized gaming. All our
current gaming operations are subject to extensive governmental
regulation and could be subjected at any time to additional or more
restrictive regulation, or banned entirely. We may be unable to
obtain, maintain or renew all governmental licenses, registrations,
permits and approvals necessary for the operation of our
pari-mutuel wagering and other gaming facilities. Licenses to
conduct live horse racing and wagering, simulcast wagering, account
wagering and alternative gaming at racetracks must be obtained from
each jurisdiction's regulatory authority, in many cases annually.
The denial, loss or non-renewal of any of our licenses,
registrations, permits or approvals may materially limit the number
of races we conduct or the form or types of pari-mutuel wagering
and other gaming activities we offer, and could have a material
adverse effect on our business. In addition, we currently devote
significant financial and management resources to complying with
the various governmental regulations to which our operations are
subject. Any significant increase in governmental regulation would
increase the amount of our resources devoted to governmental
compliance, could substantially restrict our business, and could
materially adversely affect our operating results.
Any future expansion of our pari-mutuel and
gaming operations will likely require us to obtain additional
governmental approvals or, in some cases, amendments to current
laws governing such activities.
- The high degree of regulation in the pari-mutuel and gaming
industry is a significant obstacle to our growth strategy,
especially with respect to alternative gaming at racetracks and
account wagering, including telephone, interactive television and
internet-based wagering. Currently, non-pari-mutuel gaming is only
offered at two U.S. racetracks we own, Gulfstream Park and
Portland Meadows, at which we offer a limited number of video
lottery terminal machines. (For Maryland see "RACING &
GAMING BUSINESS - GOVERNMENT REGULATIONS IMPACTING THE RACING&
GAMING BUSINESS - Maryland").
- Account wagering in the U.S. may currently be conducted only
through hubs or bases located in certain states. Our expansion
opportunities with respect to account wagering will be limited
unless more states amend their laws to permit account wagering or,
in the alternative, if states take action to make such activities
unlawful. In addition, the licensing and legislative amendment
processes can be both lengthy and costly, and we may not be
successful in obtaining required legislation, licenses,
registrations, permits and approvals.
- In the past, certain state attorneys general, district
attorneys and other law enforcement officials have expressed
concern over the legality of interstate account wagering. In
December 2000, legislation was enacted in the U.S. that amends the
Interstate Horseracing Act of 1978. We believe that this amendment
clarifies that inter-track simulcasting, off-track betting and
account wagering, as currently conducted by the U.S. horse racing
industry, are authorized under U.S. federal law. The amendment may
not be interpreted in this manner by all concerned, however, and
there may be challenges to these activities by both state and
federal law enforcement authorities, which could have a material
adverse impact on our business, financial condition, operating
results and prospects.
- In addition, the U.S. Congress passed, in September 2006, the
Unlawful Internet Gambling Enforcement Act. This act
prohibits the use of credit cards, checks, electronic funds
transfers and certain other funding methods for most forms of
internet gambling. This new law and its accompanying
regulations have curtailed our account wagering operations despite
the fact that the law contains an exemption for pari-mutuel wagers
placed pursuant to the Federal Interstate Horseracing Act of 1978.
We may suffer a materially adverse impact on our account wagering
business which, in turn could have a materially adverse impact on
our business, financial condition, operating results and financial
performance if there is further curtailment or we do not reacquire
customers that have either reduced or ceased account wagering
activities.
- It also is unclear at this time the full extent to which
financial institutions, such as banks, credit card companies and
payment processors, will nonetheless block otherwise exempt
transactions, such as those funding transactions made in connection
with lawful pari-mutuel wagering on horse racing. To the
extent a large number of banks and payment processors block these
otherwise exempt transactions, it could have a material adverse
impact on our account wagering business which, in turn, could have
a materially adverse impact on our business, financial condition,
operating results and financial performance.
- Finally, since the passage of the federal Unlawful Internet
Gambling Enforcement Act in the U.S., it is unclear just how
federal and/or state prosecutors will address wagers that involve
parties from outside the U.S. If this new act is interpreted
as prohibiting international wagers, it will have a material
adverse effect on our business, financial condition, operating
results and financial performance.
- Even before the passage of the Unlawful Internet Gambling
Enforcement Act, certain financial institutions began blocking the
use of credit cards issued by them for internet gambling, either
voluntarily or as part of a settlement with the office of the
Attorney General for New York. State legislation or actions
of this nature by a state's Attorney General or state agency, if
enacted or implemented without providing for a meaningful exception
to allow account wagering to be conducted as it is currently being
conducted by the U.S. horse racing industry, could inhibit account
wagering by restricting or prohibiting its use altogether or, at a
minimum, by restricting or prohibiting the use of credit cards and
other commonly used financial instruments to fund wagering
accounts. If enacted or implemented, these or any other forms of
legislation or practices restricting account wagering could cause
our business and its growth to suffer.
Uncertainty as to the effect of Congress'
attempt to eliminate the federal income tax withholding requirement
on winning wagers by foreign nationals could subject us to tax
liability.
- In October 2004, a bill was enacted to enable U.S. pari-mutuel
wagering operators to accept wagers from foreign nationals located
in foreign countries into their pari-mutuel pools. The previous law
required U.S. pari-mutuel wagering operators to withhold federal
income tax on any winning wagers placed by foreign nationals
located in foreign countries. Any failure to withhold income tax
from these wagers made the payer entity liable. We believe that the
new law reflects Congress' intent to eliminate the tax withholding
requirement from winning pari-mutuel wagers placed by foreign
nationals located in foreign countries. In the absence of specific
rules expressing how this new law is to be interpreted, however,
there is a risk that the law will be interpreted differently from
Congress' apparent intent, thus imposing an obligation on tracks to
continue withholding federal income tax from winning wagers by
foreign nationals located in foreign countries. This uncertainty
could expose us to tax liability if it is determined that our
method for accepting foreign wagers into our pools is incorrect.
Any resulting tax liability imposed on us could have a material
adverse impact on our revenues and financial performance.
Some jurisdictions view our operations primarily
as a means of raising taxes, and therefore we are particularly
vulnerable to additional or increased taxes and fees.
- We believe that the prospect of raising significant additional
revenue through taxes and fees is one of the primary reasons that
certain jurisdictions permit legalized gaming. As a result, gaming
companies are typically subject to significant taxes and fees in
addition to the normal federal, state and local income taxes, and
such taxes and fees may be increased at any time. From time to
time, legislators and officials have proposed changes in tax laws,
or in the administration of such laws, affecting the gaming
industry.
Competitive Environment
Gaming companies that operate on-line and offer
internet-based wagering services may materially adversely affect
our operating results.
- Gaming companies that operate on-line and offer internet-based
wagering services often do not have the same level of overhead as
we do as they do not have similar capital expenditure requirements,
which often results in those companies being able to offer services
at discount prices. In addition, unlike traditional
operations, like ours, these off-shore online operators often do
not pay certain percentages of handle to local horsemen, state
regulatory agencies and other possible entities in accordance with
applicable U.S. federal and state law and horse industry
regulations, which means those operators are able to attract U.S.
based customers that might otherwise use our services by offering
rebates we cannot afford to offer.
Our strategy of increasing international
distribution of North American horse racing may not be
successful.
- We believe that there is a demand for North American horse
racing in the international market, but we may not be correct in
our belief. Our plan to distribute our content internationally has
not been successfully carried out by any other company to date. We
are spending financial capital and deploying human capital in an
effort to capture the international market. If we are not
successful, it may have a material adverse effect on our ability to
meet any future revenue expectations and, therefore, our operating
results.
We face significant competition from other
racetrack operators, including those in states where more extensive
gaming options are authorized, which could hurt our operating
results.
- We face significant competition in each of the jurisdictions in
which we operate. The introduction of legislation enabling slot
machines or video lottery terminals to be installed at racetracks
in certain states allows those racetracks to increase their purses
and compete more effectively with us for the business of horse
owners, trainers and customers. Competition from existing
racetrack operators, as well as the addition of new competitors,
may have a material adverse effect on our future performance and
operating results.
Competition from non-racetrack gaming operators
may reduce the amount wagered at our facilities and on races
conducted at our facilities and materially adversely affect our
operating results.
- We compete for customers with casinos, sports wagering services
and other non-racetrack gaming operators, including government
sponsored lotteries, which benefit from numerous distribution
channels, including supermarkets, service stations and convenience
stores, as well as from frequent and extensive advertising
campaigns. We do not enjoy the same access to the gaming public or
possess the advertising resources that are available to government
sponsored lotteries as well as some of our other non-racetrack
competitors, which may adversely affect our ability to compete
effectively with them.
We currently face significant competition from
Internet and other forms of account wagering, which may reduce our
profitability.
- Internet and other account wagering gaming services allow their
customers to wager on a wide variety of sporting events and casino
games from home. Although many on-line wagering services are
operating from offshore locations in violation of U.S. law by
accepting wagers from U.S. residents, they may divert wagering
dollars from legitimate wagering venues such as our racetracks and
account wagering operations. Moreover, our racetrack operations
generally require greater ongoing capital expenditures in order to
expand our business than the capital expenditures required by
internet and other account wagering gaming operators. Currently, we
cannot offer the diverse gaming options provided by many internet
and other account wagering gaming operators and may face
significantly greater costs in operating our business. Our
inability to compete successfully with these operators could be
materially adverse to our business. In addition, the market for
account wagering is affected by changing technology. Our ability to
anticipate such changes and to develop and introduce new and
enhanced services on a timely basis will be a significant factor in
our ability to expand, remain competitive and attract new
customers.
XpressBet® and HRTVTM may not be able
to enter into agreements with additional content owners.
- TVG and TwinSpires are the main competitors with XpressBet® in
the account wagering business and TVG is also the main competitor
of HRTVTM in the television business. In the event TVG
is able to sign other horseracing content owners to exclusive
agreements for either or both of televising races and accepting
account wagering on races, as has been their past business
practice, those content owners will not be able to make available
their content to XpressBet® (for purposes of account wagering), and
HRTVTM (for purposes of televising races), respectively,
which will in turn negatively impact our ability to attract
additional customers.
Expansion of gaming conducted by Native American
groups may lead to increased competition in our industry, which may
negatively impact our growth and profitability.
- In March 2000, the California state constitution was amended,
resulting in the expansion of gaming activities permitted to be
conducted by Native American groups in California. This has led to,
and may continue to lead to, increased competition and may have an
adverse effect on the profitability of Santa Anita Park and Golden
Gate Fields It may also affect the purses that those tracks are
able to offer and therefore adversely affect our ability to attract
top horses.
- Several Native American groups in Florida have previously
expressed interest in opening or expanding existing casinos in
southern Florida, which could compete with Gulfstream Park and
reduce its profitability.
A decline in the popularity of horse racing
could adversely impact our business.
- The popularity of horse racing is important to our operating
results. Public tastes are unpredictable and subject to change. Any
decline in interest in horse racing or any change in public tastes
may adversely affect our revenues and, therefore, our operating
results.
Declining on-track attendance and increasing
competition in simulcasting may materially adversely affect our
operating results.
- There has been a general decline in the number of people
attending and wagering at live horse races at North American
racetracks due to a number of factors, including increased
competition from other forms of gaming, unwillingness of customers
to travel a significant distance to racetracks and the increasing
availability of off-track and account wagering. The declining
attendance at live horse racing events has prompted racetracks to
rely increasingly on revenues from inter-track, off-track and
account wagering markets. A continued decrease in attendance at
live events and in on-track wagering, as well as increased
competition in the inter-track, off-track and account wagering
markets, could lead to a decrease in the amount wagered at our
facilities and on races conducted at our racetracks and may
materially adversely affect our business, financial condition,
operating results and prospects.
The profitability of our racetracks is partially
dependent upon the size and health of the local horse population in
the areas in which our racetracks are located.
- Horse population is a factor in a racetrack's profitability
because it generally affects the average number of horses (i.e. the
average "field size") that run in races. Larger field sizes
generally mean increased wagering and higher wagering revenues due
to a number of factors, including the availability of exotic bets
(such as "exacta" and "trifecta" wagers). Various factors have led
to both short-term and long-term declines in the horse population
in certain areas of the country, including competition from
racetracks in other areas, declining levels of wagering on horse
racing, increased costs and changing economic returns for owners
and breeders, and the spread of various debilitating and contagious
equine diseases. If any of our tracks are faced with a sustained
outbreak of a contagious equine disease, or if we are unable to
attract horse owners to stable and race their horses at our tracks
by offering a competitive environment, including improved
facilities, well-maintained racetracks, better living conditions
for backstretch personnel involved in the care and training of
horses stabled at our tracks, and a competitive purse structure,
our profitability could decrease. In the event other serious
diseases present themselves and pose a serious threat to the horse
population and/or people working in our operations, we may be
required to cease operations at affected locations until such time
as the threat has passed, in which case our operations would likely
be negatively impacted.
Industry controversies could cause a decline in
bettor confidence and result in changes to legislation, regulation,
or industry practices of the horse racing industry, which could
materially reduce the amount wagered on horse racing and increase
our costs, and therefore adversely affect our revenue and operating
results.
- In general, the pari-mutuel wagering industry is adversely
affected by negative information that can erode bettor
confidence. Any investigation (whether or not charges
are ultimately laid) or any materially negative information arising
out of an investigation by the FBI or any other federal, state or
industry investigative or regulatory body, including, without
limitation, any negative information concerning the internal
controls and security of totalisator systems related to pari-mutuel
wagering activities, may materially reduce the amount wagered on
horse racing. Such a reduction would likely negatively impact
the revenue and earnings of companies engaged in the horse racing
industry, including ourselves.
If we pay persons who place fraudulent "winning"
wagers, we would remain liable to pay the holders of the proper
winning wagers the full amount due to them.
- We may be subject to claims from customers for fraudulent
"winning" wagers. If we paid those claims, we would remain liable
to the holders of the proper winning wagers for the full amount due
to them and would have the responsibility to attempt to recover the
money that we paid on the fraudulent claims. We may not be able to
recover that money, which would adversely affect our operating
results.
Seasonality, Climate and Environmental
Factors
Our operating results fluctuate seasonally and
may be impacted by a reduction in live racing dates due to
regulatory factors.
- We experience significant fluctuations in quarterly operating
results due to the seasonality associated with the racing schedules
at our racetracks. Generally, our revenues from racetrack
operations are greater in the first quarter of the calendar year
than in any other quarter. We have a limited number of live racing
dates at each of our racetracks and the number of live racing dates
varies somewhat from year to year. The allocation of live racing
dates in most of the jurisdictions in which we operate is subject
to regulatory approval from year to year and, in any given year, we
may not receive the same or more racing dates than we have had in
prior years. We are also faced with the prospect that competing
racetracks may seek to have some of our historical dates allocated
to them. A significant decrease in the number of our live racing
dates would likely reduce our revenues and cause our business to
suffer.
Unfavourable weather conditions may result in a
reduction in the number of races we hold.
- Since horse racing is conducted outdoors, unfavourable weather
conditions, including extremely high or low temperatures, excessive
precipitation, storms or hurricanes, may cause races to be
cancelled or may reduce attendance and wagering. Since a
substantial portion of our operating expenses are fixed, a
reduction in the number of races held or the number of horses
racing due to unfavourable weather would reduce our revenues and
cause our business to suffer.
An earthquake in California could interrupt our
operations at Santa Anita Park and Golden Gate Fields, which would
adversely impact our cash flow from these racetracks.
- Two of our largest racetracks, Santa Anita Park and Golden Gate
Fields, are located in California and are therefore subject to
greater earthquake risks than our other operations. We do not
maintain significant earthquake insurance on the structures at our
California racetracks. We maintain fire insurance for fire risks,
including those resulting from earthquakes, subject to policy
limits and deductibles. There can be no assurance that the
recoverable amount of insurance proceeds will be sufficient to
fully cover reconstruction costs and other losses. If an uninsured
or underinsured loss occurs, we could lose anticipated revenue and
cash flow from our California racetracks.
A severe hurricane hitting the Miami area could
interrupt our operations at Gulfstream Park, which would adversely
impact our cash flow from this track.
- Gulfstream Park is located in Hallandale Beach, Florida, just
inland from the Atlantic Ocean. Gulfstream Park has been built to
withstand severe winds but significant flooding resulting from a
hurricane or other tropical storm could result in significant
damage to the facility. If the facility sustained serious damage,
the operations and results would be negatively impacted.
We face strict environmental regulation and may
be subject to liability for environmental damage, which could
materially adversely affect our financial results.
- We are subject to a wide range of requirements under
environmental laws and regulations relating to waste water
discharge, waste management and storage of hazardous substances.
Compliance with environmental laws and regulations can, in some
circumstances, require significant capital expenditures. Moreover,
violations can result in significant penalties and, in some cases,
interruption or cessation of operations. The California
Regional Water Quality Control Board (the "Control Board") requires
that Santa Anita Park apply for, and keep in force, a wastewater
discharge permit which governs and regulates the amount of
contaminated water that may be discharged into the storm drain and
the water table as a result of maintenance of the horse population
on site. With the issuance of the permit, there are certain
compliance efforts that the Control Board has requested that
management address over the five-year permit period. The Control
Board has not given deadlines for immediate compliance nor is Santa
Anita's current permit at risk for non-compliance. Citations
are not expected unless Santa Anita Park does not make an effort to
comply. Upon receipt of the permit, we commenced discussions with
the Control Board regarding the nature of the compliance requests
and commenced the planning process as to how the Company would
address these requirements. Given the fact that a number of these
remediation requirements would be better addressed through capital
projects rather than merely a repair or fix of existing facilities,
the ultimate cost of remediation will be impacted by the decision
on how to best address the remediation requirements.
- Furthermore, we may not have all required environmental permits
and we may not otherwise be in compliance with all applicable
environmental requirements. Where we do not have an environmental
permit but one may be required, we will determine if one is in fact
required and, if so, will seek to obtain one and address any
related compliance issues, which may require significant capital
expenditures.
- Various environmental laws and regulations in the U.S. impose
liability on us as a current or previous owner and manager of real
property, for the cost of maintenance, removal and remediation of
hazardous substances released or deposited on or in properties now
or previously owned or managed by us or disposed of in other
locations. Our ability to sell properties with hazardous substance
contamination or to borrow money using that property as collateral
may also be uncertain. Changes to environmental laws
and regulations, resulting in more stringent terms of compliance,
or the enactment of new environmental legislation, could expose us
to additional liabilities and ongoing expenses.
- Any of these environmental issues could have a material adverse
effect on our business.
Union Contracts and Industry Association
Agreements
If we are unable to continue to negotiate
satisfactory union contracts, some of our employees may commence a
strike. A strike by our employees or a work stoppage by backstretch
personnel, who are employed by horse owners and trainers, may lead
to lost revenues and could have a material adverse effect on our
business.
- As of December 31, 2010, we employed approximately 2,400
employees, approximately 1,400 of whom were represented by unions.
A strike or other work stoppage by our employees could lead to lost
revenues and have a material adverse effect on our business,
financial condition, operating results and prospects. In
addition, legislation in California in 2002 facilitated the
organization of backstretch personnel. A strike by backstretch
personnel could, even though they are not our employees, lead to
lost revenues and therefore adversely affect our operating
results.
We periodically enter into agreements with third
parties over whom we have limited control but whose conduct could
affect the licenses that we hold in various jurisdictions.
- From time to time, we may enter into agreements with third
parties over whom we have limited control. Conduct arising
from or related to these agreements or joint venture arrangements
could have an impact on the various licenses that our subsidiaries
hold in multiple jurisdictions. Such impact could have a material
adverse impact on us or our financial condition, operating results
or prospects, primarily through the impact associated with any
loss, denial, suspension or other penalty imposed on such
licenses.
We depend on agreements with our horsemen's
industry associations to operate our business.
- The U.S. Interstate Horseracing Act of 1978, as well as various
state racing laws, require that, in order to simulcast races and,
in some cases conduct live racing, we have written agreements with
the horsemen at our racetracks, which are represented by industry
associations. In some jurisdictions, if we fail to maintain
operative agreements with the industry associations, we may not be
permitted to conduct live racing or simulcasting at tracks or
account wagering from hubs located within those jurisdictions. In
addition, our simulcasting agreements are generally subject to the
approval of the industry associations. Should we fail to renew
existing agreements with the industry associations on satisfactory
terms or fail to obtain approval for new simulcast agreements, we
would lose revenues and our operating results would suffer.
Real Estate Ownership and Development
Risks
The ownership and development of real estate
held by the Racing & Gaming Business is subject to risks set
out above under "Risks and Uncertainties - Real Estate
Industry". In addition, redevelopment projects at our
racetracks may result in a write down of the value of certain
assets and may cause temporary disruptions of our racing
operations. The redevelopment of excess land surrounding a
racetrack or replacing racing surfaces, grandstands and the
backstretch facilities could disrupt operations creating not only
delays to the racing season, including lost days, but the perceived
inconveniences can contribute to reduced attendance.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make
estimates that affect the amounts reported and disclosed in the
consolidated financial statements. Management bases estimates
on historical experience and various other assumptions that are
believed to be reasonable in the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities. On an ongoing basis, management
evaluates its estimates. However, actual results could differ
from those estimates under different assumptions or
conditions.
The Company's significant accounting policies
are included in note 1 to the consolidated financial statements
included in MID's annual report for fiscal 2010. Management
believes the following critical accounting policies involve the
most significant judgments and estimates used in the preparation of
the Company's consolidated financial statements.
Principles Of Consolidation
We consolidate entities when we have the ability
to control the operating and financial decisions and policies of
that entity, including if the entity is determined to be a variable
interest entity and we are the primary beneficiary. We apply
the equity method of accounting where we can exert significant
influence, but not control, over the operating and financial
decisions and policies of the entity. We use the cost method of
accounting where we are unable to exert significant influence over
the entity.
Business Combinations
In a business combination, the Company
recognizes the assets acquired and the liabilities assumed at their
acquisition date fair values. Any goodwill recognized as of the
acquisition date is measured as the excess of the respective
entity's enterprise value and the net of the acquisition date fair
values of the assets acquired and the liabilities assumed for that
entity. While the Company uses best estimates and assumptions as a
part of the purchase price allocation process to accurately value
assets acquired and liabilities assumed at the acquisition date,
the estimates are inherently uncertain and subject to refinement.
As a result, during the measurement period which may be up to one
year from the acquisition date, the Company records adjustments to
the assets acquired and liabilities assumed, with the corresponding
offset to goodwill for those respective entities that goodwill has
been recorded or an adjustment to the purchase price consideration
adjustment line item. Upon the conclusion of the measurement period
or final determination of the values of assets acquired or
liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated statements of
loss.
Accounting for business combinations requires
management to make significant estimates and assumptions,
especially at the acquisition date with respect to the value of
real estate properties, fixed assets, intangible assets,
pre-acquisition contingencies and the determination of future tax
balances associated with differences between estimated fair value
and the tax bases of assets acquired and liabilities assumed. The
fair value of the real estate properties was determined based on
external real estate appraisals on a market approach using
estimated prices at which comparable assets could be purchased and
adjusted in respect of costs associated with conversion to use the
properties contemplated in the real estate appraisal. The fair
value of fixed assets, which include machinery and equipment and
furniture and fixtures, was determined based on a market approach
using current prices at which comparable assets could be purchased
under similar circumstances. Intangible assets include customer
contracts, software technology and a trademark. The fair value of
the customer contracts was determined in consultation with an
external valuator using a discounted cash flow analysis under the
income valuation methodology. The income approach required
estimating a number of factors including projected revenue growth,
customer attrition rates, profit margin and the discount rate. The
fair value of the software technology and trademark were determined
based on the relief-from-royalty valuation methodology, which
estimates the incremental cash flows accruing to the owner of the
software technology or the trademark by virtue of the fact that the
owner does not have to pay a royalty to another party for use of
the asset.
For a given acquisition, the Company identifies
certain pre-acquisition contingencies as of the acquisition date
and may extend the review and evaluation of these pre-acquisition
contingencies throughout the measurement period (up to one
year from the acquisition date) in order to obtain sufficient
information to assess whether the Company includes these
contingencies as a part of the purchase price allocation and, if
so, to determine their estimated amounts. If the Company determines
that a pre-acquisition contingency is probable in nature and
estimable as of the acquisition date, the Company will record its
best estimate for such a contingency as a part of the preliminary
purchase price allocation. The Company often continues to gather
information for and re-evaluates pre-acquisition contingencies
throughout the measurement period and if changes to the amounts
recorded are required or if the Company identifies additional
pre-acquisition contingencies during the measurement period, such
amounts will be included in the purchase price allocation during
the measurement period and, subsequently, in the results of
operations. Pre-acquisition contingencies, among other things,
include insurance recoveries MID is seeking to receive as
compensation from MEC's directors' and officers' insurers, the
finalization of litigation proceedings, including those against PA
Meadows, LLC for any future payments under the holdback
agreement relating to MEC's prior sale of The Meadows racetrack and
Cushion Track Footing USA, LLC for failure to install a racing
surface at Santa Anita Park suitable for purposes for which it was
intended.
Long-lived Assets
The Company's most significant asset is its net
investment in real estate properties. Properties are stated
at cost less accumulated depreciation, reduced for impairment
losses where appropriate. Cost represents acquisition and
development costs, including direct construction costs, capitalized
interest and indirect costs wholly attributable to
development. The carrying values of the Company's long-lived
assets (including real estate properties and fixed assets) not held
for sale are evaluated whenever events or changes in circumstances
present indicators of impairment. If such indicators are
present, the Company completes a net recoverable amount analysis
for the long-lived assets by determining whether the carrying value
of such assets can be recovered through projected undiscounted cash
flows. If the sum of expected future cash flows, undiscounted
and without interest charges, is less than net book value, the
excess of the net book value over the estimated fair value, based
on discounted future cash flows and, if appropriate, appraisals, is
charged to operations in the period in which such impairment is
determined by management.
