AURORA, ON, March 10 /CNW/ -- AURORA, ON, March 10 /CNW/ - MI
Developments Inc. (TSX: MIM.A) (TSX: 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): MID CONSOLIDATED Three months ended Year ended December
December 31, 31, (in thousands, except per 2010 2009 2010 2009
share figures) Revenues Real Estate $ 43,655 $ 58,042 $ 174,480 $
224,034 Business Racing & Gaming Business( (1)) 65,796 -
183,880 - MEC((2)(3)) - - - 152,935 Eliminations - - - (9,636) $
109,451 $ 58,042 $ 358,360 $ 367,333 Net income (loss) attributable
to MID Real Estate $ (42,016) $ (72,800) $ 24,671 $ 11,717 Business
Racing & Gaming (47,292) - (76,683) - Business MEC - continuing
- - - (54,763) operations Eliminations - - - (107) Loss from
continuing $ (89,308) $ (72,800) $ (52,012) $ (43,153) operations
Income from MEC discontinued operations( (4)) - - - 864 $ (89,308)
$ (72,800) $ (52,012) $ (42,289) Diluted loss attributable to MID
per $ (1.91) $ (1.56) $ (1.11) $ (0.93) share from continuing
operations Diluted loss attributable $ (1.91) $ (1.56) $ (1.11) $
(0.91) to MID per share Real Estate Business Funds from operations
("FFO")((5)) $ (31,445) $ (61,873) $ 67,436 $ 52,860 Diluted FFO
per share( (5)) $ (0.67) $ (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 Park(TM), 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 Racino(TM). (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) Three months ended Year
ended December 31, December 31, (in thousands, except per share
2010 2009 2010 2009 information) Net income (loss) $ (42,016) $
(72,800) $ 24,671 $ 11,717 Add back depreciation and 10,571 10,870
41,560 41,349 amortization Add back (deduct) loss (gain) on - 57
1,205 (206) disposal of real estate Funds from $ (31,445) $
(61,873) $ 67,436 $ 52,860 operations Basic and diluted funds from
$ (0.67) $ (1.32) $ 1.44 $ 1.13 operations per share Basic and
diluted number of shares 46,708 46,708 46,708 46,708 outstanding
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, 2010 2009
Change 2010 2009 Change except per share information) 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
58.0 174.5 224.0 (25%) (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
2010 2009 Change properties) Number of income-producing 106 106 -
properties Leaseable area 27.5 27.4 1% (sq. ft.) Annualized lease
payments ("ALP") $ 176.8 $ 178.0 1% ((4)) Income-producing
property, gross $ 1,627.5 $ 1,639.0 1% book value ("IPP") ALP as
percentage of 10.9% 10.9% - IPP (()(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 0.987 0.948
4% 0.971 0.881 10% equals U.S. dollars 1 euro equals U.S. 1.359
1.475 (8%) 1.327 1.393 (5%) dollars 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) Real Estate Racing & Gaming
Consolidated Business 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 2010 2009 Change
information) Net loss $ (42,016) $ (72,800) 42% Add back
depreciation and 10,571 10,870 (3%) amortization Add back loss on
disposal of real — 57 (100%) estate Funds from operations $
(31,445) $ (61,873) 49% Basic and diluted funds from operations $
(0.67) $ (1.32) 49% per share Basic and diluted number of shares
46,708 46,708 outstanding 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 Park(TM )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 Racing & Gaming Business
Business Years Ended 2010 2009 2010 2009 2010 2009 December 31,
Revenues Rental revenue $ 172,656 $ 170,929 $ 172,656 $ 170,929 $ —
$ — Interest and other 1,824 43,469 1,824 53,105 — — income from
MEC Racing, gaming and 183,880 152,935 — — 183,880 152,935 other
revenue 358,360 367,333 174,480 224,034 183,880 152,935 Operating
costs, expenses and income Purses, awards and 100,945 82,150 — —
100,945 82,150 other Operating costs 90,655 55,274 — — 90,655
55,274 General and 76,524 53,071 49,687 52,904 26,837 157
administrative Depreciation and 50,437 48,334 41,560 41,349 8,877
7,014 amortization Interest expense, 16,447 18,985 16,197 13,535
250 14,960 net Foreign exchange (16) 8,104 86 (543) (102) 8,647
losses (gains) Equity loss 29,501 (65) — — 29,501 (65) (income)
Write-down of long-lived and 44,159 4,498 40,646 4,498 3,513 —
intangible assets Impairment provision (recovery) related (9,987)
90,800 (9,987) 90,800 — — to loans receivable from MEC Operating
income (40,305) 6,182 36,291 21,491 (76,596) (15,202) (loss)
Deconsolidation adjustment to the carrying values of — (46,677) —
(504) — (46,173) MID's investment in, and amounts due from, MEC
Gain (loss) on disposal of real (1,205) 206 (1,205) 206 — — estate
Other gains 1,913 (7,798) 1,971 (7,798) (58) — (losses), net
Purchase price consideration 21,027 — 21,027 — — — adjustment
Income (loss) before income (18,570) (48,087) 58,084 13,395
(76,654) (61,375) taxes Income tax 33,442 1,737 33,413 1,678 29 59
expense Income (loss) from continuing (52,012) (49,824) 24,671
11,717 (76,683) (61,434) operations Income from discontinued —
1,227 — — — 784 operations Net income (52,012) (48,597) 24,671
11,717 (76,683) (60,650) (loss) Add net loss attributable to the —
6,308 — — — 6,308 non-controlling interest Net income (loss) $ $
attributable to $ (52,012) (42,289) $ 24,671 $ 11,717 $ (76,683)
(54,342) MID Income (loss) attributable to MID from 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( 1,398 (c)) 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 41,560
41,349 1% amortization Add back (deduct) loss (gain) on disposal of
1,205 (206) (685%) real estate Funds from operations $ 67,436 $
52,860 28% Basic and diluted funds from operations per $ 1.44 $
1.13 27% share 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 Total Beyond
Canada 371 374 1,146 — 643 — 3,299 2,234 8,067 U.S. — 171 1,683 72
213 — 1,576 5,474 1,759 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 Percent Value 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 135 (th) 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
Park(TM )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 2013
2014 2015 Thereafter Total 2012 Mortgage $ 2,254 $ — $ — $ — $ — $
— $ 2,254 obligations 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 614 — — — — — 614 contributions
Construction and development project 8,705 — — — — — 8,705
commitments 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
HRTV(TM) 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 HRTV(TM) 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 HRTV(TM) (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") No. 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 2010
2009 2008 at December 31, Revenue: Real Estate $ 174,480 $ 224,034
$ 219,141 Business MEC/Racing & Gaming Business((2), 183,880
152,935 591,998 (3)) Eliminations((1)) — (9,636) (40,566) $ 358,360
$ 367,333 $ 770,573 Income (loss) from continuing operations
attributable to MID: Real Estate $ 24,671 $ 11,717 $ 132,172
Business((4)