When properties are classified by the Company as
available for sale or discontinued operations, the carrying value
is reduced, if necessary, to the estimated net realizable
value. "Net realizable" value is determined based on
discounted net cash flows of the assets and, if appropriate,
appraisals and/or estimated net sales proceeds from pending
offers.
For real estate properties, depreciation is
provided on a straight-line basis over the estimated useful lives
of buildings, which typically range from 20 to 40 years.
Accounting estimates related to long-lived
assets and the impairment assessments thereof, are subject to
significant measurement uncertainty and are susceptible to change
as such estimates require management to make forward-looking
assumptions regarding cash flows and business operations. Any
resulting impairment charge could have a material impact on the
Company's results of operations and financial position.
Goodwill and Other Intangible Assets
Intangible assets are classified into three
categories: (i) intangible assets with definite lives subject to
amortization; (ii) intangible assets with indefinite lives not
subject to amortization; and (iii) goodwill. Intangible
assets with definite lives consist of customer contracts and
software technology and are amortized on a straight-line basis over
the period of expected benefit ranging from three to eight
years. An impairment review is conducted when there are
indicators of impairment using the net recoverable amount analysis
disclosed above. Intangible assets with indefinite lives
consist of a trademark. The trademark is not amortized but is
evaluated for impairment by comparing the carrying amount to the
estimated fair value using the "relief from royalty valuation"
methodology. This approach involves estimating reasonable
royalty rates for the trademark and applying royalty rates to a net
revenue stream and then discounting the resulting cash flows to
determine the fair value. If the fair value is less than the
carrying value of the trademark, an impairment charge is
recorded. Goodwill represents the excess of the purchase
price over the fair value of the net tangible and identifiable
intangible assets acquired in a business combination.
Goodwill is evaluated for impairment on an annual basis or when
impairment indicators are present. Goodwill impairment is
assessed based on a comparison of the fair value of a reporting
unit to the underlying carrying value of the reporting unit's net
assets, including goodwill. When the carrying amount of the
reporting unit exceeds its fair value, the reporting unit's
goodwill is compared with its carrying amount to measure the amount
of the impairment loss, if any. The fair value of goodwill is
determined using estimated discounted future cash flows of the
reporting unit.
Accounting estimates related to goodwill and
other intangible assets and the impairment assessments thereof, are
subject to significant measurement uncertainty and are susceptible
to change as such estimates require management to make
forward-looking assumptions regarding cash flows and business
operations. Any resulting impairment charge could have a
material impact on the Company's results of operations and
financial position.
Stock-Based Compensation
Compensation expense for stock options is based
on the fair value of the options at the grant date and is
recognized over the period from the grant date to the date the
award is vested and its exercisability does not depend on continued
service by the option holder. Compensation expense is
recognized as general and administrative expenses, with a
corresponding amount included in equity as contributed
surplus. The contributed surplus balance is reduced as
options are exercised and the amount initially recorded for the
options in contributed surplus is credited to Class A Subordinate
Voting Shares, along with the proceeds received on exercise.
In the event that options are forfeited or cancelled prior to
having vested, any previously recognized expense is reversed in the
period of forfeiture or cancellation.
The fair value of stock options is estimated 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. For further details, refer to note
16 to the unaudited interim consolidated financial statements.
Revenue Recognition
Real Estate Business
Where the Company has retained substantially all
the benefits and risks of ownership of its rental properties,
leases with its tenants are accounted for as operating
leases. Where substantially all the benefits and risks of
ownership of the Company's rental properties have been transferred
to its tenants, the Company's leases are accounted for as direct
financing leases. For leases involving land and buildings, if
the fair value of the land exceeds 25% of the consolidated fair
value of the land and building at the inception of the lease, the
Company evaluates the land and building separately in determining
the appropriate lease treatment. In such circumstances, the land
lease is typically accounted for as an operating lease, and the
building is accounted for as either an operating lease or a direct
financing lease, as appropriate.
The Real Estate Business' leases, both with
Magna and third-party tenants (the "Leases"), are triple-net leases
under which the lessee is responsible for the direct payment of all
operating costs related to the properties, including property
taxes, insurance, utilities and routine repairs and maintenance.
Revenues and operating expenses do not include any amounts related
to operating costs paid directly by the lessees.
The Leases may provide for either scheduled
fixed rent increases or periodic rent increases based on increases
in a local price index. Where periodic rent increases depend
on increases in a local price index, such rent increases are
accounted for as contingent rentals and recognized in income in
applicable future years. Where scheduled fixed rent increases
exist in operating leases, the total scheduled fixed lease payments
of the lease are recognized in income evenly on a straight-line
basis over the term of the lease. The amount by which the
straight-line rental revenue differs from the rents collected in
accordance with the lease agreements is recognized in deferred rent
receivable.
The Real Estate Business' classification of its
leases as operating leases or direct financing leases, and the
resulting revenue recognition treatment, depends on estimates made
by management. If these estimates are inaccurate, there is
risk that revenues and income for a period may otherwise differ
from reported amounts.
Racing & Gaming Business
Racing revenues include pari-mutuel wagering
revenues, gaming revenues and non-wagering revenues.
Pari-mutuel wagering revenues associated with horseracing are
recorded on a daily basis. Pari-mutuel wagering revenues are
recognized gross of purses, stakes and awards and pari-mutuel
wagering taxes. The costs relating to these amounts are
included in "purses, awards and other" in the consolidated
statements of loss.
Gaming revenues represent the net win earned on
slot wagers. Net win is the difference between wagers placed
and winning payouts to patrons, and is recorded at the time wagers
are made. The costs associated with gaming revenues represent
statutory required amounts to be distributed to the state as tax
and to the horsemen to supplement purses, and are included in
"purses, awards and other" in the consolidated statements of
loss.
Non-wagering revenues include totalisator
equipment sales and service revenues from AmTote earned in the
provision of totalisator services to racetracks, food and beverage
sales, program sales, admissions, parking, sponsorship, rental fees
and other revenues. Revenues derived principally from
totalisator equipment sales are recognized upon shipment or
acceptance of the equipment by the customer depending on the terms
of the underlying contracts. Revenues generated from service
contracts in the provision of totalisator services are recognized
when earned based on the terms of the service contract.
Revenues from food and beverage sales and program sales are
recorded at the time of sale. Revenues from admissions and
parking are recorded on a daily basis, except for seasonal amounts
which are recorded rateably over the racing season. Revenues
from sponsorship and rental fees are recorded rateably over the
terms of the respective agreements or when the related event
occurs.
Income Taxes
The Company uses the liability method of tax
allocation for accounting for income taxes. Under the
liability method of tax allocation, future tax assets and
liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A
valuation allowance is provided to the extent that it is more
likely than not that future tax assets will not be
realized.
The Real Estate Business 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
Real Estate Business' 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 Real Estate Business' 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.
Management's estimates used in establishing the Company's tax
provision are subject to uncertainty. Actual results may be
materially different from such estimates.
Employee Defined Benefit And Post Retirement
Plans
The determination of the obligation and expense
for defined benefit pension and other post retirement benefits, is
dependent on the selection of certain assumptions used by actuaries
in calculating such amounts. Those assumptions include, among
others, the discount rate, expected long-term rate of return on
plan assets and rates of increase in compensation costs.
Actual results that differ from the assumptions used can impact the
recognized expense and recorded obligation in future periods.
Significant changes in assumptions or significant new plan
enhancements could materially affect our future employee benefit
obligations and future expense.
NEW ACCOUNTING PRONOUNCEMENTS AND
DEVELOPMENTS
For details of accounting standards adopted by
the Company that did not impact the Company's financial statements,
refer to note 1 to the unaudited interim consolidated financial
statements. The accounting standards adopted that impacted
the Company's financial statements are as follows:
Fair Value Measurements
In January 2010, the FASB issued Accounting
Standards Update ("ASU") # 2010-06, "Improving Disclosures about
Fair Value Measurements" ("ASU 2010-06"), which amends Accounting
Standards Codification 820, "Fair Value Measurements and
Disclosures" ("ASC 820"), to require various additional disclosures
regarding fair value measurements and also clarify certain existing
disclosure requirements. Under ASU 2010-06, an enterprise is
required to: (i) disclose separately the amounts of significant
transfers between Level 1 and Level 2 of the fair value hierarchy,
(ii) disclose activity in Level 3 fair value measurements including
transfers into and out of Level 3 and the reasons for such
transfers and (iii) present separately in the reconciliation of
recurring Level 3 measurements information about purchases, sales,
issuances and settlements on a gross basis. The amendments
prescribed by ASU 2010-06 were effective for interim and annual
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements of
recurring Level 3 fair value measurements, which are effective for
fiscal years beginning after December 15, 2010. The adoption
of ASU 2010-06, effective January 1, 2010, did not have any impact
on the Company's consolidated financial statements, except for the
additional disclosure requirements prescribed by ASU 2010-06 which
are included in note 23 to the consolidated financial
statements.
SELECTED ANNUAL AND QUARTERLY
FINANCIAL DATA (UNAUDITED)
(in thousands, except per share information)
Years Ended and As at December
31, |
2010 |
2009 |
2008 |
Revenue: |
|
|
|
Real Estate Business |
$ 174,480 |
$ 224,034 |
$ 219,141 |
MEC/Racing & Gaming
Business(2),(3) |
183,880 |
152,935 |
591,998 |
Eliminations(1) |
— |
(9,636) |
(40,566) |
|
$ 358,360 |
$ 367,333 |
$ 770,573 |
Income (loss) from continuing operations
attributable to MID: |
|
|
|
Real Estate Business(4) |
$ 24,671 |
$ 11,717 |
$ 132,172 |
MEC/Racing & Gaming
Business(3),(5),(6) |
(76,683) |
(54,763) |
(124,875) |
Eliminations(1) |
— |
(107) |
(963) |
|
$ (52,012) |
$ (43,153) |
$ 6,334 |
Net income (loss) attributable to MID: |
|
|
|
Real Estate Business(4) |
$ 24,671 |
$ 11,717 |
$ 132,172 |
MEC/Racing & Gaming
Business(3),(5),(6),(7) |
(76,683) |
(54,342) |
(146,395) |
Eliminations(1) |
— |
336 |
1,951 |
|
$ (52,012) |
$ (42,289) |
$ (12,272) |
Cash dividends declared per
share |
$ 0.50 |
$
0.60 |
$ 0.60 |
Basic and diluted earnings (loss) per share
from continuing operations |
$ (1.11) |
$ (0.93) |
$ 0.14 |
Basic and diluted earnings (loss) per share
|
$ (1.11) |
$ (0.91) |
$ (0.26) |
Total Assets: |
|
|
|
Real Estate Business |
$1,940,178 |
$ 1,918,151 |
$1,887,135 |
MEC/Racing & Gaming
Business(3) |
530,575 |
— |
1,054,271 |
Eliminations(1) |
(526,425) |
— |
(397,297) |
|
$1,944,328 |
$ 1,918,151 |
$2,544,109 |
Total Debt: |
|
|
|
Real Estate Business |
$ 279,637 |
$ 253,204 |
$ 221,922 |
MEC/Racing & Gaming Business
(3) |
— |
— |
702,711 |
Eliminations(1) |
— |
— |
(336,818) |
|
$ 279,637 |
$ 253,204 |
$ 587,815 |
|
|
|
|
Year Ended December 31,
2010 |
Mar 31 |
Jun 30 |
Sep 30 |
Dec 31 |
Total |
Revenue:
|
|
|
|
|
|
Real Estate
Business |
$ 44,563 |
$ 43,495 |
$ 42,767 |
$ 43,655 |
$ 174,480 |
Racing & Gaming
Business(2),(3) |
— |
69,670 |
48,414 |
65,796 |
183,880 |
Eliminations(1)
|
— |
— |
— |
— |
— |
|
$ 44,563 |
$ 113,165 |
$ 91,181 |
$ 109,451 |
$ 358,360 |
Income (loss) from continuing operations
attributable to MID: |
|
|
|
|
|
Real Estate
Business(4) |
$ 15,129 |
$ 38,907 |
$ 12,651 |
$ (42,016) |
$ 24,671 |
Racing & Gaming
Business(3),(5),(6) |
— |
(6,215) |
(23,176) |
(47,292) |
(76,683) |
Eliminations(1) |
— |
— |
— |
— |
— |
|
$ 15,129 |
$ 32,692 |
$ (10,525) |
$ (89,308) |
$ (52,012) |
Net income (loss) attributable to MID: |
|
|
|
|
|
Real Estate
Business(4) |
$ 15,129 |
$ 38,907 |
$ 12,651 |
$ (42,016) |
$ 24,671 |
Racing & Gaming
Business(3),(5),(6),(7) |
— |
(6,215) |
(23,176) |
(47,292) |
(76,683) |
Eliminations(1) |
— |
— |
— |
— |
— |
|
$ 15,129 |
$ 32,692 |
$ (10,525) |
$ (89,308) |
$ (52,012) |
Basic and diluted earnings (loss) per share
from continuing
operations |
$ 0.32 |
$ 0.71 |
$ (0.23) |
$ (1.91) |
$ (1.11) |
Basic and diluted earnings (loss) per
share |
$ 0.32 |
$ 0.71 |
$ (0.23) |
$
(1.91) |
$ (1.11) |
FFO: |
|
|
|
|
|
Real Estate
Business(4) |
$ 25,658 |
$ 49,115 |
$ 24,108 |
$ (31,445) |
$ 67,436 |
FFO per share: |
|
|
|
|
|
Real Estate
Business(4) |
$ 0.55 |
$ 1.04 |
$ 0.52 |
$ (0.67) |
$ 1.44 |
Diluted shares
outstanding |
46,708 |
46,708 |
46,708 |
46,708 |
46,708 |
|
|
|
|
|
|
Year Ended December 31,
2009 |
Mar 31 |
Jun 30 |
Sep 30 |
Dec 31 |
Total |
Revenue: |
|
|
|
|
|
Real Estate
Business |
$ 53,819 |
$ 55,161 |
$ 57,012 |
$ 58,042 |
$ 224,034 |
MEC(2),(3) |
152,935 |
— |
— |
— |
152,935 |
Eliminations(1) |
(9,636) |
— |
— |
— |
(9,636) |
|
$ 197,118 |
$ 55,161 |
$ 57,012 |
$ 58,042 |
$ 367,333 |
Income (loss) from continuing operations
attributable to MID: |
|
|
|
|
|
Real Estate
Business(4) |
$ 25,161 |
$ 31,329 |
$ 28,027 |
$ (72,800) |
$ 11,717 |
MEC(3),(5),(6) |
(54,763) |
— |
— |
— |
(54,763) |
Eliminations(1) |
(107) |
— |
— |
— |
(107) |
|
$ (29,709) |
$ 31,329 |
$ 28,027 |
$ (72,800) |
$ (43,153) |
Net income (loss) attributable to MID: |
|
|
|
|
|
Real Estate
Business(4) |
$ 25,161 |
$ 31,329 |
$ 28,027 |
$ (72,800) |
$ 11,717 |
MEC(3),(5),(6),(7) |
(54,342) |
— |
— |
— |
(54,342) |
Eliminations(1) |
336 |
— |
— |
— |
336 |
|
$ (28,845) |
$ 31,329 |
$ 28,027 |
$ (72,800) |
$ (42,289) |
Basic and diluted earnings (loss) per share
from continuing
operations |
$ (0.64) |
$ 0.67 |
$ 0.60 |
$ (1.56) |
$ (0.93) |
Basic and diluted earnings (loss) per
share |
$ (0.62) |
$ 0.67 |
$ 0.60 |
$
(1.56) |
$ (0.91) |
FFO: |
|
|
|
|
|
Real Estate
Business(4) |
$ 34,927 |
$ 41,459 |
$ 38,347 |
$ (61,873) |
$ 52,860 |
FFO per share: |
|
|
|
|
|
Real Estate
Business(4) |
$ 0.75 |
$ 0.89 |
$ 0.82 |
$ (1.32) |
$ 1.13 |
Diluted shares
outstanding |
46,708 |
46,708 |
46,708 |
46,708 |
46,708 |
(1) |
MEC's results of operations are
included in the Company's consolidated results of operations up to
the Petition Date (see "SIGNIFICANT MATTERS - Deconsolidation of
MEC"). The Racing & Gaming Business results of
operations are included in the Company's consolidated results of
operations subsequent to the effective date of the Plan (see
"SIGNIFICANT MATTERS - MEC's Bankruptcy"). Transactions and
balances between the Real Estate Business and MEC/Racing &
Gaming Business have not been eliminated in the presentation of
each segment's financial data and related measurements.
However, the effects of transactions and balances between these two
segments, which are further described in note 1(a) to the
consolidated financial statements, are eliminated in the
consolidated results of operations and financial position of the
Company for periods prior to the Petition Date and subsequent to
the effective date of the Plan. |
(2) |
Excludes MEC's discontinued
operations. |
(3) |
Most of the racetracks operate for
prescribed periods each year. As a result, the 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 any other quarter or for the
year as a whole. The 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
revenues and operating results included in the Company's
consolidated financial statements prior to the Petition Date (see
"SIGNIFICANT MATTERS - Deconsolidation of MEC") and
subsequent to the effective date of the Plan (see "SIGNIFICANT
MATTERS - MEC's Bankruptcy"). |
(4) |
The Real Estate Business' results for
2010 includes (i) $4.5 million ($4.5 million net of income taxes),
$3.4 million ($3.4 million net of income taxes), $0.8 million ($0.8
million net of income taxes) and $0.7 million ($0.7 million net of
income taxes) in the first, second, third and fourth quarters,
respectively, of advisory and other costs primarily incurred in
connection with MID's involvement in the Debtors' Chapter 11
process (see "SIGNIFICANT MATTERS - MEC's Bankruptcy - Chapter
11 Filing and Plan of Reorganization"), (ii) $10.0
million ($10.0 million net of income taxes) in the second
quarter of a recovery of the impairment provision related to loans
receivable from MEC, (iii) $21.0 million ($21.0 million net of
income taxes) in the second quarter of a purchase price
consideration adjustment related to the Transferred Assets, (iv)
$1.9 million ($1.2 million net of income taxes) relating to a lease
termination fee in the second quarter, (v) a $1.2 million ($0.7
million net of income taxes) loss on disposal of real estate in the
third quarter, (vi) a $40.6 million ($40.6 million net of income
taxes) write-down of long-lived assets in the fourth quarter and
(vii) $12.7 million income tax expense relating to an internal
reorganization completed in 2010. The purchase price
consideration adjustment of $18.7 million and $2.3 million incurred
in the third and fourth quarters of 2010, respectively has been
retrospectively adjusted to the second quarter as certain of the
fair values of the Transferred Assets were accounted for in
accordance with Accounting Standards Codification 805, "Business
Combinations", ("ASC 805"). These fair values were
preliminary in nature and subject to change in future reporting
periods. Such changes in estimates are accounted for on a
retrospective basis as at the acquisition date. |
|
The Real Estate Business' results for
2009 include (i) $7.0 million ($4.6 million net of income taxes) of
advisory and other costs incurred in the first quarter in
connection with a reorganization proposal announced in November
2008 and evaluating MID's relationship with MEC, including MID's
involvement in the Debtors' Chapter 11 process (including the
Stalking Horse Bid and the DIP Loan - see "SIGNIFICANT MATTERS -
MEC Chapter 11 Filing and Plan of Reorganization"), (ii) a $0.5
million adjustment to the carrying values of the MEC loan
facilities on deconsolidation of MEC (see "SIGNIFICANT MATTERS -
Deconsolidation of MEC") in the first quarter, (iii) $1.4
million, $5.3 million and $8.8 million, respectively ($1.0 million,
$3.6 million and $5.9 million, respectively, net of income taxes)
of advisory and other costs incurred in the second, third and
fourth quarters in connection with evaluating MID's relationship
with MEC, including MID's involvement in the Debtors' Chapter 11
process and matters heard by the OSC, and (iv) a $0.3 million gain
on disposal of real estate previously classified as "properties
held for sale" in the third quarter, (v) a $4.5 million ($2.7
million net of income taxes) write-down of long-lived assets in the
fourth quarter of 2009, (vi) a $90.8 million ($85.2 million net of
income taxes) impairment provision relating to loans receivable
from MEC and (vii) $7.8 million currency translation loss realized
from a capital transaction that gave rise to a reduction in the net
investment in a foreign operation in the fourth quarter. |
|
The Real Estate Business' results for
2008 include (i) a $3.9 million ($2.6 million net of income taxes)
gain in the first quarter in relation to the termination of a lease
agreement with Magna, (ii) net recoveries of $0.3 million ($0.2
million net of income taxes) and $0.9 million ($0.6 million net of
income taxes) in the first and fourth quarters, respectively, of
costs incurred in connection with the Greenlight Litigation, (iii)
$4.3 million ($3.2 million net of income taxes), $1.2 million ($0.9
million net of income taxes) and $1.9 million ($1.4 million net of
income taxes) of costs incurred in the second, third and fourth
quarters, respectively, in connection with the exploration of
alternatives in respect of MID's investments in MEC, (iv) a $0.5
million ($0.3 million net of income taxes) non-cash write-down of
long-lived assets in the second quarter, (v) a $1.0 million bonus
payment to MID's departing CEO in the third quarter, (vi) income
tax recoveries of $12.5 million and $1.4 million in the third and
fourth quarters, respectively, due to revisions to estimates of
certain tax exposures and the ability to benefit from certain
income tax loss carry forwards and (vii) a $1.8 million foreign
exchange gain driven primarily by the impact of the strengthening
of the U.S. dollar against various currencies in the fourth quarter
of 2008. |
(5) |
MEC's loss from continuing operations
attributable to MID and net loss attributable to MID are net of
noncontrolling interest and dilution gains (losses) arising from
MEC's issuance of shares of MEC Class A Stock from time to
time. |
(6) |
The Racing & Gaming Business'
results for 2010 include (i) $1.0 million ($1.0 million net of
income taxes) and $3.5 million ($3.5 net of income taxes) increase
in our proportionate equity loss share of Laurel Gaming LLC in the
third and fourth quarters, respectively, due to the pursuit of
alternative gaming opportunities, (ii) $0.1 million ($0.1 million
net of income taxes) and $3.3 million ($3.3 million net of income
taxes) of capital expenditures expensed in the third and fourth
quarters, respectively, (iii) $3.5 million ($3.5 million net of
income taxes) relating to the write-down of long-lived and
intangible assets in the fourth quarter and (iv) $14.9 million
($14.9 million net of income taxes) increase in our equity loss
share in Maryland RE & R LLC in the fourth quarter due to the
write-off of goodwill. |
|
The MEC segment's loss from
continuing operations attributable to MID and net loss attributable
to MID for the first quarter of 2009 include a $46.2 million
reduction to MID's carrying value in its investment in MEC upon the
Company's deconsolidation of MEC (see "SIGNIFICANT MATTERS -
Deconsolidation of MEC"). MEC's loss from continuing
operations attributable to MID and net loss attributable to MID for
2008 include (i) a $2.0 million gain ($1.1 million net of related
minority interest impact) recognized in the first quarter related
to a racing services agreement at The Meadows, (ii) non-cash
write-downs of $5.0 million and $5.1 million ($2.7 million and $2.7
million net of related minority interest impact) in the first and
fourth quarters, respectively, of a property held for sale, (iii) a
$0.4 million dilution loss in the second quarter in relation to
MEC's issuance of shares of MEC Class A Stock pursuant to
stock-based compensation arrangements and (iv) $115.7 million
($44.2 million net of related income tax and minority interest
impact) of non-cash write-downs of long-lived and intangible
assets. |
(7) |
MEC's net loss attributable to MID
for 2008 includes (i) non-cash write-downs, included in
discontinued operations, of $32.3 million and $16.0 million ($17.4
million and $8.6 million net of related minority interest impact)
in the first and fourth quarters, respectively, related to
long-lived assets at Magna Racino™ and Portland Meadows, (ii) a
$6.1 million ($3.3 million net of related minority interest impact)
income tax recovery, included in discontinued operations, as a
result of being able to utilize losses of discontinued operations
to offset taxable income generated by the sale of excess real
estate to a subsidiary of Magna, (iii) a $0.5 million gain ($0.3
million net of related minority interest impact) in the third
quarter, included in discontinued operations, from the disposition
of Great Lakes Downs and (iv) a $3.1 million tax recovery ($1.7
million net of related minority interest), included in discontinued
operations, in the third quarter from revisions to estimates of
certain tax exposures as a result of tax audits in certain tax
jurisdictions. |
FORWARD-LOOKING STATEMENTS
This MD&A contains 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 events,
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 the Company's Annual Information Form
for 2010, filed on SEDAR at www.sedar.com and attached as Exhibit 1
to the Company's Annual Report on Form 40-F for the year ended
December 31, 2010, 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 statements were made and unless otherwise required
by applicable securities laws, the Company expressly disclaims any
intention and undertakes no obligation to update or revise any
forward-looking statements contained in this MD&A to reflect
subsequent information, events or circumstances or otherwise.
Consolidated Balance Sheets
(Refer to note 1 - Basis of Presentation)
(U.S. dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
As at
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
$ |
|
85,407 |
|
|
$ |
|
135,163 |
|
Restricted cash
|
|
|
|
|
9,334 |
|
|
|
|
458 |
|
Accounts
receivable |
|
|
|
|
30,029 |
|
|
|
|
1,796 |
|
Income taxes
receivable |
|
|
|
|
2,184 |
|
|
|
|
1,723 |
|
Current portion of
receivable from Reorganized MEC (note 2) |
|
|
|
|
11,953 |
|
|
|
|
— |
|
Inventories |
|
|
|
|
4,763 |
|
|
|
|
— |
|
Prepaid expenses and
other |
|
|
|
|
12,078 |
|
|
|
|
1,007 |
|
|
|
|
|
155,748 |
|
|
|
|
140,147 |
Receivable from Reorganized MEC (note 2) |
|
|
|
|
15,000 |
|
|
|
|
- |
Real estate
properties, net (note 5) |
|
|
|
|
1,665,001 |
|
|
|
|
1,389,845 |
Fixed assets, net
(note 6) |
|
|
|
|
15,222 |
|
|
|
|
233 |
Other assets (note
7) |
|
|
|
|
42,985 |
|
|
|
|
2,065 |
Loans receivable from
MEC, net (note 3) |
|
|
|
|
— |
|
|
|
|
362,404 |
Deferred rent
receivable |
|
|
|
|
13,420 |
|
|
|
|
13,607 |
Intangible assets, net
(note 8) |
|
|
|
|
24,753 |
|
|
|
|
— |
Goodwill (note
9) |
|
|
|
|
8,603 |
|
|
|
|
— |
Future tax assets
(note 10) |
|
|
|
|
3,596 |
|
|
|
|
9,850 |
Total
assets |
|
|
$ |
|
1,944,328 |
|
|
$ |
|
1,918,151 |
LIABILITIES AND
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness (note
11) |
|
|
$ |
|
13,071 |
|
|
$ |
|
— |
|
Accounts payable and
accrued liabilities (note 12) |
|
|
|
|
70,753 |
|
|
|
|
21,176 |
|
Income taxes
payable |
|
|
|
|
24,291 |
|
|
|
|
10,704 |
|
Due to MEC (note
3) |
|
|
|
|
— |
|
|
|
|
458 |
|
Long-term debt due
within one year (note 11) |
|
|
|
|
2,254 |
|
|
|
|
220 |
|
Deferred
revenue |
|
|
|
|
6,376 |
|
|
|
|
5,243 |
|
|
|
|
|
116,745 |
|
|
|
|
37,801 |
Long-term debt (note
11) |
|
|
|
|
— |
|
|
|
|
2,143 |
Senior unsecured
debentures, net |
|
|
|
|
264,312 |
|
|
|
|
250,841 |
Other long-term
liabilities |
|
|
|
|
4,340 |
|
|
|
|
— |
Future tax liabilities
(note 10) |
|
|
|
|
66,551 |
|
|
|
|
37,824 |
Total
liabilities |
|
|
|
|
451,948 |
|
|
|
|
328,609 |
Shareholders'
equity: |
|
|
|
|
|
|
|
|
|
|
Class A Subordinate
Voting Shares |
|
|
|
|
|
|
|
|
|
|
|
(Shares issued -
46,160,564) |
|
|
|
|
1,506,088 |
|
|
|
|
1,506,088 |
Class B Shares |
|
|
|
|
|
|
|
|
|
|
|
(Shares issued -
547,413) |
|
|
|
|
|
|
|
|
|
|
|
(Convertible to Class
A Subordinate Voting Shares) |
|
|
|
|
17,866 |
|
|
|
|
17,866 |
Contributed surplus
(note
13)
|
|
|
|
|
59,020 |
|
|
|
|
58,575 |
Deficit
|
|
|
|
|
(266,535) |
|
|
|
|
(191,169) |
Accumulated other
comprehensive income (note
14) |
|
|
|
|
175,941 |
|
|
|
|
198,182 |
Total shareholders'
equity |
|
|
|
|
1,492,380 |
|
|
|
|
1,589,542 |
Total liabilities
and shareholders'
equity |
|
|
$ |
|
1,944,328 |
|
|
$ |
|
1,918,151 |
Commitments and contingencies (note 22)
See accompanying notes
Consolidated Statements of Loss
(U.S. dollars in thousands, except per share figures)
(Unaudited)
|
|
|
Three
Months Ended |
|
|
|
Year Ended |
|
|
|
December
31, |
|
|
|
December 31, |
|
|
|
|
|
20101 |
|
|
|
|
20092 |
|
|
|
|
|
20101 |
|
|
|
|
20092 |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenue |
|
|
$ |
|
43,655 |
|
|
$ |
|
44,778 |
|
|
|
$ |
|
172,656 |
|
|
$ |
|
170,929 |
Interest and other
income from MEC (note 3) |
|
|
|
|
— |
|
|
|
|
13,264 |
|
|
|
|
|
1,824 |
|
|
|
|
43,469 |
Racing, gaming and other
revenue |
|
|
|
|
65,796 |
|
|
|
|
— |
|
|
|
|
|
183,880 |
|
|
|
|
152,935 |
|
|
|
|
|
109,451 |
|
|
|
|
58,042 |
|
|
|
|
|
358,360 |
|
|
|
|
367,333 |
Operating
costs, expenses and income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purses, awards and
other |
|
|
|
|
37,097 |
|
|
|
|
— |
|
|
|
|
|
100,945 |
|
|
|
|
82,150 |
Operating
costs |
|
|
|
|
35,218 |
|
|
|
|
— |
|
|
|
|
|
90,655 |
|
|
|
|
55,274 |
General and
administrative |
|
|
|
|
26,747 |
|
|
|
|
20,450 |
|
|
|
|
|
76,524 |
|
|
|
|
53,071 |
Depreciation and
amortization |
|
|
|
|
14,047 |
|
|
|
|
10,870 |
|
|
|
|
|
50,437 |
|
|
|
|
48,334 |
Interest expense,
net |
|
|
|
|
4,198 |
|
|
|
|
3,695 |
|
|
|
|
|
16,447 |
|
|
|
|
18,985 |
Foreign exchange
losses (gains) |
|
|
|
|
244 |
|
|
|
|
(408) |
|
|
|
|
|
(16) |
|
|
|
|
8,104 |
Equity loss (income)
(note 7) |
|
|
|
|
23,605 |
|
|
|
|
— |
|
|
|
|
|
29,501 |
|
|
|
|
(65) |
Write-down of
long-lived and intangible assets (note 17) |
|
|
|
|
44,159 |
|
|
|
|
4,498 |
|
|
|
|
|
44,159 |
|
|
|
|
4,498 |
Impairment provision
(recovery) related to loans
receivable from MEC (note 3(a)) |
|
|
|
|
— |
|
|
|
|
90,800 |
|
|
|
|
|
(9,987) |
|
|
|
|
90,800 |
Operating income
(loss) |
|
|
|
|
(75,864) |
|
|
|
|
(71,863) |
|
|
|
|
|
(40,305) |
|
|
|
|
6,182 |
Deconsolidation
adjustment to the carrying values of MID's investment in,
and amounts due from, MEC (note 1(c)) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
(46,677) |
Gain (loss) on
disposal of real estate (note
5(b)) |
|
|
|
|
— |
|
|
|
|
(57) |
|
|
|
|
|
(1,205) |
|
|
|
|
206 |
Other gains (losses),
net (notes 3(b), 7, 14) |
|
|
|
|
42 |
|
|
|
|
(7,798) |
|
|
|
|
|
1,913 |
|
|
|
|
(7,798) |
Purchase price
consideration adjustment (note 2(c)) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
21,027 |
|
|
|
|
— |
Loss before income
taxes |
|
|
|
|
(75,822) |
|
|
|
|
(79,718) |
|
|
|
|
|
(18,570) |
|
|
|
|
(48,087) |
Income tax expense
(recovery) (note 10) |
|
|
|
|
13,486 |
|
|
|
|
(6,918) |
|
|
|
|
|
33,442 |
|
|
|
|
1,737 |
Loss from continuing
operations |
|
|
|
|
(89,308) |
|
|
|
|
(72,800) |
|
|
|
|
|
(52,012) |
|
|
|
|
(49,824) |
Income from
discontinued operations (note 4) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
1,227 |
Net
loss |
|
|
|
|
(89,308) |
|
|
|
|
(72,800) |
|
|
|
|
|
(52,012) |
|
|
|
|
(48,597) |
Add net loss attributable to the
noncontrolling interest (note 15) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
6,308 |
Net loss
attributable to MID
|
|
|
$ |
|
(89,308) |
|
|
$ |
|
(72,800) |
|
|
|
$ |
|
(52,012) |
|
|
$ |
|
(42,289) |
Income (loss) attributable to MID
from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- continuing
operations |
|
|
$ |
|
(89,308) |
|
|
$ |
|
(72,800) |
|
|
|
$ |
|
(52,012) |
|
|
$ |
|
(43,153) |
|
- discontinued operations |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
864 |
Net loss attributable to
MID |
|
|
$ |
|
(89,308) |
|
|
$ |
|
(72,800) |
|
|
|
$ |
|
(52,012) |
|
|
$ |
|
(42,289) |
Basic and diluted
earnings (loss) attributable to each MID |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Subordinate Voting or Class B
Share (note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- continuing
operations |
|
|
$ |
|
(1.91) |
|
|
$ |
|
(1.56) |
|
|
|
$ |
|
(1.11) |
|
|
$ |
|
(0.93) |
|
- discontinued operations |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
0.02 |
Total |
|
|
$ |
|
(1.91) |
|
|
$ |
|
(1.56) |
|
|
|
$ |
|
(1.11) |
|
|
$ |
|
(0.91) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of Class A Subordinate
Voting and Class B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding during the period
(in thousands) (note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted |
|
|
|
|
46,708 |
|
|
|
|
46,708 |
|
|
|
|
|
46,708 |
|
|
|
|
46,708 |
See accompanying notes
Consolidated Statements of Comprehensive Loss
(U.S. dollars in thousands)
(Unaudited)
|
|
|
Three Months
Ended |
|
|
|
Year Ended |
|
|
|
December
31, |
|
|
|
December 31, |
|
|
|
|
2010 |
|
|
2009 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
$ |
|
(89,308) |
|
|
$ |
|
(72,800) |
|
|
|
$ |
|
(52,012) |
|
|
$ |
|
(48,597) |
Other
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest
rate swaps,
net of taxes (notes 14, 15) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
171 |
|
Foreign currency
translation adjustment (notes 14, 15) |
|
|
|
|
(1,160) |
|
|
|
|
(1,308) |
|
|
|
|
|
(22,079) |
|
|
|
|
48,241 |
|
Recognition of
foreign currency translation loss (gain) in
net loss (note 14) |
|
|
|
|
(42) |
|
|
|
|
7,798 |
|
|
|
|
|
(42) |
|
|
|
|
7,798 |
|
Change in net
unrecognized actuarial pension losses |
|
|
|
|
(120) |
|
|
|
|
— |
|
|
|
|
|
(120) |
|
|
|
|
— |
|
Reclassification
to income of MEC's accumulated
other comprehensive income upon deconsolidation
of MEC (notes 1(c), 14) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
(19,850) |
Comprehensive loss |
|
|
|
|
(90,630) |
|
|
|
|
(66,310) |
|
|
|
|
|
(74,253) |
|
|
|
|
(12,237) |
Add comprehensive loss
attributable to
the noncontrolling interest (note 15) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
6,303 |
Comprehensive loss
attributable to MID |
|
|
$ |
|
(90,630) |
|
|
$ |
|
(66,310) |
|
|
|
$ |
|
(74,253) |
|
|
$ |
|
(5,934) |
See accompanying notes
Consolidated Statements of Changes in Deficit
(U.S. dollars in thousands)
(Unaudited)
|
|
|
Three
Months Ended |
|
|
Year
Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit, beginning of period as previously
stated |
|
|
$ |
|
(174,885) |
|
|
$ |
|
(111,363) |
|
|
$ |
|
(191,169) |
|
|
$ |
|
(120,855) |
Retrospective
application of purchase price consideration
adjustment (note 2(c)) |
|
|
|
|
2,329 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
Deficit, beginning
of period |
|
|
|
|
(172,556) |
|
|
|
|
(111,363) |
|
|
|
|
(191,169) |
|
|
|
|
(120,855) |
Net loss
attributable to MID |
|
|
|
|
(89,308) |
|
|
|
|
(72,800) |
|
|
|
|
(52,012) |
|
|
|
|
(42,289) |
Dividends |
|
|
|
|
(4,671) |
|
|
|
|
(7,006) |
|
|
|
|
(23,354) |
|
|
|
|
(28,025) |
Deficit, end
of period |
|
|
$ |
|
(266,535) |
|
|
$ |
|
(191,169) |
|
|
$ |
|
(266,535) |
|
|
$ |
|
(191,169) |
See accompanying notes
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
|
|
|
Three
Months Ended |
|
|
|
Year Ended |
|
|
|
December
31, |
|
|
|
December 31, |
|
|
|
20103 |
|
|
20092 |
|
|
|
20101 |
|
|
20094 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations |
|
|
$ |
|
(89,308) |
|
|
$ |
|
(72,800) |
|
|
|
$ |
|
(52,012) |
|
|
$ |
|
(49,824) |
Items not involving
current cash flows (note 19(a)) |
|
|
|
|
85,380 |
|
|
|
|
93,242 |
|
|
|
|
|
110,684 |
|
|
|
|
149,655 |
Changes in non-cash
working capital balances (note 19(b)) |
|
|
|
|
12,965 |
|
|
|
|
9,443 |
|
|
|
|
|
30,131 |
|
|
|
|
3,363 |
Cash
provided by operating activities |
|
|
|
|
9,037 |
|
|
|
|
29,885 |
|
|
|
|
|
88,803 |
|
|
|
|
103,194 |
INVESTING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of
Transferred Assets, net of cash acquired (note 2(c)) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
(50,520) |
|
|
|
|
— |
Proceeds from the sale
of 49% interest in The Maryland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jockey Club, net of cash disposed
(note 7) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
22,696 |
|
|
|
|
— |
Real estate and fixed asset
additions |
|
|
|
|
(5,187) |
|
|
|
|
(3,801) |
|
|
|
|
|
(15,290) |
|
|
|
|
(12,075) |
Proceeds on (costs
related to) disposal of real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and fixed assets, net |
|
|
|
|
— |
|
|
|
|
(57) |
|
|
|
|
|
— |
|
|
|
|
692 |
(Increase) decrease in other
assets |
|
|
|
|
(5,579) |
|
|
|
|
37 |
|
|
|
|
|
(14,770) |
|
|
|
|
(9,955) |
Loan repayments from MEC |
|
|
|
|
— |
|
|
|
|
10,606 |
|
|
|
|
|
60,794 |
|
|
|
|
10,632 |
Loan advances to MEC,
net |
|
|
|
|
— |
|
|
|
|
(22,602) |
|
|
|
|
|
(13,804) |
|
|
|
|
(54,072) |
Reduction in cash from deconsolidation
of MEC |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
(31,693) |
Cash used in
investing activities |
|
|
|
|
(10,766) |
|
|
|
|
(15,817) |
|
|
|
|
|
(10,894) |
|
|
|
|
(96,471) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank indebtedness |
|
|
|
|
5,955 |
|
|
|
|
— |
|
|
|
|
|
77,077 |
|
|
|
|
18,048 |
Repayment of bank
indebtedness |
|
|
|
|
(25,756) |
|
|
|
|
— |
|
|
|
|
|
(106,091) |
|
|
|
|
(18,597) |
Repayment of long-term debt |
|
|
|
|
(59) |
|
|
|
|
(20) |
|
|
|
|
|
(74,264) |
|
|
|
|
(5,073) |
Disgorgement payment
received from noncontrolling interest (note 15) |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
420 |
Dividends paid |
|
|
|
|
(4,671) |
|
|
|
|
(7,006) |
|
|
|
|
|
(23,354) |
|
|
|
|
(28,025) |
Cash used in
financing activities |
|
|
|
|
(24,531) |
|
|
|
|
(7,026) |
|
|
|
|
|
(126,632) |
|
|
|
|
(33,227) |
Effect of exchange
rate changes on cash and cash equivalents |
|
|
|
|
(118) |
|
|
|
|
416 |
|
|
|
|
|
(1,033) |
|
|
|
|
5,235 |
Net cash flows
provided by (used in) continuing operations |
|
|
|
|
(26,378) |
|
|
|
|
7,458 |
|
|
|
|
|
(49,756) |
|
|
|
|
(21,269) |
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by
operating activities |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
1,788 |
Cash used in investing activities |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
(230) |
Net cash flows provided by
discontinued operations |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
1,558 |
Net increase
(decrease) in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during the
period |
|
|
|
|
(26,378) |
|
|
|
|
7,458 |
|
|
|
|
|
(49,756) |
|
|
|
|
(19,711) |
Cash and cash
equivalents, beginning of period |
|
|
|
|
111,785 |
|
|
|
|
127,705 |
|
|
|
|
|
135,163 |
|
|
|
|
154,874 |
Cash and cash equivalents, end
of period |
|
|
$ |
|
85,407 |
|
|
$ |
|
135,163 |
|
|
|
$ |
|
85,407 |
|
|
$ |
|
135,163 |
See accompanying notes
Notes to Interim Consolidated Financial Statements
(All amounts in U.S. dollars and all tabular amounts in
thousands unless otherwise noted)
(All amounts as at December 31, 2010 and 2009 and for the
three-month periods and years ended December 31, 2010 and 2009 are
unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Organization, Segmented Information and Basis of
Presentation
Organization
MI Developments Inc. ("MID" or the "Company") is
the successor to Magna International Inc.'s ("Magna") real estate
division, which prior to its spin-off from Magna on August 29, 2003
was organized as an autonomous business unit within Magna.
MID was formed as a result of four companies that amalgamated on
August 29, 2003 under the Business Corporations Act
(Ontario): 1305291 Ontario Inc., 1305272 Ontario Inc.,
1276073 Ontario Inc. and MID. These companies were
wholly-owned subsidiaries of Magna and held Magna's real estate
division and the controlling interest in Magna Entertainment Corp.
("MEC"). All of MID's Class A Subordinate Voting Shares and
Class B Shares were distributed to the shareholders of Magna of
record on August 29, 2003 on the basis of one of MID's Class A
Subordinate Voting Shares for every two Class A Subordinate Voting
Shares of Magna held, and one Class B Share for every two Class B
Shares of Magna held. MID acquired Magna's controlling
interest in MEC as a result of this spin-off transaction.
On March 5, 2009 (the "Petition Date"), MEC and
certain of its subsidiaries (collectively, the "Debtors") filed
voluntary petitions for reorganization under Chapter 11 of Title 11
of the United States Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of Delaware (the "Court")
and were granted recognition of the Chapter 11 proceedings from the
Ontario Superior Court of Justice under section 18.6 of the
Companies' Creditors Arrangement Act in Canada. On February
18, 2010, MID announced that MEC had filed the Joint Plan of
Affiliated Debtors, the Official Committee of Unsecured Creditors
(the "Creditors' Committee"), MID and MI Developments US Financing
Inc. pursuant to the Bankruptcy Code (as amended, the "Plan") and
related Disclosure Statement (the "Disclosure Statement") in
connection with the MEC Chapter 11 proceedings which provided for,
among other things, the assets of MEC remaining after certain asset
sales to be transferred to MID, including, among other assets,
Santa Anita Park, Golden Gate Fields, Gulfstream Park (including
MEC's interest in The Village at Gulfstream Park™, a joint venture
between MEC and Forest City Enterprises, Inc. ("Forest City")),
Portland Meadows, AmTote International, Inc. ("AmTote") and
XpressBet, Inc. ("XpressBet"). On March 23, 2010, the Plan
was amended to include the transfer of The Maryland Jockey Club
("MJC") to MID (together with the assets referred to in the
preceding sentence, the "Transferred Assets"). On April 30,
2010, the closing conditions of the Plan were satisfied or waived,
and the Plan became effective following the close of business on
April 30, 2010 (note 2).
Under the Plan, on the date the shares of MEC
Lone Star, LP ("Lone Star LP") or substantially all the assets of
Lone Star LP are sold, all MEC stock will be cancelled and the
holders of MEC shares will not be entitled to nor will receive or
retain any property or interest in property under the Plan, and the
stock of the Reorganized MEC will be issued and distributed to the
administrator retained by the Debtors as of the effective date to
administer the Plan.
On December 22, 2010, MID received a
reorganization proposal providing for the elimination of the
Company's dual class share structure from the Class A shareholders
and its controlling shareholder (note 24(a)).
Segmented Information
The Company's reportable segments reflect the
manner in which the Company is organized and managed by its senior
management. Subsequent to the effective date of the Plan on April
30, 2010, the Company operates in two segments, the "Real Estate
Business" and the "Racing & Gaming Business". The Company's
reportable segments are determined based on the distinct nature of
their operations and each segment offers different services and is
managed separately. In the accompanying unaudited interim
consolidated financial statements, the Company uses the terms "Real
Estate Business" and "Racing & Gaming Business" to analyze the
financial results for the three-month periods and years ended
December 31, 2010 and 2009. The results of operations of the
Racing & Gaming Business for the three-month period and year
ended December 31, 2010 include the results of the Transferred
Assets from April 30, 2010, the date the assets were acquired by
MID. The results of operations of the Racing & Gaming
Business for the year ended December 31, 2009 also include MEC's
results for the period up to March 5, 2009, the Petition Date.
Prior to the deconsolidation of MEC at the
Petition Date, the Company's operations were segmented in the
Company's internal financial reports between wholly-owned
operations ("Real Estate Business") and publicly-traded operations
("MEC"). This segregation of operations between wholly-owned
and publicly-traded operations recognized the fact that, in the
case of the Real Estate Business, the Company's Board of Directors
(the "Board") and executive management have direct responsibility
for the key operating, financing and resource allocation decisions,
whereas, in the case of MEC, such responsibility resided with MEC's
separate Board of Directors and executive management.
Real Estate Business
MID's real estate operations are engaged
primarily in the acquisition, development, construction, leasing,
management and ownership of a predominantly industrial rental
portfolio leased primarily to Magna and its automotive operating
units. In addition, MID owns land for industrial development
and owns and acquires land that it intends to develop for mixed-use
and residential projects.
At December 31, 2010, the Real Estate Business
portfolio consists of 106 income-producing industrial and
commercial properties, representing 27.5 million square feet of
leaseable area located in nine countries: Canada, the United
States, Mexico, Austria, Germany, the Czech Republic, the United
Kingdom, Spain and Poland. Substantially all of these real
estate assets are leased to Magna's automotive operating
units. The Real Estate Business also owns approximately 1,400
acres of land held for future development, including approximately
900 acres in the United States, 300 acres in Canada, 100 acres in
Mexico and 100 acres in Europe.
Racing & Gaming Business (certain
former Magna Entertainment Corp. assets)
Effective following the close of business on
April 30, 2010, as a result of the Plan, MID became the owner and
operator of horse racetracks and a supplier, via simulcasting, of
live horse racing content to the inter-track, off-track and account
wagering markets through the transfer of certain former MEC assets
as outlined above.
At December 31, 2010, the Racing & Gaming
Business owns and operates four thoroughbred racetracks located in
the United States, as well as the simulcast wagering venues at
these tracks, which consist of: Santa Anita Park, Golden Gate
Fields, Gulfstream Park (which includes a casino with alternative
gaming machines) and Portland Meadows. In addition, the
Racing & Gaming Business operates: XpressBet®, a United States
based national account wagering business; AmTote, a provider of
totalisator services to the pari-mutuel industry; and a
thoroughbred training centre in Palm Meadows, Florida. The Racing
& Gaming Business also includes: a 50% joint venture interest
in The Village at Gulfstream Park™, an outdoor shopping and
entertainment centre located adjacent to Gulfstream Park; a 50%
joint venture interest in HRTV, LLC, which owns Horse Racing TV®, a
television network focused on horse racing and, effective July 1,
2010, a 51% interest in Maryland RE & R LLC, a joint venture
with real estate and racing operations in Maryland, including
Pimlico Race Course, Laurel Park and a thoroughbred training centre
and a 49% joint venture interest in Laurel Gaming LLC, a joint
venture established to pursue gaming opportunities at the Maryland
properties (note 7).
Basis of Presentation
The accompanying unaudited interim consolidated
financial statements include the accounts of MID and its
subsidiaries (collectively "MID" or the "Company").
(b) Consolidated Financial Statements
The accompanying unaudited interim consolidated
financial statements have been prepared in U.S. dollars following
United States generally accepted accounting principles ("U.S.
GAAP") and the accounting policies as set out in note 1 to the
annual consolidated financial statements for the year ended
December 31, 2009.
The accompanying unaudited interim consolidated
financial statements do not conform in all respects to the
requirements of U.S. GAAP 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,
2009.
The preparation of interim consolidated
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
amounts reported in the interim consolidated financial statements
and accompanying notes. Actual results could differ from these
estimates. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments,
which are of a normal recurring nature except as disclosed in note
1(c), necessary to present fairly the financial position at
December 31, 2010 and 2009, and the results of operations and cash
flows for the three-month periods and years ended December 31, 2010
and 2009.
(c) Deconsolidation of MEC
As a result of the MEC Chapter 11 filing on the
Petition Date as described in note 2 to the accompanying unaudited
interim consolidated financial statements, the Company concluded
that, under U.S. GAAP, it ceased to have the ability to exert
control over MEC on or about the Petition Date. Accordingly,
the Company's investment in MEC was deconsolidated from the
Company's results beginning on the Petition Date.
Prior to the Petition Date, MEC's results were
consolidated with the Company's results, with outside ownership
accounted for as a noncontrolling interest. As of the
Petition Date, the Company's consolidated balance sheet included
MEC's net assets of $84.3 million. As of the Petition Date,
the Company's total equity also included accumulated other
comprehensive income of $19.8 million and a noncontrolling interest
of $18.3 million related to MEC.
Upon deconsolidation of MEC, the Company
recorded a $46.7 million reduction to the carrying values of its
investment in, and amounts due from, MEC, which is computed as
follows:
Reversal of MEC's net
assets |
$ (84,345) |
Reclassification to income of MEC's accumulated
other comprehensive income (note
14) |
19,850 |
Reclassification to income of the noncontrolling
interest in MEC (note
15) |
18,322 |
|
(46,173) |
Fair value adjustment to loans receivable from MEC
|
(504) |
Deconsolidation adjustment to the
carrying valuesof MID's investment in, and amounts due from,
MEC |
$ (46,677) |
U.S. GAAP requires the carrying values of any
investment in, and amounts due from, a deconsolidated subsidiary to
be adjusted to their fair value at the date of
deconsolidation. In light of the significant uncertainty, at
the Petition Date, as to whether MEC shareholders, including MID,
would receive any recovery at the conclusion of MEC's Chapter 11
process, the carrying value of MID's equity investment in MEC was
reduced to zero. Although, subject to the uncertainties of
MEC's Chapter 11 process, MID management believed at the Petition
Date that the claims of MID Islandi s.f. (the "MID Lender") were
adequately secured and therefore had no reason to believe that the
amount of the MEC loan facilities with the MID Lender was impaired
upon deconsolidation of MEC, a reduction in the carrying values of
the MEC loan facilities (note 3(a)) was required under U.S. GAAP,
reflecting the fact that certain of the MEC loan facilities bore
interest at a fixed rate of 10.5% per annum, which was not
considered to be reflective of the market rate of interest that
would have been used had such facilities been established on the
Petition Date. The fair value of the loans receivable from
MEC was determined at the Petition Date based on the estimated
future cash flows of the loans receivable from MEC being discounted
to the Petition Date using a discount rate equal to the London
Interbank Offered Rate ("LIBOR") plus 12.0%. The discount
rate was equal to the interest rate charged to MEC on the secured
non-revolving debtor-in-possession financing facility (the "DIP
Loan") that was implemented as of the Petition Date, and therefore
was considered to approximate a reasonable market interest rate for
the MEC loan facilities for this purpose. Accordingly, upon
deconsolidation of MEC, the Company reduced its carrying values of
the MEC loan facilities by $0.5 million (net of derecognizing $1.9
million of unamortized deferred arrangement fees at the Petition
Date). As a result, the adjusted aggregate carrying values of
the MEC loan facilities at the Petition Date was $2.4 million less
than the aggregate face value of the MEC loan facilities. The
adjusted carrying values were accreted up to the face value of the
MEC loan facilities over the estimated period of time before the
loans were expected to be repaid, with such accretion being
recognized in "interest and other income from MEC" on the
accompanying unaudited interim consolidated statements of loss.
(d) Seasonality
The Racing & Gaming Business is seasonal in
nature and racing revenues and operating results for any period are
not indicative of the racing revenues and operating results for any
year. The racing operations historically operate at a loss in the
second half of the year, with the third quarter typically
generating the largest operating loss. This seasonality
results in large quarterly fluctuations in revenues, operating
results and cash flows.
(e) Accounting Changes
Consolidation of Variable Interest
Entities
In June 2009, the Financial Accounting Standards
Board (the "FASB") issued Accounting Standards Codification ("ASC")
810-10, "Consolidation". ASC 810 requires a qualitative
rather than a quantitative analysis to determine the primary
beneficiary of a variable interest entity ("VIE"), amends the
variable interest model's consideration of related party
relationships in the determination of the primary beneficiary of a
VIE by providing, among other things, an exception with respect to
de facto agency relationships in certain circumstances, amends the
criteria for determining whether fees paid to a decision maker and
other service contracts are variable interests, requires continuous
assessments of whether an enterprise is the primary beneficiary of
a VIE and requires enhanced disclosures about an enterprise's
involvement with a VIE. These amendments are effective as of
the beginning of an enterprise's first annual reporting period that
begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting
periods thereafter. The adoption of ASC 810, effective
January 1, 2010, did not have any impact on the Company's
consolidated financial statements.
Fair Value Measurements
In January 2010, the FASB issued Accounting
Standards Update ("ASU") # 2010-06, "Improving Disclosures about
Fair Value Measurements" ("ASU 2010-06"), which amends Accounting
Standards Codification 820, "Fair Value Measurements and
Disclosures" ("ASC 820"), to require various additional disclosures
regarding fair value measurements and also clarify certain existing
disclosure requirements. Under ASU 2010-06, an enterprise is
required to: (i) disclose separately the amounts of significant
transfers between Level 1 and Level 2 of the fair value hierarchy,
(ii) disclose activity in Level 3 fair value measurements including
transfers into and out of Level 3 and the reasons for such
transfers and (iii) present separately in the reconciliation of
recurring Level 3 measurements information about purchases, sales,
issuances and settlements on a gross basis. The amendments
prescribed by ASU 2010-06 are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements of
recurring Level 3 fair value measurements, which are effective for
fiscal years beginning after December 15, 2010. The adoption
of ASU 2010-06, effective January 1, 2010, did not have any impact
on the Company's consolidated financial statements, except for the
additional disclosure requirements prescribed by ASU 2010-06.
Subsequent Events
In February 2010, the FASB issued Accounting
Standards Update # 2010-09, "Subsequent Events - Topic 855 -
Amendments to Certain Recognition and Disclosure Requirements"
("ASU 2010-09"). ASU 2010-09 removes the requirement for a
Securities and Exchange Commission ("SEC") filer to disclose the
date through which subsequent events have been evaluated.
Additionally, ASU 2010-09 clarifies that if the financial
statements have been revised, then an entity that is not an SEC
filer should disclose both the date that the financial statements
were issued or available to be issued and the date the revised
financial statements were issued or available to be issued.
These amendments remove potential conflicts with the SEC's
literature. The amendments were effective upon issuance of
the final update to ASU 2010-09. The adoption of ASU 2010-09
did not have any impact on the Company's consolidated financial
statements other than the Company no longer disclosing the date
through which subsequent events have been evaluated.
Multiple-Deliverable Revenue
Arrangements
In September 2009, the FASB amended ASC 605,
"Revenue Recognition: Multiple-Deliverable Revenue
Arrangements". ASC 605 has been amended: (1) to provide
updated guidance on whether multiple deliverables exist, how the
deliverables in an arrangement should be separated and the
consideration allocated; (2) to require an entity to allocate
revenue in an arrangement using estimated selling prices of
deliverables if a vendor does not have third-party evidence of
selling price; and (3) to eliminate the use of the residual method
and require an entity to allocate revenue using the relative
selling price method. The amendments are effective for fiscal
years beginning on or after June 30, 2010 and adoption may be
either prospective or retrospective. The Company is currently
evaluating the potential impact on the consolidated financial
statements.
Stock-Based Compensation
In April 2010, the FASB issued ASU 2010-13,
"Compensation - Stock Compensation: Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of
the Market in Which the Underlying Equity Security Trades".
ASU 2010-13 provides guidance on the classification of a
share-based payment award as either equity or a liability. A
share-based payment that contains a condition that is not a market,
performance, or service condition is required to be classified as a
liability. ASU 2010-13 is effective for fiscal years
beginning on or after December 15, 2010. The Company is
currently evaluating the potential impact on the consolidated
financial statements.
2. PARTICIPATION IN MEC'S BANKRUPTCY,
ASSET SALES AND ASSETS TRANSFERRED TO MID
(a) Chapter 11 Filing and Plan of
Reorganization
On the Petition Date, the Debtors filed
voluntary petitions for reorganization under the Bankruptcy Code in
the Court and were granted recognition of the Chapter 11
proceedings from the Ontario Superior Court of Justice under
section 18.6 of the Companies' Creditors Arrangement Act in
Canada.
MEC filed for Chapter 11 protection in order to
implement a comprehensive financial restructuring and conduct an
orderly sales process for its assets. Under Chapter 11, the
Debtors operated as "debtors-in-possession" under the jurisdiction
of the Court and in accordance with the applicable provisions of
the Bankruptcy Code and orders of the Court. In general, the
Debtors were authorized under Chapter 11 to continue to operate as
an ongoing business, but could not engage in transactions outside
the ordinary course of business without the prior approval of the
Court. The filing of the Chapter 11 petitions constituted an
event of default under certain of the Debtors' debt obligations,
including those with the MID Lender, and those debt obligations
became automatically and immediately due and payable.
However, subject to certain exceptions under the Bankruptcy Code,
the Debtors' Chapter 11 filing automatically enjoined, or stayed,
the continuation of any judicial or administrative proceedings or
other actions against the Debtors or their property to recover on,
collect or secure a claim arising prior to the Petition Date.
The Company did not guarantee any of the Debtors' debt obligations
or other commitments. Under the priority scheme established
by the Bankruptcy Code, unless creditors agreed to different
treatment, allowed pre-petition claims and allowed post-petition
expenses must be satisfied in full before stockholders are entitled
to receive any distribution or retain any property in a Chapter 11
proceeding.
As a result of the MEC Chapter 11 filing, the
carrying value of MID's equity investment in MEC was reduced to
zero at the Petition Date. Under the Plan, on the date the
shares of Lone Star LP or substantially all the assets of Lone Star
LP are sold, all MEC stock will be cancelled and the holders of MEC
shares will not be entitled to nor receive or retain any property
or interest in property under the Plan, and the stock of the
Reorganized MEC will be issued and distributed to the administrator
retained by the Debtors as of the effective date to administer the
Plan.
On July 21, 2009, the MID Lender was named as a
defendant in an action commenced by the Creditors' Committee in
connection with the Debtors' Chapter 11 proceedings asserting,
among other things, fraudulent transfer and recharacterization or
equitable subordination of MID claims. On August 21, 2009,
the Creditors' Committee filed an amended complaint to add MID and
Mr. Frank Stronach, among others, as defendants, and to include
additional claims for relief, specifically a breach of fiduciary
duty claim against all defendants, a breach of fiduciary duty claim
against MID and the MID Lender, and a claim for aiding and abetting
a breach of fiduciary duty claim against all defendants. On
August 24, 2009, MID and the MID Lender filed a motion to dismiss
the claims against them by the Creditors' Committee. The
Court denied the motion on September 22, 2009. On October 16,
2009, MID and the MID Lender filed their answer to the complaint,
denying the allegations asserted against them.
On January 11, 2010, the Company announced that
MID, the MID Lender, MEC and the Creditors' Committee had agreed in
principle to the terms of a global settlement and release in
connection with the action. Under the terms of the
settlement, as amended, in exchange for the dismissal of the action
with prejudice and releases of MID, the MID Lender, their
affiliates, and all current and former officers and directors of
MID and MEC and their respective affiliates, the unsecured
creditors of MEC received on the effective date of the Plan on
April 30, 2010 cash of $89.0 million plus $1.5 million as a
reimbursement for certain expenses incurred in connection with the
action. Under the terms of the settlement, MID received the
Transferred Assets. The settlement and release was
implemented through the Plan.
On February 18, 2010, MID announced that MEC had
filed the Plan and Disclosure Statement in connection with the MEC
Chapter 11 proceedings which provided for, among other things, the
assets of MEC remaining after certain asset sales to be transferred
to MID, including, among other assets, Santa Anita Park, Golden
Gate Fields, Gulfstream Park (including MEC's interest in The
Village at Gulfstream Park™, a joint venture between MEC and Forest
City), Portland Meadows, AmTote and XpressBet. On March 23,
2010, the Plan was amended to include the transfer of MJC to
MID. On April 26, 2010, MID announced that the Plan was
confirmed by order of the Court. On April 30, 2010, the
closing conditions of the Plan were satisfied or waived, and the
Plan became effective following the close of business on April 30,
2010.
In satisfaction of MID's claims relating to the
2007 MEC Bridge Loan, the 2008 MEC Loan and the MEC Project
Financing Facilities (each discussed further in note 3(a)), in
addition to the assets of MEC that were transferred to MID on the
effective date of the Plan, MID received $19.9 million of the net
proceeds from the sale of Thistledown by the Debtors on July 29,
2010 and the unsecured creditors of MEC received the net proceeds
in excess of such amount (discussed further in note 2(b)). In
addition, the Plan provided that upon the completion of the sale of
Lone Star LP by the Debtors pursuant to an agreement previously
filed in the Court, the unsecured creditors of MEC will receive the
first $20.0 million of the net proceeds from such sale and MID will
receive any net proceeds in excess of such amount, which is
estimated to be $27.0 million. The estimated proceeds of
$27.0 million will consist of $12.0 million in cash and a note
receivable of $15.0 million. The note receivable will bear interest
at 5.0% per annum and will be repaid in three $5.0 million
installments plus accrued interest every 9 months from the date of
closing. As a result, the note receivable will mature 27 months
after closing. The note receivable is unsecured but has been
guaranteed by the parent company of the purchaser. From the
effective date of the Plan to November 30, 2010, the unsecured
creditors and MID funded the costs and expenses incurred in
connection with the operations of Lone Star LP on a pro rata basis
based upon their respective proceeds. Following November 30, 2010
to the date the Lone Star LP sale is consummated, MID will no
longer fund the costs and expenses incurred in connection with the
operations of Lone Star LP. The Company has determined that it
effectively received a variable interest in Lone Star LP. As
a result of the bankruptcy, the power to direct the activities that
impact Lone Star LP's economic performance ultimately rests with
the administrator retained by the Debtors to administer the Plan
and, as such, the Company does not control the variable interest in
Lone Star LP. Based on the above, the Company has determined
that it is a non-primary beneficiary and accordingly, this VIE does
not meet the criteria for consolidation. The carrying value
of the VIE at December 31, 2010 represents the estimated net
proceeds MID is entitled to receive of $27.0 million from the sale
of Lone Star LP. The maximum possible loss exposure is $27.0
million at December 31, 2010.
The aggregate proceeds from the sale of Lone
Star LP are included in "receivable from Reorganized MEC" on the
accompanying unaudited interim consolidated balance sheets at
December 31, 2010. The risks and uncertainties relating to the sale
of Lone Star LP pursuant to the Plan include, among others:
- that the closing does not occur or is delayed;
- if closing does not occur, it is uncertain as to how long the
process for the marketing and sale of such asset will take;
and
- if closing does not occur, there is uncertainty as to whether
or at what price such asset will be sold or whether any bids by any
third party for such asset will materialize or be successful.
MID also has the right to receive any proceeds
from the litigation by MEC against PA Meadows, LLC currently
pending in the Court and future payments under the holdback
agreement relating to MEC's prior sale of The Meadows racetrack
(note 22(m)) and litigation against Cushion Track Footing USA, LLC
relating to the failure to install a racing surface at Santa Anita
Park suitable for the purpose for which it was intended (note
22(k)).
Under the Plan, rights of MID and MEC against
MEC's directors' and officers' insurers were preserved with regard
to the settlement in order to seek appropriate compensation for the
releases of all current and former officers and directors of MID
and MEC and their respective affiliates. On July 19, 2010,
September 2, 2010 and October 29, 2010, MID received $13.0 million,
$5.9 million and $2.5 million, respectively, for an aggregate total
of $21.4 million of compensation from MEC's directors' and
officers' insurers. Pursuant to the Plan, on April 30,
2010, MID also received $51.0 million of the amounts previously
segregated by the Debtors from the sale of Remington Park.
(b) MEC Asset Sales
The Debtors' Chapter 11 filing contemplated the
Debtors selling all or substantially all their assets through an
auction process and using the proceeds to satisfy claims against
the Debtors, including indebtedness owed to the MID Lender. Since
the Petition Date, the Debtors have entered into and completed
various asset sales, including assets sold pursuant to orders
obtained by the Debtors from the Court in the Chapter 11
cases. The auction process was suspended as a result of the
Plan, which addressed the disposition of the Debtors' remaining
assets.
On July 31, 2009, the Court approved the
Debtors' motion for authorization to sell for 6.5 million euros the
assets of one of MEC's non-debtor Austrian subsidiaries, which
assets include Magna Racino™ and surrounding lands, to an entity
affiliated with Fair Enterprise Limited, a company that forms part
of an estate planning vehicle for the family of Frank Stronach,
certain members of which are trustees of the Stronach Trust, MID's
controlling shareholder. The sale transaction was completed
on October 1, 2009 and the net proceeds were used to repay existing
indebtedness secured by the assets.
On August 26, 2009, the Court approved the sale,
by an Austrian non-debtor subsidiary of MEC to a third party, of
the company that owns and operates the Austrian plant that
manufactures StreuFex™, for certain contingent future
payments. The sale was completed on September 1,
2009.
On August 26, 2009, the Court approved the
Debtors entering into a stalking horse bid to sell Remington Park
to Global Gaming RP, LLC for $80.25 million, subject to higher and
better offers. Following an auction, no additional offers
were received, and on September 15, 2009, the Court approved the
sale of Remington Park to Global Gaming RP, LLC. The sale of
Remington Park was completed on January 1, 2010. On January
4, 2010, the Debtors paid $27.8 million of the net sale proceeds to
the MID Lender as partial repayment of the DIP Loan. The
balance of the net sales proceeds of $51.0 million was distributed
to the MID Lender subsequent to the effective date of the Plan, on
May 3, 2010.
Following an auction, on September 2, 2009, the
Court approved the sale of the Ocala lands to a third party at a
price of $8.1 million and the sale closed on September 17,
2009. On October 28, 2009, the Debtors paid the net sales
proceeds of $7.6 million to the MID Lender as a partial repayment
of the DIP Loan.
Following an auction, on October 29, 2009, the
Court approved the sale of Lone Star LP to a third party for $62.8
million, comprised of $47.7 million of cash and the assumption by
the purchaser of the $15.1 million capital lease for the
facility. The sale of Lone Star LP is anticipated to be
completed by the third quarter of 2011, subject to regulatory
approval.
Following an auction, on November 18, 2009, the
Court approved the sale of the Dixon lands to Ocala Meadows Lands
LLC, a company controlled by Frank Stronach, for approximately $3.1
million and the sale closed on November 30, 2009. On November
30, 2009, the Debtors paid the net sales proceeds of $3.0 million
to the MID Lender as a partial repayment of the DIP Loan.
Following an auction, on May 25, 2010, the Court
approved the sale of Thistledown to a third party for $43.0 million
and the sale closed on July 27, 2010. On July 29, 2010, the
Debtors paid the first $20.0 million ($19.9 million, net of
transaction costs) of the proceeds to the MID Lender in accordance
with the Plan.
(c) Acquisition of Transferred
Assets
The Company accounted for the transfer of the
Transferred Assets, in satisfaction of MID's claims relating to the
2007 MEC Bridge Loan, the 2008 MEC Loan and the MEC Project
Financing Facilities, with an estimated fair value of $347.1
million less $40.0 million of cash acquired at April 30, 2010 and
the cash payment of $89.0 million to the unsecured creditors of MEC
plus $1.5 million as a reimbursement for certain expenses incurred
in connection with the action commenced by the Creditors'
Committee, under the acquisition method of accounting. Accordingly,
the fair value of the consideration was allocated to the net assets
acquired and liabilities assumed based on the determination of fair
values at April 30, 2010. Determination of fair value
required the use of significant assumptions and estimates including
future expected cash flows and applicable discount rates and the
use of third-party valuations. The purchase consideration and
related allocations are preliminary due to certain estimates made
relating to amounts recoverable from the Reorganized MEC,
pre-petition accounts receivable on account of track wagering, the
completion of bankruptcy proceedings related to expected allowed
administrative, priority and other claims to be paid by the Company
under the Plan, the finalization of litigation proceedings,
including litigation proceedings against PA Meadows, LLC (note
22(m)) and Cushion Track Footing USA, LLC (note 22(k)) and the
determination of future tax balances associated with differences
between estimated fair value and the tax bases of assets acquired
and liabilities assumed. The purchase price is preliminary
and will be completed within one year of the acquisition. The
Company's preliminary allocation of the fair value of assets
acquired and liabilities assumed is as follows:
Assets acquired: |
|
|
Restricted
cash |
$ 10,190 |
|
Accounts
receivable |
65,053 |
|
Current portion of receivable from
Reorganized MEC |
53,252 |
|
Other current
assets |
20,479 |
|
Receivable from Reorganized MEC |
15,000 |
|
Real estate
properties |
375,944 |
|
Fixed
assets |
17,517 |
|
Intangible
assets |
29,200 |
|
Goodwill |
41,004 |
|
Other non-current
assets |
38,157 |
|
|
$ 665,796 |
Liabilities assumed: |
|
|
Bank indebtedness
|
$ 41,910 |
|
Accounts payable and accrued
liabilities |
108,229 |
|
Income taxes
payable |
1,160 |
|
Long-term debt due within one
year |
74,039 |
|
Deferred revenue
|
5,328 |
|
Future tax
liabilities |
33,224 |
|
Other long-term
liabilities |
4,346 |
|
|
268,236 |
Total purchase price consideration
(net of $39,980 of transferred or acquired
cash) |
$ 397,560 |
The total preliminary purchase price
consideration of $397.6 million has been retrospectively adjusted
by $2.3 million to the date of acquisition due to additional
information obtained in the fourth quarter of 2010 relating to
certain preliminary amounts previously recorded for the above
assets acquired and liabilities assumed. The $2.3 million
purchase price consideration adjustment for the three-month period
ended December 31, 2010 represents a measurement period adjustment
and is retrospectively applied to the three-month period ended June
30, 2010 when the transfer of the assets was first recorded as an
adjustment to the purchase price consideration and related
allocation to the Transferred Assets.
In satisfaction of MID's claims relating to the
2007 MEC Bridge Loan, the 2008 MEC Loan and the MEC Project
Financing Facilities, the Company received the Transferred Assets
on April 30, 2010. The fair values of the assets acquired and
liabilities assumed were initially determined as at April 30, 2010
resulting in a $10.0 million impairment recovery related to the
loans receivable from MEC being recognized (note 3(a)).
However, as described above, certain of the fair values assigned to
the Transferred Assets as at April 30, 2010 were preliminary in
nature and subject to change in future reporting periods. As
the loans were considered settled on April 30, 2010, any further
changes to fair value are no longer considered an adjustment to the
impairment provision related to the loans receivable from MEC, but
rather are considered an adjustment to the fair values of the
purchase price consideration which has been presented as a
"purchase price consideration adjustment" on the consolidated
statements of loss on a retrospective basis as at April 30, 2010,
with such changes being recorded as an adjustment to the opening
deficit for the three-month period ended December 31, 2010.
Accordingly, the changes in the fair values of the Transferred
Assets in the three-month period ended December 31, 2010 of $2.3
million has been recorded as an adjustment to the opening deficit
in order to give effect to the retrospective adjustment. The
purchase price consideration adjustment for the year ended December
31, 2010 is comprised of the following items:
Directors' and officers' insurance
proceeds(a)
|
$ 8,400 |
Bankruptcy claims(b)
|
11,229 |
Changes in fair value of net assets retained under
the Plan(c)
|
1,398 |
Purchase price consideration
adjustment |
$ 21,027 |
(a) Directors' and Officers' Insurance
Proceeds
Under the Plan, rights of MID and MEC against
MEC's directors' and officers' insurers are preserved with regard
to the settlement in order to seek appropriate compensation for the
release of all current and former officers and directors of MID and
MEC and their respective affiliates. MID is entitled to
receive such compensation, if any, from MEC's directors' and
officers' insurers. At April 30, 2010, MID was in continued
discussions with the insurers regarding its claim. Given the
complex nature of the claim and related discussions, the expected
proceeds could not be reasonably estimated. During the
measurement period, settlement agreements were subsequently entered
into in September 2010 and October 2010 with the insurers,
resulting in MID receiving compensation of $5.9 million and $2.5
million, respectively. Given that these events confirmed
facts and circumstances that existed at April 30, 2010, the Company
recognized an adjustment of $8.4 million to the purchase price
consideration and related allocations to the Transferred Assets on
April 30, 2010 and is included in "purchase price consideration
adjustment" on the consolidated statements of loss for the year
ended December 31, 2010.
(b) Bankruptcy Claims
At April 30, 2010, the settlement of allowed
administrative, priority and other claims which the Company assumed
under the Plan were ongoing and subject to Bankruptcy Court
approval. Consequently, at each reporting date during the
measurement period, the Company makes estimates of such settlements
based on claims that have been resolved, continue to be objected to
and/or negotiated and claims which are still pending Bankruptcy
Court approval. As a result, the Company revised the
estimates related to expected allowed administrative, priority and
other claims assumed by the Company under the Plan by approximately
$11.2 million as a result of information received and/or the cash
settlement of certain allowed administrative, priority and other
claims previously outstanding. Accordingly, the Company
recognized an adjustment of $11.2 million to the purchase price
consideration and related allocations to the Transferred Assets on
April 30, 2010 and is included in "purchase price consideration
adjustment" on the consolidated statements of loss for the year
ended December 31, 2010.
(c) Changes in Fair Value of Net Assets
Retained Under the Plan
At April 30, 2010, the Company estimated the
working capital, including pre-petition accounts receivable on
account of track wagering and litigation and other accruals, of the
Transferred Assets under the Plan. During the measurement
period, the Company revised its estimates relating to pre-petition
accounts receivable relating to track wagering and litigation
accruals and other liabilities as a result of information obtained
relating to the estimated and/or actual settlement of such
amounts. As a result of changes in fair value of the
Transferred Assets, there was a corresponding change in the
determination of future tax balances associated with differences
between estimated fair value and tax bases of assets acquired and
liabilities assumed. Accordingly, the Company recognized an
adjustment of $1.4 million to the purchase price consideration and
related allocations to the Transferred Assets on April 30, 2010 and
is included in "purchase price consideration adjustment" on the
consolidated statements of loss for the year ended December 31,
2010.
Goodwill arose from the acquisition of
XpressBet, MJC and AmTote. Goodwill arising from the acquisition of
XpressBet of $10.4 million is deductible for tax purposes and the
remainder arising from the acquisition of MJC and AmTote in the
aggregate amount of $30.6 million is not deductible for tax
purposes.
The fair values of the assets of the racing
businesses, with the exception of MJC, were assessed based on the
underlying real estate as this was determined to be the highest and
best use. The fair values of the real estate were determined
based on external real estate appraisals on a market approach using
estimated prices at which comparable assets could be purchased and
adjusted in respect of costs associated with conversion to use the
properties contemplated in the real estate appraisal. In the
case of MJC, the fair values were established based on the sale
transaction with Penn National Gaming, Inc. ("Penn") (note 7).
The fair values of fixed assets, which include
machinery and equipment and furniture and fixtures, were determined
based on a market approach using current prices at which comparable
assets could be purchased under similar circumstances.
Intangible assets include customer contracts,
software technology and a trademark. The fair values of the
intangible assets were determined in consultation with an external
valuator. The fair value of the customer contracts was
determined using a discounted cash flow analysis under the income
valuation methodology. The income approach required
estimating a number of factors including projected revenue growth,
customer attrition rates, profit margin and the discount
rate. Projected revenue growth, customer attrition rates and
profit margin were based upon past experience and management's best
estimate of future operating results. The discount rate
represents the respective entity's weighted average cost of capital
including a risk premium where warranted. Customer contracts
of $12.1 million are amortized over the term of the contract, which
range from 3 to 8 years. The fair value of the software
technology was based on the relief-from-royalty valuation
methodology, which estimates the incremental cash flows accruing to
the owner of the software technology by virtue of the fact that the
owner does not have to pay a royalty to another party for use of
the asset. The incremental cash flows were derived from
applying a royalty rate to estimates of the entity's projected
revenues. The royalty rate was determined by comparing
third-party licensing transactions to the entity's operations.
The discount rate applied was based upon the respective
entity's weighted average cost of capital including a risk premium
where warranted. Software technology of $13.0 million is
amortized on a straight-line basis over 5 years. The
trademark was also determined based on the relief-from-royalty
valuation methodology using similar inputs described above.
The trademark of $4.1 million, which is active and relates to
corporate identification, has an indefinite life and therefore is
not amortized.
Other non-current assets primarily represent a
50% joint venture interest in The Village at Gulfstream Park™
("VGP"). Fair value of VGP was determined based on an
external real estate appraisal using a discounted cash flow
analysis under the income valuation method.
Due to the short period to maturity, the
carrying values of bank indebtedness and long-term debt due within
one year approximate fair value.
Other long-term liabilities relate primarily to
pension liabilities. The Company, in consultation with actuaries,
determined the assumptions used in assessing the fair value of the
pension liabilities relating to the two pension plans as
follows:
- the assumed discount rate for each pension plan reflects market
rates for high quality fixed income investments currently available
whose cash flows match the timing and amount of expected benefit
payments;
- the expected long-term rate of return on plan assets was
determined by considering the plans' current investment mix and the
historical and expected future performance of these investment
categories; and
- the average rate of increase in compensation levels was
determined based on past salary history and expectations on salary
progression.
The remaining identifiable assets and
liabilities were primarily cash and cash equivalents, restricted
cash, accounts receivable, other current assets, accounts payable
and accrued liabilities, income taxes payable and deferred revenue,
for which carrying value approximates fair value. The current
portion of the receivable from Reorganized MEC relates to insurance
recovery proceeds as well as the proceeds from the sale of
Thistledown received subsequent to the date the Transferred Assets
were transferred to MID under the Plan and the current portion of
the expected proceeds from the sale of Lone Star LP. Due to
the short-term nature of these amounts, the book value approximates
fair value. The proceeds from insurance recoveries were
received in July 2010, September 2010 and October 2010 and proceeds
from the sale of Thistledown were received in July 2010.
Receivable from Reorganized MEC includes the long-term portion of
the expected proceeds from the sale of Lone Star LP. The closing of
the sale of Lone Star LP is expected by the third quarter of 2011.
MID expects to receive proceeds of $12.0 million in cash and a note
receivable of $15.0 million. The note receivable will bear interest
at 5.0% per annum and will be repaid in three $5.0 million
instalments plus accrued interest every 9 months from the date of
closing. As a result, the note receivable will mature 27 months
after closing. The note receivable is unsecured but has been
guaranteed by the parent company of the purchaser. The fair value
of the note receivable approximates the carrying value as it bears
interest at current market rates negotiated between arms-length
parties.
The Company has determined that the presentation
of pro-forma information is impracticable as the businesses
acquired were previously combined with MEC, for which MEC incurred
costs that were not reflected in the operations acquired during the
Chapter 11 process. The financial results of the Transferred
Assets are included in the Company's consolidated financial
statements from the date of transfer of April 30, 2010. The
following represents revenues and net loss of the Transferred
Assets included in the accompanying unaudited interim consolidated
statements of loss since the date of transfer of April 30,
2010:
|
Three Months Ended |
|
Year
Ended |
|
December 31, |
|
December
31, |
|
2010 |
2009 |
|
2010 |
2009 |
Revenues |
$ 65,796 |
$ — |
|
$ 183,880 |
$ — |
Net loss |
$ (47,292) |
$ — |
|
$ (76,683) |
$ — |
3. TRANSACTIONS WITH RELATED PARTIES
Mr. Frank Stronach, who serves as the Chairman
of the Company, Magna and 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. Prior to
August 31, 2010, Magna was 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 owned 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 owned the shares carrying the substantial
majority of the votes of M Unicar. Effective August 31, 2010,
Magna's dual-class share capital structure described above was
eliminated pursuant to a court-approved plan of arrangement and
approval by Magna's shareholders and the Ontario Superior Court,
resulting in the Stronach Trust no longer having a controlling
interest in Magna. However, as Mr. Frank Stronach serves as
Chairman and Chief Executive Officer of the Company and Chairman of
Magna and also indirectly controls MID and owns the largest
shareholding of Magna, MID and Magna are still considered to be
related parties solely for accounting purposes.
(a) Loans to MEC
(i) The Company's loans receivable from
MEC, net consist of the following:
As at |
December 31,
2010 |
December 31,
2009 |
2007 MEC Bridge Loan |
$ — |
$ 139,166 |
Gulfstream Park Project
Financing |
— |
185,811 |
Remington Park Project
Financing |
— |
24,789 |
2008 MEC Loan |
— |
58,394 |
DIP Loan, net of unamortized deferred arrangement
fees of nil (2009 - $1,334) |
— |
45,044 |
Total loans outstanding from MEC |
— |
453,204 |
Less: valuation allowance |
— |
(90,800) |
Loans receivable from MEC,
net |
$ — |
$ 362,404 |
A summary of the changes in the valuation
allowance due to changes in the fair value of the Transferred
Assets at April 30, 2010 related to the loans receivable from MEC
is as follows:
|
Three Months Ended |
|
Year
Ended |
|
December 31, |
|
December 31, |
|
2010 |
2009 |
|
2010 |
2009 |
Balance, beginning of period |
$ — |
$ — |
|
$ 90,800 |
$ — |
Impairment provision |
— |
90,800 |
|
— |
90,800 |
Impairment
recovery related to loans
receivable from MEC |
— |
— |
|
(9,987) |
— |
Release of
valuation allowance on settlement
under the Plan (note 2(a)) |
— |
— |
|
(80,813) |
— |
Balance, end of period |
$ — |
$ 90,800 |
|
$ — |
$ 90,800 |
In connection with the development and
completion of the Plan (note 2), the Company estimated the values
and resulting recoveries of loans receivable from MEC, net of any
related obligations, provided to the Company pursuant to the terms
of the Plan. As a result of such analysis, the Company
estimated that it would be unable to realize on all amounts due in
accordance with the contractual terms of the MEC loans.
Accordingly, for the year ended December 31, 2009, the Company
recorded a $90.8 million impairment provision related to the loans
receivable from MEC, which represented the excess of the carrying
amounts of the loans receivable and the estimated recoverable
value. As a result of the transfer of the Transferred Assets under
the Plan effective April 30, 2010 (note 2(c)), the Company reduced
the impairment provision by $10.0 million in the three-month period
ended June 30, 2010 as a result of assessing the fair value of the
Transferred Assets on April 30, 2010. Estimated recoverable
value was determined based on the future cash flows from expected
proceeds to be received from Court-approved sales of MEC's assets,
discounted at the loans' effective interest rate, and the fair
value of the collateral based on third-party appraisals or other
valuation techniques, such as discounted cash flows, for those MEC
assets that were transferred to the Company under the Plan or for
which the Court has yet to approve for sale under the Plan, net of
expected allowed administrative, priority and other claims to be
paid by the Company under the Plan.
The estimates of values and recoveries involved
complex considerations and judgments concerning various factors
that affected the value of MEC's assets. Moreover, the value
of MEC's assets were subject to measurement uncertainty and
contingencies that were difficult to predict and fluctuated with
changes in factors affecting the financial conditions and prospects
of such assets. Because valuation recoveries and estimates
are made at a specific point in time and are inherently subject to
measurement uncertainty, such estimates could differ from actual
results.
A reconciliation of the changes in the
impairment recovery related to the loans receivable from MEC at the
date the Transferred Assets were acquired is presented below:
Directors' and officers' insurance
proceeds(a) |
$ 13,000 |
Sale proceeds from liquidated assets under the
Plan(b) |
7,538 |
Bankruptcy claims(c) |
(15,907) |
Changes in fair value of net assets retained under
the Plan(d) |
5,356 |
Impairment recovery for the period from
April 30, 2010 to December 31, 2010 |
$ 9,987 |
The significant changes in facts or
circumstances that resulted in the recognition of the $10.0 million
reduction in the impairment provision in the year ended December
31, 2010 are primarily as a result of the following:
(a) Directors' and Officers' Insurance
Proceeds
Under the Plan, rights of MID and MEC against
MEC's directors' and officers' insurers are preserved with regard
to the settlement in order to seek appropriate compensation for the
release of all current and former officers and directors of MID and
MEC and their respective affiliates. MID is entitled to
receive such compensation, if any, from MEC's directors' and
officers' insurers. At December 31, 2009, when the $90.8
million impairment provision relating to loans receivable from MEC
was initially determined, MID was in discussions with the insurers
regarding its claim. Given the complex nature of the claim
and related discussions, the expected proceeds could not be
reasonably estimated. A settlement agreement was subsequently
entered into in July 2010 with one of the insurers, resulting in
MID receiving compensation of $13.0 million. Given that these
events confirmed facts and circumstances that existed at April 30,
2010, the Company recognized an asset and reduced the impairment
provision by $13.0 million related to the Transferred Assets on
April 30, 2010 which is included in "impairment provision
(recovery) related to loans receivable from MEC" on the
consolidated statements of loss for the year ended December 31,
2010.
(b) Sale Proceeds from Liquidated Assets
Under the Plan
The estimates of sale proceeds from liquidated
assets under the Plan increased approximately $7.5 million
primarily as a result of the sale of Thistledown. Thistledown
was initially approved for sale in an auction on September 30,
2009; however, the purchaser had the right to terminate the
agreement, which it exercised. The sale of Thistledown went
back to auction on May 25, 2010 and the Bankruptcy Court approved
the sale of Thistledown to a third party which subsequently closed
on July 27, 2010. Given that the completion of the sale of
Thistledown confirmed facts and circumstances that existed at April
30, 2010, the Company used such information to establish the fair
value of Thistledown when assessing the fair value of the
underlying collateral of the loans. Accordingly, the Company
reduced the impairment provision by $7.5 million related to the
Transferred Assets on April 30, 2010 which is included in
"impairment provision (recovery) related to loans receivable from
MEC" on the consolidated statements of loss for the year ended
December 31, 2010.
(c) Bankruptcy Claims
The settlement of allowed administrative,
priority and other claims which the Company assumed under the Plan
is ongoing and subject to Bankruptcy Court approval.
Consequently, at each reporting date, the Company makes estimates
of such settlements based on claims that have been resolved,
continue to be objected to and/or negotiated and claims which are
still pending Bankruptcy Court approval. As a result, the
Company revised the estimates related to expected allowed
administrative, priority and other claims assumed by the Company
under the Plan by approximately $15.9 million as a result of
additional information received and/or the cash settlement of
certain allowed administrative, priority and other claims
previously outstanding. Accordingly, the Company increased
the impairment provision by $15.9 million related to the
Transferred Assets on April 30, 2010 which is included in
"impairment provision (recovery) related to loans receivable from
MEC" on the consolidated statements of loss for the year ended
December 31, 2010.
(d) Changes in Fair Value of Net Assets Retained
Under the Plan
At each reporting date, the Company estimated
the working capital of the Transferred Assets under the Plan based
on available unaudited internally prepared results and operating
projections. On the effective date of the Plan, the fair
value of the working capital differed from the original estimates
as a result of actual operating results and events related to the
bankruptcy process. The Company also estimated the fair value
of the real estate of the Transferred Assets taking into
consideration: (i) certain economic and industry information
relevant to the Transferred Assets' operating business; (ii)
various indications of interest received by MEC in connection with
the sales marketing efforts conducted by financial advisors of MEC
during the Chapter 11 proceedings; and (iii) third-party real
estate appraisals. Throughout the bankruptcy process and to the
effective date of the Plan, the Company continually updated such
information related to market conditions and assumptions related to
the real estate values based on the premise of highest and best
use. The appraisals included additional information related
to assumptions regarding potential uses, costs related to obtaining
appropriate entitlements and demolition costs, and comparable sales
data for real estate transactions in each jurisdiction. As a result
of changes in fair value of the Transferred Assets, there was a
corresponding change in the determination of future tax balances
associated with differences between estimated fair value and tax
bases of assets acquired and liabilities assumed.
Accordingly, the Company reduced the impairment provision by $5.4
million related to the Transferred Assets on April 30, 2010 which
is included in "impairment provision (recovery) related to loans
receivable from MEC" on the consolidated statements of loss for the
year ended December 31, 2010.
(ii) 2007 MEC Bridge Loan
On September 13, 2007, MID announced that the
MID Lender had agreed to provide MEC with a bridge loan of up to
$80.0 million (subsequently increased to $125.0 million as
discussed below) through a non-revolving facility (the "2007 MEC
Bridge Loan").
The 2007 MEC Bridge Loan was secured by certain
assets of MEC, including first ranking security over the
Thistledown land, second ranking security over Golden Gate Fields
and third ranking security over Santa Anita Park. In
addition, the 2007 MEC Bridge Loan was guaranteed by certain MEC
subsidiaries and MEC had pledged the shares and all other interests
MEC had 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 2007 MEC Bridge Loan initially had a
maturity date of May 31, 2008 and bore interest at a rate per annum
equal to LIBOR plus 10.0% prior to December 31, 2007, at which time
the interest rate on outstanding and subsequent advances was
increased to LIBOR plus 11.0%. On February 29, 2008, the
interest rate on outstanding and subsequent advances under the 2007
MEC Bridge Loan was increased by a further 1.0%.
During the year ended December 31, 2008, the
maximum commitment under the 2007 MEC Bridge Loan was increased
from $80.0 million to $125.0 million, MEC was given the ability to
re-borrow $26.0 million that had been repaid during the year ended
December 31, 2008 from proceeds of asset sales and MEC was
permitted to use up to $3.0 million to fund costs associated with
the November 2008 gaming referendum in Maryland. In addition,
the maturity date of the 2007 MEC Bridge Loan was extended from May
31, 2008 to March 31, 2009. However, as a result of a
reorganization proposal announced in November 2008 not proceeding,
such maturity date was accelerated to March 20, 2009. As a
result of MEC's Chapter 11 filing on March 5, 2009 (note 1(a)), the
2007 MEC Bridge Loan was not repaid when due. On the Petition
Date, the balance outstanding under the 2007 MEC Bridge Loan was
$125.6 million. Interest on the 2007 MEC Bridge Loan accrued
during the Debtors' Chapter 11 process rather than being paid in
cash.
The MID Lender received an arrangement fee of
$2.4 million (3% of the commitment) at closing in 2007 and received
an additional arrangement fee of $0.8 million on February 29, 2008
(1% of the then current commitment). In connection with the
amendments and maturity extensions during the year ended December
31, 2008, the MID Lender received aggregate fees of $7.0
million. The MID Lender also received a commitment fee equal
to 1% per annum of the undrawn facility. All fees, expenses
and closing costs incurred by the MID Lender in connection with the
2007 MEC Bridge Loan and the changes thereto were paid by MEC.
As of the effective date of the Plan, on April
30, 2010, in satisfaction of, among other things, MID's claim
relating to the 2007 MEC Bridge Loan, MID received the Transferred
Assets and all liens and security under the 2007 MEC Bridge Loan
were released. Accordingly, at December 31, 2010, no amounts
remained outstanding under the 2007 MEC Bridge Loan. At
December 31, 2009, $139.2 million due under the fully drawn 2007
MEC Bridge Loan was included in non-current portion of "loans
receivable from MEC, net" on the Company's consolidated balance
sheets.
(iii) MEC Project Financings
The MID Lender had made available separate
project financing facilities to Gulfstream Park Racing Association,
Inc. and Remington Park, Inc., the wholly-owned subsidiaries of MEC
that owned and/or operated 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 were
established with 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 contained cross-guarantee,
cross-default and cross-collateralization provisions. The
Remington Park project financing was secured by all assets of the
borrower (including first ranking security over the Remington Park
leasehold interest), excluding licences and permits, and was
guaranteed by the MEC subsidiaries that owned Gulfstream Park and
the Palm Meadows Training Center. The security package also
included 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 agreed not
to pledge any licences or permits held by it and MEC agreed not to
pledge the shares of the borrower or the owner of Gulfstream
Park. The Gulfstream Park project financing was guaranteed by
MEC's subsidiaries that owned and operated the Palm Meadows
Training Center and was secured principally by security over the
lands forming part of the operations at Gulfstream Park and the
Palm Meadows Training Center and over all other assets of
Gulfstream Park and the Palm Meadows Training Center, excluding
licences and permits (which were not subject to security under
applicable legislation). Prior to the completion of the sale
of Remington Park on January 1, 2010 (note 2), the Gulfstream Park
project financing was also guaranteed by MEC's subsidiary that
owned and operated Remington Park and was also secured by security
over the leasehold interest forming part of the operations at
Remington Park and over all other assets of Remington Park,
excluding licences and permits (which could not be subjected 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
were established with a maturity date of 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. The July 2006
and December 2006 amendments did not affect the fact that the
Gulfstream Park project financing facility continued to be
cross-guaranteed, cross-defaulted and cross-collateralized with the
Remington Park project financing facility.
Amounts outstanding under each of the MEC
Project Financing Facilities bore interest at a fixed rate of 10.5%
per annum compounded semi-annually and required repayment in
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 was also 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 was used to
pay capitalized interest on the Remington Park project financing
facility plus a portion of the principal under the facility equal
to the capitalized interest on the Gulfstream Park project
financing facility. For the year ended December 31, 2010, no
such payments were made (2009 - $2.0 million) given the MEC Chapter
11 proceedings.
In September 2007, the terms of the Gulfstream
Park project financing facility were amended such that: (i) MEC was
added as a guarantor under that facility; (ii) the borrower and all
of the guarantors agreed to use commercially reasonable efforts to
implement the MEC Debt Elimination Plan (note 4), including the
sale of specific assets by the time periods listed in the MEC Debt
Elimination Plan; and (iii) the borrower became obligated to repay
at least $100.0 million under the Gulfstream Park project financing
facility on or prior to May 31, 2008.
During the year ended December 31, 2008, the
deadline for repayment of at least $100.0 million under the
Gulfstream Park project financing facility was extended from May
31, 2008 to March 31, 2009. However, as a result of a
reorganization proposal announced in November 2008 not proceeding,
such maturity date was accelerated to March 20, 2009. In
connection with the amendments and maturity extensions during the
year ended December 31, 2008, the MID Lender received aggregate
fees of $3.0 million. As a result of the Debtors' Chapter 11
filing on March 5, 2009 (note 1(a)), the repayment of at least
$100.0 million under the Gulfstream Park project financing facility
was not made when due.
On the Petition Date, the balances outstanding
under the Gulfstream Park project financing facility and the
Remington Park project financing facility were $170.8 million and
$22.8 million, respectively. During the Debtors' Chapter 11
process, monthly principal and interest payments, as well as the
quarterly excess cash flow sweeps, under the MEC Project Financing
Facilities were stayed and interest accrued rather than being paid
in cash.
As of the effective date of the Plan, on April
30, 2010, in satisfaction of, among other things, MID's claim
relating to the MEC Project Financings, MID received the
Transferred Assets and all liens and security under the MEC Project
Financing Facilities were released. Accordingly, at December
31, 2010, no amounts remained outstanding under the MEC Project
Financing Facilities. At December 31, 2009, there were balances of
$185.8 million and $24.8 million due under the Gulfstream Park
project financing facility and the Remington Park project financing
facility, respectively, which are included in non-current portion
of "loans receivable from MEC, net" on the Company's consolidated
balance sheets.
In connection with the Gulfstream Park project
financing facility, MEC had 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) could be
funded. At December 31, 2009, the amount held under the Gulfstream
Escrow was $0.5 million. All funds in the Gulfstream Escrow
are reflected as "restricted cash" and "due to MEC" on the
Company's consolidated balance sheets. As of the effective
date of the Plan, on April 30, 2010, in satisfaction of MID's claim
relating to the MEC Project Financings, MID retained the escrow
proceeds.
(iv) 2008 MEC Loan
On November 26, 2008, concurrent with the
announcement of a reorganization proposal, MID announced that the
MID Lender had agreed to provide MEC with the 2008 MEC Loan of up
to a maximum commitment, subject to certain conditions being met,
of $125.0 million (plus costs and fees). The 2008 MEC Loan
bore interest at the rate of LIBOR plus 12.0%, was guaranteed by
certain subsidiaries of MEC and was secured by substantially all
the assets of MEC (subject to prior encumbrances). The 2008
MEC Loan was made available through two tranches of a non-revolving
facility.
|
|
|
Tranche 1 in the amount of up to $50.0 million
(plus costs and fees) was made available to MEC solely to fund (i)
operations, (ii) payments of principal or interest and other costs
under the 2008 MEC Loan and under other loans provided by the MID
Lender to MEC, (iii) mandatory payments of interest in connection
with other of MEC's existing debt, (iv) maintenance capital
expenditures and (v) capital expenditures required pursuant to the
terms of certain of MEC's joint venture arrangements with third
parties. |
|
|
|
In connection with Tranche 1 of the 2008 MEC Loan,
the MID Lender charged an arrangement fee of $1.0 million (2% of
the commitment), such amount being capitalized to the outstanding
balance of Tranche 1 of the 2008 MEC Loan. The MID Lender was
also entitled to a commitment fee equal to 1% per annum of the
undrawn facility. All fees, expenses and closing costs
incurred by the MID Lender in connection with the 2008 MEC Loan
were capitalized to the outstanding balance of Tranche 1 of the
2008 MEC Loan. |
|
|
|
Tranche 1 had an initial maturity date of March
31, 2009 but as a result of the reorganization proposal announced
in November 2008 not proceeding, such maturity date was accelerated
to March 20, 2009. As a result of the Debtors' Chapter 11
filing on March 5, 2009 (note 1(a)), Tranche 1 of the 2008 MEC Loan
was not repaid when due. |
|
|
|
Tranche 2 in the amount of up to $75.0 million
(plus costs and fees) was to be used by MEC solely to fund (i) up
to $45.0 million (plus costs and fees) in connection with the
application by MEC's subsidiary, Laurel Park, for a Maryland slots
licence and related matters and (ii) up to $30.0 million (plus
costs and fees) in connection with the construction of the
temporary slots facility at Laurel Park, following receipt of the
Maryland slots licence. In addition to being secured by
substantially all the assets of MEC, Tranche 2 of the 2008 MEC Loan
was also to be guaranteed by the MJC group of companies and secured
by all of such companies' assets. |
|
|
|
In February 2009, MEC's subsidiary, Laurel Park,
submitted an application for a Maryland video lottery terminal
licence (the "MEC VLT Application") and drew $28.5 million under
Tranche 2 of the 2008 MEC Loan in order to place the initial
licence fee in escrow pending resolution of certain issues
associated with the application. Subsequently, MEC was
informed by the Maryland VLT Facility Location Commission that the
MEC VLT Application was not accepted for consideration as it had
been submitted without payment of the initial licence fee of $28.5
million. Accordingly, MEC repaid $28.5 million to the MID
Lender under Tranche 2 of the 2008 MEC Loan. |
|
|
|
In connection with the February 2009 advance under
Tranche 2 of the 2008 MEC Loan, the MID Lender charged an
arrangement fee of $0.6 million, such amount being capitalized to
the outstanding balance of Tranche 2 of the 2008 MEC Loan.
The MID Lender was also entitled to a commitment fee equal to 1%
per annum of the undrawn amount made available under Tranche 2 of
the 2008 MEC Loan. All fees, expenses and closing costs
incurred by the MID Lender in connection with Tranche 2 were
capitalized to the outstanding balance of Tranche 2 under the 2008
MEC Loan. The initial maturity date of Tranche 2 was December
31, 2011, which, as a result of the MEC VLT Application not being
accepted for consideration, was accelerated in accordance with the
terms of the loan to May 13, 2009. As a result of the
Debtors' Chapter 11 filing on March 5, 2009 (note 1(a)), there was
an automatic stay of any action to collect, assert or recover on
the 2008 MEC Loan. |
On the Petition Date, the balance outstanding
under the 2008 MEC Loan was $52.5 million. Interest and fees on the
2008 MEC Loan accrued during the Debtors' Chapter 11 process rather
than being paid in cash. As of the effective date of the
Plan, on April 30, 2010, in satisfaction of MID's claim relating to
the 2008 MEC Loan, MID received the Transferred Assets and all
liens and security under the 2008 MEC Loan were released.
Accordingly, at December 31, 2010, no amounts remained outstanding
under the 2008 MEC Loan. At December 31, 2009, $58.4 million due
under the 2008 MEC Loan was included in non-current portion of
"loans receivable from MEC, net" on the Company's consolidated
balance sheets.
(v) DIP Loan
In connection with the Debtors' Chapter 11
filing (note 1(a)), the MID Lender originally agreed to provide a
six-month secured non-revolving DIP Loan to MEC in the amount of up
to $62.5 million. The DIP Loan initial tranche of up to $13.4
million was made available to MEC on March 6, 2009 pursuant to
approval of the Court and an interim order was subsequently entered
by the Court on March 13, 2009.
On April 3, 2009, MEC requested an adjournment
until April 20, 2009 for the Court to consider the motion for a
final order relating to the DIP Loan. The Court granted the
request and authorized an additional $2.5 million being made
available to MEC under the DIP Loan pending the April 20, 2009
hearing.
On April 20, 2009, the DIP Loan was amended to,
among other things, (i) extend the maturity from September 6, 2009
to November 6, 2009 in order to allow for a longer marketing period
in connection with MEC's asset sales and (ii) reduce the principal
amount available from $62.5 million to $38.4 million, with the
reduction attributable to the fact that interest on the
pre-petition loan facilities between MEC and the MID Lender accrued
during the Chapter 11 process rather than being paid in cash. The
final terms of the DIP Loan were presented to the Court on April
20, 2009 and the Court entered a final order authorizing the DIP
Loan on the amended terms on April 22, 2009.
Under the terms of the DIP Loan, MEC was
required to pay an arrangement fee of 3% (on each tranche as it was
made available) and advances bore interest at a rate per annum
equal to LIBOR plus 12.0%. MEC was also required to pay a
commitment fee equal to 1% per annum on all undrawn amounts.
The DIP Loan was secured by liens on
substantially all assets of MEC and its subsidiaries (subject to
prior ranking liens of third parties), as well as a pledge of
capital stock of certain guarantors. Under the DIP Loan, MEC
could request funds to be advanced on a monthly basis and such
funds were to be used in accordance with an approved budget.
The terms of the DIP Loan contemplated that MEC would sell all or
substantially all its assets through an auction process and use the
proceeds from the asset sales to repay its creditors, including the
MID Lender.
On October 28, 2009, the Court entered a final
order authorizing amendments to the DIP Loan, which, among other
things, increased the principal amount available thereunder by
$26.0 million to up to $64.4 million and extended the maturity date
to April 30, 2010. The amended DIP Loan contemplated that MEC would
use its best efforts to market and sell all its assets, including
seeking stalking horse bidders, conducting auctions and obtaining
sales orders from the Court. If certain asset sale milestones were
not satisfied, there would be an event of default and/or additional
arrangement fees would be payable by MEC. The other fees and the
interest rate payable by MEC to the MID Lender under the amended
DIP Loan were unchanged. All advances under the amended DIP Loan
were to be made in accordance with an approved budget.
On March 3, 2010, the DIP Loan was further
amended and restated, such that an additional $7.0 million was
approved by the Court and made available to MEC under the DIP
Loan. Accordingly, the maximum commitment amount under the
DIP Loan was $71.4 million, of which no amounts remained available
to be borrowed by MEC at the effective date of the Plan and $33.0
million was outstanding as at April 30, 2010, the maturity date of
the DIP Loan. Under the Plan, a portion of the amounts held
in escrow by the Debtors reflecting the net proceeds from the sale
of the assets of Remington Park was used to pay and satisfy in full
all outstanding DIP Loan obligations on May 3, 2010.
Accordingly, at December 31, 2010, no amounts remained outstanding
under the DIP Loan. At December 31, 2009, $45.0 million, net
of $1.3 million of unamortized deferred arrangement fees, due under
the DIP Loan was included in the non-current portion of "loans
receivable from MEC, net" on the Company's consolidated balance
sheets.
To the Petition Date (note 1(a)), approximately
$9.4 million of external third-party costs were incurred in
association with these loan facilities between MEC and the MID
Lender. Prior to the Petition Date, these costs were
recognized as deferred financing costs at the MEC segment level and
were amortized into interest expense (of which a portion had been
capitalized in the case of the MEC Project Financing Facilities)
over the respective term of each of the loan facilities.
Prior to the Petition Date, such costs were charged to "general and
administrative" expenses at a consolidated level in the periods in
which they were incurred.
All interest and fees charged by the Real Estate
Business prior to the Petition Date relating to the loan
facilities, including any capitalization and subsequent
amortization thereof by MEC, and any adjustments to MEC's related
deferred financing costs, have been eliminated from the Company's
consolidated results of operations and financial position.
(b) Magna Lease Termination
During the three-month period ended June 30,
2010, the Company and Magna agreed to terminate the lease on a
property in the United States. In conjunction with the lease
termination, Magna agreed to pay the Company a fee of $1.9 million,
which amount will be collected based on a repayment schedule over
the remaining term of the original lease which was scheduled to
expire in September 2013. The amount has been recognized in
"other gains (losses)" in the Company's consolidated statements of
loss for the year ended December 31, 2010.
(c) MEC's Lease Termination
During the year ended December 31, 2007, the
Company acquired a 205 acre parcel of land located in Bonsall,
California from MEC, which currently houses the San Luis Rey Downs
Thoroughbred Training Facility. This property is being held
by MID for future development and MID agreed to lease the property
to MEC on a triple-net basis for nominal rent while MID pursues the
necessary development entitlements and other approvals. The
lease was scheduled to terminate on June 6, 2010, however, on
November 11, 2009, MEC elected to exercise its option to terminate
the agreement by providing MID four months written notice, as
stipulated in the agreement. The lease with MEC was scheduled
to terminate on April 11, 2010, however, on March 16, 2010, the
property was re-leased to San Luis Racing, Inc., a third party, on
a triple-net lease basis for nominal rent while MID continues to
pursue the necessary development entitlements and other
approvals.
(d) MEC's Real Estate Sales to
Magna
On March 5, 2009, MEC announced that one of its
subsidiaries in Austria had entered into an agreement to sell to a
subsidiary of Magna approximately 100 acres of real estate located
in Oberwaltersdorf, Austria for a purchase price of approximately
4.6 million euros ($6.0 million). The transaction was
completed on April 28, 2009.
4. DISCONTINUED OPERATIONS OF
MEC
On September 12, 2007, MEC's Board of Directors
approved a debt elimination plan (the "MEC Debt Elimination Plan")
to generate funds from, among other things, the sale of Great Lakes
Downs in Michigan, Thistledown in Ohio, Remington Park in Oklahoma
City and MEC's interest in Portland Meadows in Oregon. In
September 2007, MEC engaged a U.S. investment bank to assist in
soliciting potential purchasers and managing the sale process for
certain of these assets. In October 2007, the U.S. investment
bank began marketing Thistledown and Remington Park for sale and
initiated an active program to locate potential buyers.
However, MEC subsequently took over the sales process from the U.S.
investment bank and was in discussions with potential buyers of
these assets prior to the Petition Date. For additional
details on the sales of Remington Park and Thistledown, refer to
note 2.
In November 2007, MEC initiated a program to
locate a buyer for Portland Meadows and was marketing for sale its
interest in this property prior to the Petition Date.
In March 2008, MEC committed to a plan to sell
Magna Racino™. MEC had initiated a program to locate
potential buyers and, prior to the Petition Date, was marketing the
assets for sale through a real estate agent. For additional
details on the sales process for Magna Racino™, refer to note
2.
On July 16, 2008, MEC completed the sale of
Great Lakes Downs in Michigan for cash consideration of $5.0
million.
MEC's results of operations related to
discontinued operations for the three-month periods and years ended
December 31, 2010 and 2009 are shown in the following table.
There are no assets and liabilities related to MEC's discontinued
operations included in the Company's consolidated balance sheets as
at December 31, 2010 and 2009 given the deconsolidation of MEC at
the Petition Date.
|
Three Months
Ended |
|
Year Ended |
|
December 31, |
|
December 31, |
|
2010 |
20095 |
|
2010 |
20095 |
Revenues |
$ — |
$ — |
|
$ — |
$ 21,226 |
Costs and expenses |
— |
— |
|
— |
19,937 |
|
— |
— |
|
— |
1,289 |
Interest expense, net |
— |
— |
|
— |
505 |
Income from discontinued
operations |
— |
— |
|
— |
784 |
Eliminations (note
3(a)) |
— |
— |
|
— |
443 |
Consolidated income from
discontinued operations |
— |
— |
|
— |
1,227 |
Deduct income attributable to
noncontrolling interest |
— |
— |
|
— |
(363) |
Consolidated income from
discontinued
|
operations attributable to
MID |
$ — |
$ — |
|
$ — |
$ 864 |
5. REAL ESTATE PROPERTIES
(a) Real estate properties consist of:
|
December 31, |
December 31, |
As at |
2010 |
2009 |
Real Estate Business -
Revenue-producing properties |
Land and improvements |
$215,337 |
$219,962 |
Buildings, parking lots and roadways - cost |
1,412,204 |
1,418,989 |
Buildings, parking lots and roadways - accumulated
depreciation |
(455,034) |
(418,922) |
|
1,172,507 |
1,220,029 |
Real Estate Business - Development
properties |
Land and improvements |
132,303 |
169,816 |
Properties under development |
10,324 |
— |
|
142,627 |
169,816 |
Racing and Gaming
properties |
Land and improvements |
323,370 |
— |
Buildings, parking lots and roadways - cost |
27,314 |
— |
Buildings, parking lots and roadways - accumulated
depreciation |
(817) |
— |
|
349,867 |
— |
|
$1,665,001 |
$1,389,845 |
(b) |
During the year ended December 31, 2010, the
Company recorded a loss of $1.2 million resulting from the
disposition of 8.72 acres of land held for development.
In 2004, a wholly-owned subsidiary of the Company entered into an
agreement with the municipality in which the land is located that
if certain development did not occur within a specified period of
time, then the land would convey to the municipality. Such
development did not occur, resulting in the conveyance of the land
to the municipality. The loss on disposal of $1.2 million is
included in "gain (loss) on disposal of real estate" on the
consolidated statements of loss for the year ended December 31,
2010 and is included in the "Real Estate Business" operations
segment. |
|
During the year ended December 31, 2009, the
Company completed the sale of land and a vacant building for cash
consideration of $0.8 million and recorded a gain on disposal of
$0.2 million, which is included in "gain (loss) on disposal of real
estate" on the consolidated statements of loss for the year ended
December 31, 2009 and is included in the "Real Estate Business"
operations segment. |
(c) |
During the three-month period ended December 31,
2010, the Real Estate Business recorded impairment charges
totalling $40.6 million relating to parcels of land held for
development located in California, Florida, Michigan and Ilz,
Austria. In connection with the reorganization proposal
received in the fourth quarter of 2010 (note 24(a)), the Company
obtained information related to the above noted properties that
indicated the existence of potential impairments and inability to
recover the carrying value. The write-down represents the excess of
the carrying value of the assets over the estimated fair values
based on external real-estate appraisals. The write-down
reduced the cost of the land and was included in "write-down of
long-lived and intangible assets" on the consolidated statements of
loss for the year ended December 31, 2010 (note 17). |
|
As a result of further weakening in the commercial
office real estate market in Michigan, in the fourth quarter of
2009, the Real Estate Business recorded a $4.5 million write-down
of a revenue-producing commercial office building. The write-down
represents the excess of the carrying value of the asset over the
estimated fair value. Fair value was determined based on the
present value of the estimated future cash flows from the leased
property. The write-down reduced the cost of the building and
was included in "write-down of long-lived and intangible assets" on
the consolidated statements of loss for the three-month period and
year ended December 31, 2009. |
(d) |
During the three-month period and year ended
December 31, 2010, the Racing & Gaming Business expensed $3.3
million and $3.4 million, respectively, of capital expenditures
that could not be recovered through estimated undiscounted cash
flows at the respective racetracks which is included in "operating
costs" on the consolidated statements of loss. |
6. FIXED ASSETS
Fixed assets consist of:
|
December 31, |
December 31, |
As at |
2010 |
2009 |
Cost |
|
Machinery and equipment |
$14,439 |
$— |
|
Furniture and fixtures |
6,313 |
1,968 |
|
20,752 |
1,968 |
Accumulated depreciation |
|
Machinery and equipment |
(2,640) |
— |
|
Furniture and fixtures |
(2,890) |
(1,735) |
|
(5,530) |
(1,735) |
|
$15,222 |
$233 |
7. OTHER ASSETS
Other assets consist of:
|
December 31, |
December 31, |
As at |
2010 |
2009 |
Investments in unconsolidated joint ventures of
Racing & Gaming Business |
$38,527 |
$— |
Deferred leasing costs |
1,333 |
1,511 |
Long-term receivables |
958 |
554 |
Tenant inducements |
2,065 |
— |
Other |
102 |
— |
|
$42,985 |
$2,065 |
The Company's ownership percentages and carrying
values of its investments in unconsolidated joint ventures at
December 31, 2010 and 2009 are as follows:
|
|
December 31, |
December 31, |
|
Ownership % |
2010 |
2009 |
The Village at Gulfstream Park, LLC |
50% |
$32,041 |
$— |
HRTV, LLC(i) |
50% |
(188) |
— |
Maryland RE & R LLC(ii) |
51% |
6,674 |
— |
Laurel Gaming LLC |
49% |
— |
— |
|
|
$38,527 |
$— |
(i) |
The Company's investment in HRTV, LLC
is recorded beyond the current investment as the members have
committed to provide financial support. |
(ii) |
On May 6, 2010, the Company, through an indirect
wholly-owned subsidiary, entered into an agreement with a
wholly-owned subsidiary of Penn providing for joint ventures to own
and operate the MJC real estate and racing operations and the right
to pursue gaming opportunities at MJC properties. On July 1,
2010, all closing conditions relating to this transaction were
completed. Accordingly, the Company has recorded a 51% joint
venture interest in Maryland RE & R LLC, which owns MJC's real
estate and racing operations in Maryland including Pimlico Race
Course, Laurel Park and a thoroughbred training centre (the "Real
Estate and Racing Venture"). The Real Estate and Racing
Venture is managed by MID. The Company has also recorded a 49%
joint venture interest in Laurel Gaming LLC, established to develop
and operate any future gaming opportunities other than racing at
the Maryland properties (the "Gaming Venture"). The Gaming
Venture is managed by Penn. Penn paid MID $26.3 million for
Penn's interest in the Real Estate and Racing Venture and the
Gaming Venture on closing, which included a working capital
adjustment and the reimbursement of certain expenses of
approximately $0.3 million. The Company realized a loss on
disposal of $0.1 million in "other gains (losses), net" on the
consolidated statements of loss for the year ended December 31,
2010. MID and Penn have agreed to ensure adequate operating
capital at MJC, pursuant to an operating plan as mutually
determined by MID and Penn and approved by the Maryland Racing
Commission, until December 31, 2011. The investments in these joint
ventures have been accounted for using the equity method of
accounting as of July 1, 2010. Investments in entities which
the Company does not control, but has the ability to exercise
significant influence over operating and financial policies, are
accounted for using the equity method of accounting. The
Company has also determined that these joint ventures do not
constitute VIEs. Accordingly, the results of MJC are no
longer consolidated in these consolidated financial statements
effective July 1, 2010. |
The results of operations related to the
Company's investments in unconsolidated joint ventures of the
Racing & Gaming Business for the three-month periods and years
ended December 31, 2010 and 2009 are as follows:
|
Three Months
Ended |
|
Year Ended |
|
December 31, |
|
December 31, |
|
2010 |
2009 |
|
2010 |
2009 |
Revenues |
$18,999 |
$— |
|
$40,242 |
$2,630 |
Costs and expenses(iii) |
65,780 |
— |
|
98,645 |
2,500 |
|
|
Net income (loss) |
$(46,781) |
$— |
|
$(58,403) |
$130 |
MID's share of net income (loss) |
$(23,605) |
$— |
|
$(29,501) |
$65 |
(iii) |
For the three-month period and year ended December
31, 2010, costs and expenses of the unconsolidated joint ventures
of the Racing & Gaming Business include a write-down of
goodwill in the amount of $29.2 million at MJC of which the
Company's share of the write-down of goodwill was $14.9
million. The write-down of goodwill is primarily a result of
reduced expectations of achieving alternative gaming at Laurel Park
due to the November 2010 referendum whereby the Anne Arundel
electorate voted in favour of a bill permitting the zoning of a
video lottery terminal facility at Anne Arundel Mills Mall.
The unfavourable decision represents an impediment to the Company's
efforts to pursue alternative gaming opportunities. |
The following represents 100% of the assets and liabilities of
the Company's investments in unconsolidated joint ventures of the
Racing & Gaming Business:
|
December 31, |
December 31, |
As at |
2010 |
2009 |
ASSETS |
Current
assets: |
|
Cash and cash equivalents |
$5,368 |
$— |
|
Restricted cash |
133 |
— |
|
Accounts receivable |
7,586 |
— |
|
Income taxes receivable |
800 |
— |
|
Inventories |
167 |
— |
|
Prepaid expenses and other |
4,523 |
— |
|
18,577 |
— |
Real estate properties, net |
256,804 |
— |
Fixed assets, net |
1,274 |
— |
Other assets, net |
15,837 |
— |
Total assets |
$292,492 |
$— |
LIABILITIES |
Current
liabilities: |
|
Accounts payable and accrued liabilities |
$35,184 |
$— |
|
Long-term debt due within one year |
4,200 |
— |
|
Deferred revenue |
280 |
— |
|
39,664 |
— |
Long-term debt |
157,196 |
— |
Future tax liabilities |
2,586 |
— |
Total liabilities |
$199,446 |
$— |
8. INTANGIBLE ASSETS
Intangible assets consist of:
|
December 31, |
December 31, |
As at |
2010 |
2009 |
Racing & Gaming
Business |
Cost |
|
Customer contracts |
$12,111 |
$— |
|
Software technology |
13,000 |
— |
|
Trademark (note 17) |
3,800 |
— |
|
28,911 |
— |
Accumulated amortization |
|
Customer contracts |
(2,425) |
— |
|
Software technology |
(1,733) |
— |
|
Trademark |
— |
— |
|
(4,158) |
— |
|
$24,753 |
$— |
Amortization expense for each of the following
five years is estimated to be as follows:
2011 |
|
|
$ 6,243 |
2012 |
|
|
6,243 |
2013 |
|
|
4,332 |
2014 |
|
|
3,007 |
2015 |
|
|
983 |
|
|
|
$ 20,808 |
9. GOODWILL
Goodwill represents the excess of the purchase
price over the fair value of net assets acquired. Goodwill
consists of:
|
December 31, |
December 31, |
As at |
2010 |
2009 |
Racing & Gaming
Business |
Cost: |
|
XpressBet (notes 2(c), 17) |
$ 7,191 |
$ — |
|
AmTote (note 2(c)) |
1,412 |
— |
|
|
$ 8,603 |
$ — |
Goodwill of $29.2 million resulting from the
acquisition of MJC at April 30, 2010 (note 2(c)) is no longer
recorded on the consolidated balance sheets as the Company sold a
49% interest in MJC on July 1, 2010 to Penn and as a result the
investment is accounted for using the equity method (note
7).
10. INCOME TAXES
(a) The provision for (recovery of) income
taxes from continuing operations differs from the expense
(recovery) that would be obtained by applying Canadian statutory
rates as a result of the following:
|
Three Months
Ended
December 31, |
Year
Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
MID |
|
|
|
|
Expected income taxes at Canadian statutory rate
of 31% (2009 - 33%) |
$ (23,505) |
$ (26,308) |
$ (5,757) |
$ 4,420 |
Foreign rate differentials |
(12,703) |
(8,567) |
(21,708) |
(30,942) |
Changes in enacted tax rates and
legislation |
— |
(1,536) |
— |
(1,536) |
Reversal of prior years' provisions for uncertain
tax positions |
— |
(173) |
— |
(173) |
Non-deductible foreign currency translation loss
on translation of the net investment in a foreign
operation |
— |
2,573 |
— |
2,573 |
Non-deductible expenses |
1,329 |
1,797 |
1,452 |
1,818 |
Equity loss |
9,442 |
— |
11,800 |
— |
Write-down of long-lived and intangible
assets |
15,392 |
— |
15,392 |
— |
Losses not benefited |
9,298 |
— |
29,611 |
— |
Valuation allowance on provision related to loans
receivable from MEC |
— |
25,245 |
— |
25,245 |
Impairment recovery relating to loans receivable
from MEC |
— |
— |
(3,995) |
— |
Purchase price consideration adjustment
|
— |
— |
(8,411) |
— |
Tax resulting from internal
amalgamation |
12,745 |
— |
12,745 |
— |
Other |
1,488 |
51 |
2,313 |
273 |
|
13,486 |
(6,918) |
33,442 |
1,678 |
MEC1 |
|
|
|
|
Expected income taxes at Canadian statutory rate
of 31% (2009 - 33%) |
— |
— |
— |
(20,254) |
Foreign rate differentials |
— |
— |
— |
45 |
Losses not benefited |
— |
— |
— |
4,994 |
Non-deductible expenses |
— |
— |
— |
37 |
Deconsolidation adjustment to the carrying value
of MID's investment in, and amounts due from, MEC |
— |
— |
— |
15,237 |
|
— |
— |
— |
59 |
|
$ 13,486 |
$ (6,918) |
$ 33,442 |
$ 1,737 |
1 The results for the three-month
period ended December 31, 2009 do not include the results of MEC,
while the results for the year ended December 31, 2009 include the
results of MEC up to the Petition Date of March 5, 2009 (note
1(c)).
During 2010, an internal amalgamation was
undertaken with the unintended result of causing the Company to
incur $12.7 million of current income tax expense. The
Company has retained legal counsel to apply to the Ontario Superior
Court of Justice to have the amalgamation set aside and cancelled.
The outcome of this process is uncertain.
(b) Future tax assets consist of the following temporary
differences:
As at |
December 31,
2010 |
December 31,
2009 |
Tax benefit of operating loss carry
forwards |
$ 40,691 |
$ 29,835 |
Tax benefit of capital loss carry
forwards |
29,273 |
— |
Tax value of assets in excess of book
value |
109,942 |
9,850 |
Other |
21,466 |
— |
|
201,372 |
39,685 |
Valuation allowance |
(197,776) |
(29,835) |
|
$ 3,596 |
$ 9,850 |
As at December 31, 2010, future tax assets include approximately
$1.0 million related to the acquisitions of the Transferred Assets
(note 2(c)).
(c) Future tax liabilities consist
of the following temporary differences:
As at |
December 31,
2010 |
December 31,
2009 |
Book value of assets in excess of tax
value |
$ 59,814 |
$ 32,235 |
Other |
6,737 |
5,589 |
|
$ 66,551 |
$ 37,824 |
As at December 31, 2010, future tax liabilities
include approximately $26.0 million related to the acquisition of
the Transferred Assets (note 2(c)).
11. BANK INDEBTEDNESS AND LONG-TERM
DEBT
(a) |
Bank Indebtedness |
|
The Company has an unsecured senior
revolving credit facility in the amount of $50.0 million that is
available by way of U.S. or Canadian dollar loans or letters of
credit (the "MID Credit Facility") and matures on December 22,
2011, unless further extended with the consent of both parties.
Interest on drawn amounts is calculated based on an applicable
margin determined by the ratio of funded debt to earnings before
interest, income tax expense, depreciation and amortization.
The Company is subject to interest at LIBOR or bankers' acceptance
rates, in each case plus 3.25% (December 31, 2009 - 3.50%), or the
U.S. base or Canadian prime rate, in each case plus 2.25% (December
31, 2009 - 2.50%). At December 31, 2010, the Company had Cdn.
$13.0 million ($13.1 million) drawn under the MID Credit Facility
(December 31, 2009 - no borrowings) and had issued letters of
credit totalling $2.9 million (December 31, 2009 - $0.2
million). The weighted average interest rate on the loans
outstanding under the MID Credit Facility at December 31, 2010 was
5.83%. |
|
At December 31, 2010, the Company was
in compliance with its debt agreement and related covenants.
The Company intends to amend the MID Credit Facility to allow for
the change in control of the Company should the reorganization
proposal (note 24(a)) close. |
|
A wholly-owned subsidiary of the
Company that owns and operates Santa Anita Park had a $7.5 million
revolving loan facility under its existing credit facility with a
U.S. financial institution that required that the aggregate
outstanding principal be fully repaid for a period of 60
consecutive days during each year. The revolving loan
facility was scheduled to mature on October 31, 2012.
However, the facility was due on demand as a result of MEC filing
Chapter 11 petitions on March 5, 2009. The revolving loan
facility was secured by a first deed of trust on Santa Anita Park
and the surrounding real property. During 2010, the Company
fully repaid the $3.9 million outstanding under the revolving loan
facility. This facility is no longer available to the
Company. Borrowings under the revolving loan facility bore
interest at the U.S. prime rate. |
(b) |
Long-term Debt |
|
The Company has a mortgage in the
amount of $2.3 million (December 31, 2009 - $2.4 million) bearing
interest at 8.1% with a maturity date in January 2011. The
mortgage was fully repaid in January 2011. The mortgage was
repayable in equal blended monthly payments of Cdn. $35 thousand
and was collateralized by the underlying property. |
|
The Company's wholly-owned subsidiary
that owns and operates Santa Anita Park also had $61.1 million
outstanding under its fully drawn term loan facility at April 30,
2010, the date of acquisition of the Transferred Assets, which bore
interest at LIBOR plus 2.0%. In the second and third quarters
of 2010, the Company fully repaid the $61.1 million outstanding
under the term loan facility. The term loan facility was
repayable in monthly principal payments of $375 thousand until
maturity. The term loan facility was scheduled to mature on October
31, 2012. However, the facility was due on demand as a result
of MEC filing Chapter 11 petitions on March 5, 2009. The term
loan was collateralized by a first deed of trust on Santa Anita
Park and the surrounding real property. This facility is no
longer available to the Company. |
|
The Company's wholly-owned
subsidiaries that owned and operated 100% of MJC also had an
aggregate of $12.9 million outstanding under three term loan
facilities at April 30, 2010, the date of acquisition of the
Transferred Assets. In the second quarter of 2010, the
Company fully repaid the $12.9 million outstanding under the term
loans facilities. The term loans were scheduled to mature on
December 1, 2013 or June 7, 2017. However, these facilities were
due on demand as a result of MEC filing Chapter 11 petitions on
March 5, 2009. The term loans bore interest at LIBOR plus
2.6% per annum or 7.7% per annum and were collateralized by deeds
of trust on MJC's land, buildings and improvements. These
facilities are no longer available to the Company. |
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist
of:
As at |
December 31,
2010 |
December 31,
2009 |
Accounts payable |
$ 25,087 |
$ 1,263 |
Accrued salaries and wages |
6,967 |
2,565 |
Accrued interest payable |
390 |
371 |
Accrued construction payable |
6,854 |
827 |
Accrued director share-based
compensation |
4,237 |
1,424 |
Deposits |
2,767 |
— |
Other accrued liabilities |
24,451 |
14,726 |
|
$ 70,753 |
$ 21,176 |
13. CONTRIBUTED SURPLUS
Changes in the Company's contributed surplus are
shown in the following table:
|
Three Months Ended
December 31, |
Year Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
Contributed surplus, beginning of
period |
$ 58,916 |
$ 57,128 |
$ 58,575 |
$ 57,062 |
Stock-based compensation |
104 |
1,447 |
445 |
1,513 |
Contributed surplus, end of
period |
$ 59,020 |
$ 58,575 |
$ 59,020 |
$ 58,575 |
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in the Company's accumulated other
comprehensive income are shown in the following
table:
|
Three Months
Ended
December 31, |
Year Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
Accumulated other comprehensive income, beginning
of period |
$ 177,263 |
$ 191,692 |
$ 198,182 |
$ 161,827 |
Change in fair value of interest rate swaps, net
of taxes and noncontrolling interest |
— |
— |
— |
92 |
Foreign currency translation adjustment, net of
noncontrolling interest(i) |
(1,160) |
(1,308) |
(22,079) |
48,315 |
Recognition of foreign currency translation loss
(gain) in net loss(ii) |
(42) |
7,798 |
(42) |
7,798 |
Change in net unrecognized actuarial pension
losses, net of noncontrolling interest |
(120) |
— |
(120) |
— |
Reclassification to income upon deconsolidation of
MEC (note 1(c)) |
— |
— |
— |
(19,850) |
Accumulated other comprehensive income,
end of period(iii) |
$ 175,941 |
$ 198,182 |
$ 175,941 |
$ 198,182 |
(i) |
The Company incurs unrealized foreign
currency translation gains and losses related to its
self-sustaining operations having functional currencies other than
the U.S. dollar. During the three-month periods ended
December 31, 2010 and 2009, the Company reported unrealized
currency translation loss primarily due to the weakening of the
euro against the U.S. dollar. The loss in the year ended
December 31, 2010 is primarily due to the weakening of the euro
against the U.S. dollar. The gain in the year ended
December 31, 2009 is primarily due to the strengthening of the euro
and Canadian dollar against the U.S. dollar. |
(ii) |
Included in "other gains (losses),
net" for the three-month period and year ended December 31, 2009 is
a $7.8 million foreign currency translation loss realized from a
capital transaction that gave rise to a reduction in the net
investment in a foreign operation, which was considered a
substantially complete liquidation of that foreign operation. For
the three-month period and year ended December 31, 2010, $0.1
million included in "other gains (losses), net" represents the
remaining foreign currency translation gain realized from the final
liquidation of that foreign operation. |
(iii) |
Accumulated other comprehensive
income consists of: |
As at |
December 31,
2010 |
December 31,
2009 |
Foreign currency translation adjustment |
$ 176,061 |
$ 198,182 |
Net unrecognized actuarial pension
losses |
(120) |
— |
|
$ 175,941 |
$ 198,182 |
15. NONCONTROLLING INTEREST
Changes in the noncontrolling interest of MEC
are shown in the following
table:
|
Three Months Ended
December 31, |
Year Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
Noncontrolling interest, beginning of
period |
$ — |
$ — |
$ — |
$ 24,182 |
MEC's stock-based
compensation |
— |
— |
— |
23 |
Disgorgement payment received from
noncontrolling interest(i) |
— |
— |
— |
420 |
Comprehensive income (loss): |
|
|
|
|
|
Net loss attributable to the
noncontrolling interest |
— |
— |
— |
(6,308) |
|
Other comprehensive income (loss)
attributable to the noncontrolling
interest: |
|
|
|
|
|
|
Change in fair value of interest rate swaps, net
of taxes |
— |
— |
— |
79 |
|
|
Foreign currency translation
adjustment |
— |
— |
— |
(74) |
Reclassification to income upon
deconsolidation of MEC (note 1(c)) |
— |
— |
— |
(18,322) |
Noncontrolling interest,
end of period |
$ — |
$ — |
$ — |
$ — |
(i) |
In January 2009, MEC received notice
from an institutional shareholder holding more than 10% of MEC's
outstanding shares that such institution had completed various
transactions involving MEC Class A Stock which were determined to
be in violation of Section 16 of the Securities Exchange Act of
1934 (the "Act"). In efforts to regain compliance with
Section 16 of the Act, the institution was required to file reports
with the SEC of the institution's holdings in, and transactions
involving, MEC Class A Stock and determined that, based on
transactions completed in 2003 and 2004, a disgorgement payment of
$0.4 million, representing "short-swing profits" realized by the
institution, was required to be made to MEC. The Company
accounted for the cash receipt as an increase to the noncontrolling
interest in MEC. |
16. STOCK-BASED COMPENSATION
On August 29, 2003, the Board approved the
Incentive Stock Option Plan (the "MID Plan"), which allows for the
grant of stock options or stock appreciation rights to directors,
officers, employees and consultants. Amendments to the MID Plan
were approved by the Company's shareholders at the May 11, 2007
Annual and Special Meeting, and became effective on June 6,
2007. At December 31, 2010, 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 Class A Subordinate Voting
Shares. Except for the options granted on November 10, 2009 and
August 18, 2010, as described below, 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. On
November 12, 2009, MID granted to the outside directors and to
management an aggregate of 455,000 stock options to acquire MID's
Class A Subordinate Voting Shares. The options granted vest 50% on
the date of grant, 25% on the first anniversary of the date of
grant and 25% on the second anniversary of the date of grant. On
August 18, 2010, MID granted to outside directors an aggregate of
95,000 stock options to acquire MID's Class A Subordinate Voting
Shares. The options granted vest 50% on the date of grant and
50% on the first 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:
|
2010 |
2009 |
|
Number |
Weighted
Average
Exercise
Price
(Cdn. $) |
Number |
Weighted
Average
Exercise
Price
(Cdn. $) |
Stock options outstanding, January 1 |
881,544 |
24.50 |
494,544 |
34.83 |
Cancelled or forfeited |
(121,544) |
26.25 |
(8,000) |
39.12 |
Stock options outstanding, June 30 and March
31 |
760,000 |
24.22 |
486,544 |
34.76 |
Granted |
95,000 |
12.90 |
— |
— |
Cancelled or forfeited |
(20,000) |
35.49 |
(60,000) |
32.15 |
Stock options outstanding, September 30 |
835,000 |
22.66 |
426,544 |
35.12 |
Granted |
— |
— |
455,000 |
14.54 |
Stocks options outstanding, December 31 |
835,000 |
22.66 |
881,544 |
24.50 |
Stock options exercisable, December 31 |
835,000 |
22.66 |
624,044 |
27.47 |
The Company estimates the fair value of stock
options 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 model does
not necessarily provide the only measure of the fair value of the
Company's stock options.
The weighted average assumptions used in
determining the fair value of the stock options granted are shown
in the table below:
|
Three Months Ended
December 31, |
Year Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
Risk-free interest
rate |
— |
1.4% |
1.3% |
1.4% |
Expected dividend
yield
|
— |
4.3% |
3.3% |
4.3% |
Expected volatility of MID's Class A Subordinate
Voting
Shares
|
— |
56.2% |
58.7% |
56.2% |
Weighted average expected life
(years) |
— |
2.0 |
2.0 |
2.0 |
Weighted average fair value per option
granted |
$
— |
$ 3.65 |
$ 3.40 |
$ 3.65 |
At December 31, 2010, the total unrecognized
compensation expense relating to the outstanding stock options is
nil as on December 23, 2010 all issued and unvested options were
fully vested by amendment to the stock option agreements.
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:
|
|
2010 |
2009 |
DSUs outstanding, January 1
Granted
Redeemed |
|
115,939
14,000
(11,640) |
80,948
32,815
(11,245) |
DSUs outstanding, March 31
Granted
Redeemed |
|
118,299
9,537
— |
102,518
21,540
(25,536) |
DSUs outstanding, June 30
Granted |
|
127,836
13,977 |
98,522
15,118 |
DSUs outstanding, September 30
Granted
Redeemed |
|
141,813
14,544
— |
113,640
10,999
(8,700) |
DSUs outstanding, December 31 |
|
156,357 |
115,939 |
During the year ended December 31, 2010, 11,640
DSUs were redeemed by a director, who left the Board in 2009, for
cash proceeds of $143 thousand. During the year ended
December 31, 2009, 45,481 DSUs were redeemed by five directors, two
of which left the Board in 2008 and three of which left the Board
in 2009, for aggregate cash proceeds of $0.4 million.
During the three-month period and year ended
December 31, 2010, the Company recognized stock-based compensation
expense of $2.8 million (2009 - $1.4 million) and $3.4 million
(2009 - $2.7 million), respectively, which includes an expense of
$2.7 million (2009 - $22 thousand) and an expense of $3.0 million
(2009 - $1.2 million), respectively, pertaining to DSUs.
17. WRITE-DOWN OF LONG-LIVED AND
INTANGIBLE ASSETS
Write-downs relating to long-lived and intangible assets have
been recognized as follows:
|
Three Months Ended
December 31, |
Year Ended
December 31, |
|
2010(i) |
2009(ii) |
2010(i) |
2009(ii) |
Continuing operations - Real Estate
Business |
|
|
|
|
|
Development properties - Land and
improvements |
$ 40,646 |
$ — |
$
40,646 |
$ — |
|
Commercial office |
— |
4,498 |
— |
4,498 |
|
40,646 |
4,498 |
40,646 |
4,498 |
Continuing operations - Racing
& Gaming Business |
|
|
|
|
XpressBet |
3,513 |
— |
3,513 |
— |
|
$ 44,159 |
$ 4,498 |
$ 44,159 |
$ 4,498 |
(i) |
During the three-month period ended
December 31, 2010, the Real Estate Business recorded impairment
charges totalling $40.6 million relating to parcels of land held
for development located in California, Florida, Michigan and Ilz,
Austria. In connection with the reorganization proposal
received in the fourth quarter of 2010 (note 24(a)), the Company
obtained information related to the above noted properties that
indicated the existence of potential impairments and inability to
recover the carrying value. The write-down represents the
excess of the carrying value of the assets over the estimated fair
values based on external real-estate appraisals. The
write-down reduced the cost of the land and was included in
"write-down of long-lived and intangible assets" on the
consolidated statements of loss for the year ended December 31,
2010. |
|
During the second half of 2010,
XpressBet's operations were adversely impacted by certain credit
card companies choosing to block otherwise exempt internet
gambling related transactions. As a result, the 2011 business plan
reflected reductions in estimated future cash flows based on lower
expectations for growth and profitability as it is anticipated that
it will require additional time and investment to re-acquire
customers that have either reduced or ceased their account wagering
activity. Accordingly, during the three-month period and year ended
December 31, 2010, XpressBet recorded an impairment charge of $3.2
million relating to goodwill and $0.3 million relating to its
trademark. |
|
During the three-month period and
year ended December 31, 2010, an unconsolidated joint venture of
the Racing & Gaming Business recorded a write-down of goodwill
in the amount of $29.2 million for which the Company's share of the
write-down was $14.9 million (note 7). |
(ii) |
As a result of further weakening in
the commercial office real estate market in Michigan, in the fourth
quarter of 2009, the Real Estate Business recorded a $4.5 million
write-down of a revenue-producing commercial office building.
The write-down represents the excess of the carrying value of the
asset over the estimated fair value. Fair value was
determined based on the present value of the estimated future cash
flows from the leased property. |
18. EARNINGS (LOSS) PER SHARE
Diluted earnings (loss) per share for the
three-month periods and years ended December 31, 2010 and 2009 are
computed as follows:
|
Three Months
Ended
December 31, |
Year Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
Loss from continuing
operations |
$ (89,308) |
$ (72,800) |
$
(52,012) |
$ (43,153) |
Income from discontinued
operations |
— |
— |
— |
864 |
Net loss attributable to
MID |
$ (89,308) |
$ (72,800) |
$ (52,012) |
$ (42,289) |
Weighted average number of Class
A |
|
|
|
|
|
Subordinate Voting and Class B Shares outstanding
during the period (in thousands) |
46,708 |
46,708 |
46,708 |
46,708 |
Diluted earnings (loss) per Class
A |
|
|
|
|
|
Subordinate Voting or Class B Share |
|
|
|
|
|
- from continuing operations |
$ (1.91) |
$ (1.56) |
$ (1.11) |
$ (0.93) |
|
- from discontinued
operations |
— |
— |
— |
0.02 |
|
$ (1.91) |
$ (1.56) |
$ (1.11) |
$ (0.91) |
As a result of the net loss attributable to MID
for the three-month periods and years ended December 31, 2010 and
2009, the potential exercise of 835,000 (2009 - 426,544) and
881,544 (2009 - 494,544) options, respectively, to acquire Class A
Subordinate Voting Shares of the Company have been excluded from
the computation of diluted loss per share since the effect would be
anti-dilutive.
19. DETAILS OF CASH FROM OPERATING
ACTIVITIES
(a) Items not involving current cash flows are shown in the
following table:
|
Three Months Ended
December 31, |
Year Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
MID |
|
|
|
|
Straight-line rent adjustment |
$ 535 |
$ 207 |
$ 1,069 |
$ 760 |
Interest and other income from MEC |
— |
(12,172) |
— |
(43,419) |
Stock-based compensation expense |
2,783 |
1,469 |
3,402 |
2,734 |
Depreciation and amortization |
14,047 |
10,870 |
50,437 |
41,349 |
Write-down of long-lived and intangible assets |
44,159 |
4,498 |
44,159 |
4,498 |
Impairment provision (recovery) related to loans receivable
from MEC |
— |
90,800 |
(9,987) |
90,800 |
Equity loss |
23,605 |
— |
29,501 |
— |
Deconsolidation adjustment to the carrying values of amounts
due from MEC |
— |
— |
— |
504 |
Future income taxes |
(287) |
(10,369) |
11,011 |
(11,645) |
Loss (gain) on disposal of real estate |
— |
57 |
1,205 |
(206) |
Other losses (gains), net |
16 |
7,798 |
16 |
7,798 |
Purchase price consideration adjustment |
— |
— |
(21,027) |
— |
Other |
522 |
84 |
898 |
310 |
|
85,380 |
93,242 |
110,684 |
93,483 |
MEC1 |
|
|
|
|
Stock-based compensation expense |
— |
— |
— |
23 |
Depreciation and amortization |
— |
— |
— |
7,014 |
Amortization of debt issuance costs |
— |
— |
— |
3,346 |
Equity income |
— |
— |
— |
(65) |
Deconsolidation adjustment to the carrying value of the
investment in MEC |
— |
— |
— |
46,173 |
Other |
— |
— |
— |
20 |
|
— |
— |
— |
56,511 |
Eliminations (note 3(a)) |
— |
— |
— |
(339) |
Consolidated |
$ 85,380 |
$ 93,242 |
$ 110,684 |
$ 149,655 |
(b) Changes in non-cash working capital balances are shown
in the following table:
|
Three Months Ended
December 31, |
Year Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
MID |
|
|
|
|
Restricted cash |
$ 1,321 |
$ — |
$ 801 |
$ — |
Accounts receivable |
(6,049) |
1,817 |
30,855 |
571 |
Receivable from Reorganized MEC |
2,500 |
— |
41,299 |
— |
Inventories |
832 |
— |
(234) |
— |
Loans receivable from MEC, net |
— |
(51) |
(613) |
(771) |
Prepaid expenses and other |
80 |
1,137 |
1,522 |
(5) |
Accounts payable and accrued liabilities |
673 |
2,128 |
(52,294) |
7,392 |
Income taxes |
14,017 |
2,305 |
12,940 |
2,981 |
Deferred revenue |
(409) |
2,107 |
(4,145) |
1,542 |
|
12,965 |
9,443 |
30,131 |
11,710 |
MEC1 |
|
|
|
|
Restricted cash |
— |
— |
— |
189 |
Accounts receivable |
— |
— |
— |
(18,624) |
Prepaid expenses and other |
— |
— |
— |
(2,076) |
Accounts payable and accrued liabilities |
— |
— |
— |
11,289 |
Income taxes |
— |
— |
— |
48 |
Loans payable to MID, net |
— |
— |
— |
653 |
Deferred revenue |
— |
— |
— |
217 |
|
— |
— |
— |
(8,304) |
Eliminations (note 3(a)) |
— |
— |
— |
(43) |
Consolidated |
$ 12,965 |
$ 9,443 |
$ 30,131 |
$ 3,363 |
(c) Non-cash investing and financing activities
On April 30, 2010, the Company acquired the
Transferred Assets with the purchase price being settled by the
outstanding MEC loans of $347.1 million (note 2(c)) and cash
payments aggregating $90.5 million.
1 The results for the three-month
period ended December 31, 2009 do not include the results of MEC,
while the results for the year ended December 31, 2009 include the
results of MEC up to the Petition Date of March 5, 2009 (note
1(c)).
20. |
DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE
INFORMATION |
(a) |
Derivative Financial Instruments |
|
The Company periodically purchases foreign exchange forward
contracts to hedge specific anticipated foreign currency
transactions. At December 31, 2010, the Company did not
have any foreign exchange forward contracts outstanding. At
December 31, 2009, the Company held foreign exchange forward
contracts to purchase Cdn. $0.6 million and sell U.S. $0.5
million. These contracts matured on January 4, 2010 and were
entered into by a wholly-owned subsidiary of the Company with a
U.S. dollar functional currency to mitigate its foreign exchange
exposure to a Canadian dollar denominated payable to the Company's
corporate operations having the Canadian dollar as its functional
currency. Based on foreign exchange rates at December 31,
2009, the fair value of these foreign exchange forward contracts at
December 31, 2009 was a liability of approximately $10 thousand,
which is included in "accounts payable and accrued liabilities" on
the Company's consolidated balance sheets. |
|
The following tables summarize the impact of these derivative
financial instruments in the Company's unaudited interim
consolidated financial statements as at December 31, 2010 and 2009
and for the three-month periods and years ended December 31, 2010
and 2009: |
As at |
|
December 31,
2010 |
December 31, 2009 |
Derivatives not designated as hedging instruments |
|
|
|
Foreign exchange forward contracts
- included in accounts payable and accrued liabilities
|
|
$ — |
$ 10 |
Three Months
Ended December 31 |
Location of Losses
(Gains) Recognized in Income on
Derivatives |
Amount of Losses
(Gains) Recognized in Income on
Derivatives |
|
|
2010 |
2009 |
Derivatives not designated as hedging instruments |
|
|
|
Foreign exchange forward
contracts |
Foreign Exchange
Losses (Gains)
|
$ — |
$ 10 |
Year Ended December
31 |
Location of Losses
(Gains) Recognized in Income on
Derivatives |
Amount of Losses
(Gains) Recognized in
Income on Derivatives |
|
|
2010 |
2009 |
Derivatives not designated as hedging instruments
|
|
|
|
Foreign exchange forward
contracts |
Foreign Exchange
Losses (Gains)
|
$ (10) |
$ 526 |
(b) |
Fair Value Measurements |
|
Fair value measurements are based on inputs of
observable and unobservable market data that a market participant
would use in pricing an asset or liability. ASC 820, "Fair
Value Measurements and Disclosures", establishes a fair value
hierarchy which is summarized below: |
|
Level 1: |
Fair value determined based on quoted prices in active markets
for identical assets or liabilities. |
|
Level 2: |
Fair value determined using significant observable inputs,
generally either quoted prices in active markets for similar assets
or liabilities or quoted prices in markets that are not
active. |
|
Level 3: |
Fair value determined using significant unobservable inputs,
such as pricing models, discounted cash flows or similar
techniques. |
The following table represents information
related to the Company's assets and liabilities measured at fair
value on a recurring and nonrecurring basis and the level within
the fair value hierarchy in which the fair value measurements
fall:
As at December 31,
2010 |
Quoted Prices in
Active Markets for Identical
Assets or Liabilities
(Level 1) |
Significant
Other
Observable Inputs
(Level 2) |
Significant
Unobservable
Inputs
(Level 3) |
ASSETS CARRIED AT FAIR VALUE ON
A RECURRING BASIS |
|
|
|
|
Assets carried at fair value |
|
|
|
|
|
Cash and cash equivalents |
$ 85,407 |
$ — |
$ — |
|
|
Restricted cash |
9,334 |
— |
— |
ASSETS CARRIED AT FAIR VALUE ON A
NONRECURRING BASIS |
|
|
|
|
|
Trademark(i) |
$ — |
$ — |
$ 3,800 |
|
|
Goodwill(i) |
— |
— |
7,191 |
|
|
Development properties - Land and
improvements(ii) |
— |
— |
39,449 |
As at December
31, 2009 |
Quoted Prices in
Active Markets
for Identical Assets or Liabilities
(Level 1) |
Significant
Other
Observable Inputs
(Level 2) |
Significant
Unobservable
Inputs
(Level 3) |
ASSETS AND LIABILITIES CARRIED AT FAIR
VALUE
ON A RECURRING BASIS |
|
|
|
|
Assets carried at fair value |
|
|
|
|
|
Cash and cash equivalents |
$ 135,163 |
$ — |
$ — |
|
|
Restricted cash |
458 |
— |
— |
|
|
Loans receivable from MEC, net (note
3(a))(iii) |
— |
— |
362,404 |
|
Liabilities carried at fair
value |
|
|
|
|
|
Foreign exchange forward
contracts(iv) |
— |
10 |
— |
ASSETS CARRIED AT FAIR VALUE ON A
NONRECURRING BASIS |
|
|
|
|
|
Real estate property(v) |
$ — |
$ — |
$ 10,000 |
(i) |
During the three-month period and year ended
December 31, 2010, a trademark with a cost of $4.1 million was
written down to fair value of $3.8 million (note 17). The
write-down of $0.3 million is included in "write-down of long-lived
and intangible assets" on the consolidated statements of loss for
the three-month period and year ended December 31, 2010. This
is a Level 3 fair value measurement as the fair value of the
trademark was determined based on the present value of estimated
royalty rates using a net revenue stream determined by the
relief-from-royalty valuation methodology. |
|
During the three-month period and year ended
December 31, 2010, goodwill in the amount of $10.4 million was
written down to fair value of $7.2 million (note 17). The
write-down of $3.2 million is included in "write-down of long-lived
and intangible assets" on the consolidated statements of loss for
the three-month period and year ended December 31, 2010. This
is a Level 3 fair value measurement as the fair value of goodwill
was determined based on the present value of future cash flows of
the reporting unit. |
(ii) |
During the three-month period and year ended
December 31, 2010, certain lands held for development in the amount
of $80.0 million were written down to fair value of $39.4 million
(note 17). The write-down of $40.6 million is included in
"write-down of long-lived and intangible assets" on the
consolidated statements of loss for the three-month period and year
ended December 31, 2010. This is a Level 3 fair value
measurement as the fair value of the development properties were
determined based on external real estate appraisals using estimated
prices at which comparable assets could be purchased and adjusted
for, among other things, location, size, zoning/density and
topography of the properties. |
(iii) |
The following table reconciles the beginning and
ending balances of assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the years
ended December 31, 2010 and 2009: |
|
Year Ended December 31,
|
2010 |
2009 |
|
Loans receivable from MEC, net, beginning of
period |
$ 362,404 |
$ — |
|
Loan advances to MEC |
13,804 |
— |
|
Loan repayments from MEC |
(60,794) |
— |
|
Non-cash settlement of loan receivable from MEC (note
3(a)) |
(326,012) |
— |
|
Impairment recovery related to loans receivable
from MEC (note 3(a)) |
9,987 |
— |
|
Other |
611 |
— |
|
Loans receivable from MEC, net,
end of period |
$ — |
$ — |
|
Certain assets are measured at fair value on a
nonrecurring basis; that is, the assets are not measured at fair
value on an ongoing basis but are subject to fair value adjustments
in certain circumstances, such as when there is evidence of
impairment. As at December 31, 2009, loans receivable from
MEC, net with an aggregate cost of $453.2 million were written down
to fair value of $362.4 million. At April 30, 2010, loans
receivable from MEC, net were settled. Loans receivable from
MEC, net are a Level 3 fair value measurement as estimated
recoverability is partially determined based on the value of the
collateral based on third-party appraisals or other valuation
techniques, such as discounted cash flows, for those MEC assets
transferred to the Company under the Plan or for which the Court
has yet to approve for sale under the Plan, net of expected
administrative, priority and allowed claims to be paid by the
Company under the Plan (note 3(a)). |
(iv) |
Foreign exchange forward contracts are a Level 2
fair value measurement as the fair value of the contracts are
determined based on foreign exchange rates in effect at December
31, 2009. |
(v) |
During the three-month period and year ended
December 31, 2009, a real estate property with a cost of $14.5
million was written down to fair value of $10.0 million (note
17). The write-down of $4.5 million was included in
"write-down of long-lived and intangible assets" on the
consolidated statements of loss for the three-month period and year
ended December 31, 2009. This is a Level 3 fair value
measurement as the fair value of the real estate property was
determined based on the present value of the estimated future cash
flows from the leased property. |
(vi) |
The fair value of the senior unsecured debentures
is determined using the quoted market price of the senior unsecured
debentures. At December 31, 2010, the fair value of the
senior unsecured debentures was approximately $282.4 million (2009
- $219.0 million). |
21. SEGMENTED INFORMATION |
The Company's reportable segments are described in
note 1(a) to the accompanying unaudited interim consolidated
financial statements. The following tables present certain
information with respect to the Company's operating segments: |
|
December 31, |
December 31, |
As at |
2010 |
2009 |
Total assets |
Real Estate Business |
$ 1,940,178 |
$ 1,918,151 |
Racing & Gaming Business |
530,575 |
— |
|
2,470,753 |
1,918,151 |
Eliminations |
(526,425) |
— |
Total assets |
$ 1,944,328 |
$ 1,918,151 |
|
Three Months
Ended |
Year
Ended |
|
December 31, |
December 31, |
|
20101 |
20092 |
20101 |
20092 |
Revenues |
|
|
|
|
Real Estate Business |
$ 43,655 |
$ 58,042 |
$ 174,480 |
$ 224,034 |
Racing & Gaming Business |
65,796 |
— |
183,880 |
152,935 |
|
109,451 |
58,042 |
358,360 |
376,969 |
Eliminations (note 3(a)) |
— |
— |
— |
(9,636) |
Total revenues |
$ 109,451 |
$ 58,042 |
$ 358,360 |
$ 367,333 |
Net loss |
|
|
|
|
Real Estate Business |
$ (42,016) |
$ (72,800) |
$ 24,671 |
$ 11,717 |
Racing & Gaming Business |
(47,292) |
— |
(76,683) |
(54,342) |
|
(89,308) |
(72,800) |
(52,012) |
(42,625) |
Eliminations (note 3(a)) |
— |
— |
— |
336 |
Net loss attributable to MID |
$ (89,308) |
$ (72,800) |
$ (52,012) |
$ (42,289) |
22. |
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) |
The Company has learned of the filing of a
Statement of Claim (commenced by a Notice of Action) against it and
certain of its current and former directors and officers with the
Ontario Superior Court of Justice by certain shareholders alleging,
among other things, that directors of MID breached their duties in
connection with certain transactions with MEC. MID has not been
served with this Statement of Claim or Notice of Action. The
Company believes that this claim is entirely without merit.
These shareholders filed the claim on May 21, 2010, but did not
serve it upon MID or any of the other defendants. If and when
the shareholders who have commenced this new claim decide to pursue
it, MID will defend the claim vigorously and will seek the highest
cost award possible in the circumstances. |
(c) |
The Company's Racing & Gaming Business
operations generate a substantial amount of its revenues from
wagering activities and are 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) |
In addition to the letters of credit issued under
the Company's credit facilities (note 11), the Company had $2.3
million of letters of credit issued with various financial
institutions at December 31, 2010 to guarantee various construction
projects. These letters of credit are secured by cash deposits of
the Company. |
(e) |
The Company has provided indemnities related to
surety bonds issued in the process of obtaining licences and
permits at certain of the Company's Racing & Gaming Business
racetracks and to guarantee various construction projects related
to activities of its subsidiaries. At December 31, 2010,
these indemnities amount to $5.4 million, with expiration dates
through 2013. |
(f) |
At December 31, 2010, the Company's contractual
commitments related to construction and development projects
outstanding amounted to approximately $8.7 million. |
(g) |
In August 2010, the Company introduced the creation
of the "Preakness 5.5", a bonus program which could award an
aggregate of $5.5 million to the winner of the Preakness Stakes in
May 2011. The bonus will be shared between the horse owner
and the trainer. In order to qualify for the Preakness 5.5,
two pre-qualifying races must be won. XpressBet will also
sponsor the "XpressBet .55", a prize of $550 thousand awarded to
the winner of the 2011 Preakness if that horse was not eligible for
the Preakness $5.5 million bonus but was a runner in one of the
pre-qualifying races and finished first, second or third in the
second pre-qualifying race. The Company has acquired
insurance coverage in the amount of $4.25 million for the Preakness
5.5 program. Should additional insurance coverage not be
obtained, the Company is committed to award the remaining $1.25
million if there is a winner of the Preakness 5.5. In
addition, the Company has acquired insurance coverage in the amount
of $550 thousand for the XpressBet .55 program. |
(h) |
In September 2010, the Company announced the
introduction of the "Black-Eyed Susan 2.2", a bonus program that
could award an aggregate of $2.2 million to the winning horse owner
and trainer of the Black-Eyed Susan Stakes in May 2011. To
qualify for the Black-Eyed Susan Stakes, a three-year-old horse
must first win two pre-qualifying races plus the Gulfstream Park
Oaks race. Also, the Company has committed to award the
"XpressBet Consolation Prize", an aggregate of $220 thousand to the
horse owner and trainer if they are a runner in a pre-qualifying
race of the Black-Eyed Susan 2.2, finishes first, second or third
in the Gulfstream Park Oaks race and wins the Black-Eyed Susan
Stakes. In addition, the Company is committed to award $50
thousand for the "AmTote Jockey Bonus". This prize is awarded
to the Black-Eyed Susan Stakes winning jockey who wins one of the
qualifying races and competes in at least one other qualifying
race. The Company has acquired insurance coverage in the
amount of $2.2 million for the Black-Eyed Susan 2.2 bonus
program. In addition, the Company is committed to award the
XpressBet Consolation Prize and the AmTote Jockey Bonus should
there be a winner as described above. |
(i) |
On March 4, 2007, certain of the Transferred Assets
entered into a series of agreements with Churchill Downs
Incorporated ("CDI") in order to enhance wagering integrity and
security, to own and operate HRTV®, to buy and sell horse racing
content and to promote the availability of horse racing signals to
customers worldwide. These agreements involved the formation
of a joint venture, TrackNet Media Group, LLC ("TrackNet"), a
reciprocal content swap agreement and the purchase by CDI from the
Transferred Assets of a 50% interest in HRTV®. Under the
reciprocal content swap agreement, the Company and CDI exchanged
their respective horse racing signals. Both the Company and
CDI are required to make capital contributions, as required, on an
equal basis, to fund the operations of HRTV, LLC. The
TrackNet joint venture is in the process of being
dissolved. |
(j) |
In May 2005, a Limited Liability Company
Agreement was entered into between the Transferred Assets and
Forest City concerning the development of The Village at Gulfstream
Park™, an outdoor shopping and entertainment centre adjacent to
Gulfstream Park that opened in February 2010. Forest City
contributed $15.0 million as an initial capital contribution.
The Company is obligated to contribute 50% of any equity amounts in
excess of $15.0 million, as required. If the Company or
Forest City fail to make required capital contributions when due,
then either party to the agreement 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 partners would be adjusted
accordingly. Upon the opening of The Village at Gulfstream
Park™, annual cash receipts (adjusted for certain disbursements and
reserves) will first be distributed to the Forest City partner,
subject to certain limitations, until such time as the initial
contribution accounts of the partners are equal. Thereafter,
the cash receipts are generally expected to be distributed to the
partners equally, provided they maintain their equal interest in
the partnership. The annual cash payments made to the Forest
City partner to equalize the partners' initial contribution
accounts will not exceed the amount of the annual ground rent. |
(k) |
On May 8, 2008, the Los Angeles Turf Club,
Incorporated. ("LATC") commenced civil litigation in the District
Court in Los Angeles for breach of contract. It is seeking damages
in excess of $8.4 million from Cushion Track Footing USA, LLC and
other defendants for failure to install a racing surface at Santa
Anita Park suitable for the purpose for which it was
intended. The defendants were served with the complaint and
filed a motion to dismiss the action for lack of personal
jurisdiction. On October 20, 2008, the presiding judge denied
the defendants' motions. The defendants have filed answers
and cross complaints against all other vendors who participated in
the removal and construction of the track. In addition, the
defendants filed a counter-claim against LATC, which was
dismissed. A court-ordered mediation was held on December 1,
2010 and the mediator had requested the defendants to provide
additional documents by December 24, 2010. The documents are
being reviewed by the mediator. |
(l) |
The California Regional Water Quality Control Board
(the "Control Board") requires that Santa Anita Park apply for, and
keep in force, a wastewater discharge permit which governs and
regulates the amount of contaminated water that may be discharged
into the storm drain and water table as a result of maintenance of
the horse population on site. With the issuance of the permit
in 2006, there are certain compliance efforts the Control Board
requested that management address over the five-year permit
period. The Control Board has not given deadlines for
immediate compliance nor is Santa Anita Park's current permit at
risk for non-compliance. Citations are not expected unless
Santa Anita Park does not make an effort to comply. Upon receipt of
the permit, Santa Anita commenced discussions with the Control
Board regarding the nature of the compliance requests and commenced
the planning process as to how Santa Anita would address these
requirements. A number of these requirements have been or are
expected to be addressed through planned capital projects.
Given the fact that a number of these remediation requirements
would be better addressed through capital projects rather than
merely a repair or fix of existing facilities, the ultimate cost of
remediation will be impacted by the decision on how to best address
the remediation requirement. This process will span several
years as Santa Anita Park addresses each of these
requirements. The exact scope, cost and timing of the
remediation efforts have not been finalized and a compliance plan
has not been agreed upon with the Control Board. It has been
concluded that no accrual is required at December 31, 2010, since
the Control Board had granted a permit for a five-year period,
there were no manifestations by the Control Board for immediate
compliance and Santa Anita Park had not finalized a compliance plan
with the Control Board. |
(m) |
On November 14, 2006, MEC completed the sale to PA
Meadows, LLC of all the outstanding shares of Washington Trotting
Association, Inc., Mountain Laurel Racing, Inc. and MEC
Pennsylvania Racing, Inc. (collectively "The Meadows") through
which MEC owned and operated The Meadows, a standardbred racetrack
in Pennsylvania. On closing, MEC received cash consideration
and a holdback agreement ("The Meadows Holdback Agreement"), under
which $25.0 million was payable to MEC over a five-year period,
subject to the offset for certain indemnification obligations as
well as the purchaser having available excess cash flow. In
April 2009, MEC estimated $10.0 million (less certain offsets) was
payable based upon certain triggering events in The Meadows
Holdback Agreement, however, payment was not made by PA Meadows,
LLC. Accordingly, MEC commenced litigation proceedings for
collection of the $10.0 million proceeds plus interest. In
addition, in February 2010 and February 2011, an additional $5.0
million, less certain offsets, for each year was considered owing
under the terms of The Meadows Holdback Agreement; however,
payments were not made. As part of the acquisition of the
Transferred Assets (note 2(c)), MID received the right to receive
any payments under The Meadows Holdback Agreement. In
February 2011, an unfavourable decision was made by the court
concerning the motion for summary judgment made by MEC with respect
to whether any amounts were owed from certain triggering events
under The Meadows Holdback Agreement. As a result, MID
expects that payments from The Meadows Holdback Agreement will
commence once the purchaser has available excess cash flow, if
any. |
(n) |
At December 31, 2010, the Company had commitments
under operating leases requiring future minimum annual rental
payments as follows: |
|
2011 |
$ 1,924 |
|
2012 |
1,434 |
|
2013 |
1,177 |
|
2014 |
989 |
|
2015 |
834 |
|
Thereafter |
- |
|
|
$ 6,358 |
23. |
RECONCILIATION TO CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES |
|
The Company's accounting policies as reflected in these
unaudited interim consolidated financial statements do not
materially differ from Canadian GAAP except as described in the
following tables presenting net loss attributable to MID, earnings
(loss) attributable to each MID Class A Subordinate Voting or Class
B Share and comprehensive income (loss) attributable to MID under
Canadian GAAP. The following table reflects the significant
differences between U.S. GAAP and Canadian GAAP that impact the
financial statements for the reported periods. Accordingly,
these unaudited interim consolidated financial statements should be
read in conjunction with the annual consolidated financial
statements for the year ended December 31, 2009. |
|
Three
Months Ended December 31, |
Year
Ended
December 31, |
|
2010 |
2009 |
2010 |
2009 |
Net loss attributable to MID under U.S. GAAP |
$ (89,308) |
$ (72,800) |
$ (52,012) |
$ (42,289) |
Interest expense on subordinated
notes(i) |
— |
— |
— |
6,570 * |
Depreciation and
amortization(ii) |
— |
— |
— |
(340)* |
Stock-based
compensation(iii) |
— |
— |
— |
3,204 * |
Foreign currency translation
losses(iv) |
(8,004) |
— |
(8,004) |
(28,241) |
Net loss attributable to MID under
Canadian GAAP |
$ (97,312) |
$ (72,800) |
$ (60,016) |
$ (61,096) |
Basic and diluted earnings (loss) attributable to each MID
Class A Subordinate Voting or Class B Share |
|
|
|
|
- continuing operations |
$ (2.08) |
$ (1.56) |
$ (1.28) |
$ (1.33) |
- discontinued operations |
— |
— |
— |
0.02 |
|
$ (2.08) |
$ (1.56) |
$ (1.28) |
$ (1.31) |
Comprehensive loss attributable to MID
under U.S. GAAP |
$ (90,630) |
$ (66,310) |
$ (74,253) |
$ (5,934) |
Net adjustments to U.S. GAAP net loss
per above table |
— |
— |
— |
(18,807) |
Translation of development property carrying
costs(v) |
102 |
111 |
380 |
210 |
Foreign currency translation
losses(iv) |
8,004 |
— |
8,004 |
28,241 |
Employee defined benefit and postretirement
plans(vi) |
120 |
— |
120 |
(728) * |
Comprehensive income (loss)
attributable to MID
under Canadian GAAP |
$ (82,404) |
$ (66,199) |
$ (65,749) |
$ 2,982 |
* Reflects cumulative impact of
Canadian GAAP accounting to MID's investment in MEC being adjusted
to nil upon deconsolidation of MEC at the Petition Date (note
1(c)). |
(i) |
Financial Instruments and Long-term Debt |
|
Under Canadian GAAP, a portion of the face value of MEC's
convertible subordinated notes (the "MEC Notes") attributable to
the value of the conversion feature at inception is recorded as
part of the noncontrolling interest in MEC, rather than as a
liability. The remaining value of the MEC Notes at inception
is accreted up to their face value on an effective yield basis over
the term of the MEC Notes, with the accretion amount being included
in MEC's net interest expense. Under U.S. GAAP, the MEC Notes
are recorded entirely as debt, resulting in lower net interest
expense than under Canadian GAAP. |
(ii) |
Depreciation and Amortization |
|
Based on the terms of MEC's sale of The Meadows in 2006, the
sale of The Meadows' real estate properties and fixed assets is not
accounted for as a sale and leaseback, but rather using the
financing method of accounting under U.S. GAAP as MEC was deemed to
have a continuing interest in the transaction. Accordingly,
under U.S. GAAP, such real estate properties and fixed assets were
required to remain on the balance sheet and continue to depreciate
and $7.2 million of the sale proceeds were required to be deferred
at inception and were included in MEC's "other long-term
liabilities" on the Company's consolidated balance sheets at
December 31, 2008. Under U.S. GAAP, these sale proceeds are
to be recognized at the point when the transaction subsequently
qualifies for sale recognition. Under Canadian GAAP, the
disposal of such real estate properties and fixed assets was
recognized as a sale transaction. |
(iii) |
Stock-based Compensation |
|
Canadian GAAP requires the expensing of all stock-based
compensation awards for fiscal years beginning on or after January
1, 2004. The Company also adopted this policy under U.S. GAAP
effective January 1, 2004. However, under U.S. GAAP, the
cumulative impact on adoption of stock-based compensation is not
recognized in the consolidated financial statements as an
adjustment to opening deficit. As a result, prior to the
deconsolidation of MEC (note 1(c)), $3.2 million of MEC's
stock-based compensation expense related to periods prior to
January 1, 2004 are excluded from MID shareholders' equity under
U.S. GAAP but not under Canadian GAAP. |
(iv) |
Investment Translation Gains or Losses |
|
Under Canadian GAAP, investment translation gains or losses are
accumulated in the "accumulated other comprehensive income"
component of shareholders' equity, and the appropriate amounts of
the investment translation gains or losses are reflected in income
when there is a reduction resulting from capital transactions in
the Company's net investment in the operations that gave rise to
such exchange gains and losses. Under U.S. GAAP, the
appropriate amounts of the investment translation gains or losses
are only reflected in income when there is a sale or partial sale
of the Company's investment in these operations or upon a complete
or substantially complete liquidation of the investment. |
(v) |
Capitalization of Development Property Carrying Costs |
|
Under both Canadian and U.S. GAAP, certain carrying costs
incurred in relation to real estate property held for development
are permitted to be capitalized as part of the cost of such
property while being held for development. However,
Codification Subtopic 970-360, "Real Estate - Property, Plant and
Equipment", is more restrictive than Canadian Institute of
Chartered Accountants Handbook Section 3061, "Property, Plant and
Equipment", in relation to the necessary criteria required to
capitalize such costs. As a result, certain carrying costs
have been capitalized from time to time under Canadian GAAP that
are not permitted under U.S. GAAP. |
(vi) |
Employee Defined Benefit and Postretirement Plans |
|
Codification Topic 715, "Compensation - Retirement
Benefits" requires employers to recognize the funded status (the
difference between the fair value of plan assets and the projected
benefit obligations) of a defined benefit postretirement plan as an
asset or liability on the consolidated balance sheets with a
corresponding adjustment to "accumulated other comprehensive
income", net of related tax and noncontrolling interest
impact. No such adjustment is required under Canadian
GAAP. |
(vii) |
Joint Ventures |
|
Under U.S. GAAP, the Company's investments in joint ventures
are accounted for using the equity method of accounting, resulting
in the proportionate share of the net income or loss of the joint
ventures in which it has an interest being recorded in a single
line, "equity loss (income)" on the Company's consolidated
statements of loss. Similarly, the Company's investments in
joint ventures are included in a single line, "other assets", on
the Company's consolidated balance sheets. Only cash invested
by the Company into its interests in joint ventures are reflected
in the Company's consolidated statements of cash flows. Under
Canadian GAAP, the Company's investments in joint ventures are
accounted for using the proportionate consolidation method.
The Company's proportionate share of the joint ventures in which it
has an interest is added to the consolidated balance sheets,
consolidated statements of loss and consolidated statements of cash
flows on a line-by-line basis. |
The following tables indicate the items in the
consolidated balance sheets that would have been affected had the
consolidated financial statements been prepared under Canadian
GAAP:
As at December
31, 2010 |
U.S.
GAAP |
Joint
Ventures |
Benefit
Plans |
Property
Carrying
Costs |
Canadian
GAAP |
Cash and cash equivalents |
$ 85,407 |
$ 2,703 |
$ — |
$ — |
$ 88,110 |
Restricted cash |
9,334 |
67 |
— |
— |
9,401 |
Accounts receivable |
30,029 |
3,847 |
— |
— |
33,876 |
Income taxes receivable |
2,184 |
408 |
— |
— |
2,592 |
Inventories |
4,763 |
85 |
— |
— |
4,848 |
Prepaid expenses and other |
12,078 |
2,271 |
— |
— |
14,349 |
Real estate properties, net |
1,665,001 |
129,459 |
— |
4,859 |
1,799,319 |
Fixed assets, net |
15,222 |
650 |
— |
— |
15,872 |
Other assets |
42,985 |
(30,607) |
— |
— |
12,378 |
Future tax assets |
3,596 |
— |
— |
(218) |
3,378 |
Accounts payable and accrued
liabilities |
70,753 |
19,223 |
— |
— |
89,976 |
Long-term debt due within one year |
2,254 |
2,100 |
— |
— |
4,354 |
Deferred revenue |
6,376 |
143 |
— |
— |
6,519 |
Long-term debt |
— |
78,598 |
— |
— |
78,598 |
Other long-term liabilities |
4,340 |
7,500 |
(2,137) |
— |
9,703 |
Future tax liabilities |
66,551 |
1,319 |
— |
1,413 |
69,283 |
Shareholders' equity |
1,492,380 |
— |
2,137 |
3,228 |
1,497,745 |
As at December 31,
2009 |
|
|
U.S.
GAAP
|
Property
Carrying
Costs |
Canadian
GAAP |
Real estate properties, net |
|
|
$1,389,845 |
$ 4,325 |
$ 1,394,170 |
Future tax assets |
|
|
9,850 |
(218) |
9,632 |
Future tax liabilities |
|
|
37,824 |
1,258 |
39,082 |
MID shareholders' equity |
|
|
1,589,542 |
2,849 |
1,592,391 |
24. |
SUBSEQUENT EVENTS |
(a) |
On January 31, 2011, the Company entered into definitive
agreements with respect to a reorganization proposal which
contemplates the elimination of MID's dual class share capital
structure through which Mr. Frank Stronach and his family control
MID (the "Stronach Shareholder"). The reorganization proposal
achieves this through: i) the cancellation of all 363,414 Class B
Shares held by the Stronach Shareholder upon the transfer to the
Stronach Shareholder of MID's Racing & Gaming Business as well
as lands held for development as described in note 5(a) and other
assets (and associated liabilities), and $20 million of working
capital as of January 1, 2011 and ii) the purchase for cancellation
by MID of each of the other 183,999 Class B Shares in consideration
for 1.2 Class A Subordinate Voting Shares, which following
cancellation of the Class B Shares will be renamed Common Shares.
As part of the reorganization proposal, MID must contribute to the
Racing & Gaming Business cash in the amount of $2.5 million in
respect of January 2011 and $3.8 million per month in respect of
the period from February 1, 2011 to closing. In addition, MID and
the Stronach Shareholder have agreed to split equally any amounts
received upon the completion of the sale of Lone Star LP and any
proceeds pursuant to The Meadows Holdback Agreement. |
|
The reorganization proposal was made by holders of MID's Class
A Subordinate Voting Shares representing in excess of 50% of the
outstanding Class A Subordinate Voting Shares (the "Initiating
Shareholders"), including eight of MID's top ten shareholders, and
is supported by MID's controlling shareholder, which holds 57% of
the votes attaching to MID's outstanding shares. Each of the
Initiating Shareholders and the Stronach Shareholder have agreed to
vote in favour of the proposed reorganization. In addition,
shareholders representing in excess of 50% of the outstanding Class
B Shares held by minority shareholders have also agreed to vote in
favour of the proposed reorganization. |
|
The proposed reorganization will be implemented pursuant to a
court-approved plan of arrangement (the "Arrangement") under the
Business Corporations Act (Ontario) and will be subject to
approval by shareholders at the annual and general meeting
scheduled to be held on March 29, 2011 and the Ontario Superior
Court of Justice thereafter. The Board of Directors has
approved MID entering into the transaction and recommends that the
holders of Class A Subordinate Voting Shares and Class B Shares
vote in favour of the resolution approving the Arrangement (the
"Arrangement Resolution"). The votes represented by the
Stronach Shareholder, the Initiating Shareholders and the other
holders of the Class B Shares who have agreed to vote in favour of
the Arrangement will be sufficient to pass the Arrangement
Resolution. |
(b) |
On October 1, 2010, ST Acquisition Corp. (''STAC''), a
corporation controlled by members of the Stronach family, announced
by way of press release that it intended to acquire any or all of
the outstanding Class A Subordinate Voting Shares and Class B
Shares of MID that it did not already own at a price of $13.00 per
share in cash (the ''Proposed STAC Offer''). The closing price of
the Class A Subordinate Voting Shares on the TSX and the NYSE on
September 30, 2010 was Cdn.$11.25 and $10.99, respectively. The
Proposed STAC Offer was not conditional on any minimum number of
shares being tendered. STAC has subsequently advised MID that, as a
result of the reorganization proposal, it has suspended the
Proposed STAC Offer. |
(c) |
On February 15, 2011, Power Plant Entertainment Casino Resorts
Indiana, LLC, PPE Casino Resorts Maryland, LLC and The Cordish
Company (the "Plaintiffs") sued, among other defendants, MID,
certain subsidiary entities and joint ventures, including MJC and
certain of its subsidiaries (collectively, the "MJC Entities"), as
well as MID's Chairman and Chief Executive Officer, Frank Stronach,
in the Circuit Court for Baltimore City in Baltimore
Maryland. The claims asserted in the Plaintiffs' complaint
against MID, the MJC Entities and Stronach (the "Complaint") are
alleged to have arisen from events that occurred in Maryland in
connection with the referendum conducted in November 2010
concerning the award of a gaming license to Plaintiff PPE Casino
Resorts Maryland, LLC to conduct alternative gaming at the Arundel
Mills Mall. The specific claims asserted against MID, the
MJC Entities and Mr. Frank Stronach are for alleged civil
conspiracy, false light invasion of privacy and defamation.
The Complaint seeks an award against all defendants in the amount
of $300 million in compensatory damages and $300 million in
punitive damages. The Company believes this claim is without
merit. |
1 The results for the three-month
period ended December 31, 2010 include the results of the
Transferred Assets, while the results for the year ended December
31, 2010 include the results of the Transferred Assets from the
date of transfer of April 30, 2010 (note 2(c)).
2 The results for the three-month
period ended December 31, 2009 do not include the results of MEC,
while the results for the year ended December 31, 2009 include the
results of MEC up to the Petition Date of March 5, 2009 (note
1(c)).
3The results for the three-month
period ended December 31, 2010 include the results of the
Transferred Assets, while the results for the year ended December
31, 2010 include the results of the Transferred Assets from the
date of transfer of April 30, 2010 (note 2(c)).
4 The results for the three-month
period ended December 31, 2009 do not include the results of MEC,
while the results for the year ended December 31, 2009 include the
results of MEC up to the Petition Date of March 5, 2009 (note
1(c)).
5 The results for the three-month
period ended December 31, 2009 do not include the results of MEC's
discontinued operations, while the results for the year ended
December 31, 2009 include the results of MEC's discontinued
operations up to the Petition Date of March 5, 2009 (note
1(c)).
6 The results for the three-month
period ended December 31, 2009 do not include the results of MEC,
while the results for the year ended December 31, 2009 include the
results of MEC up to the Petition Date of March 5, 2009 (note
1(c)).
7 The results for the three-month
period ended December 31, 2009 do not include the results of MEC,
while the results for the year ended December 31, 2009 include the
results of MEC up to the Petition Date of March 5, 2009 (note
1(c)).
8 The results for the three-month
period ended December 31, 2010 include the results of the
Transferred Assets, while the results for the year ended December
31, 2010 include the results of the Transferred Assets from the
date of transfer of April 30, 2010 (note 2(c)).
9 The results for the three-month
period ended December 31, 2009 do not include the results of MEC,
while the results for the year ended December 31, 2009 include the
results of MEC up to the Petition Date of March 5, 2009 (note
1(c)).
SOURCE MI Developments Inc.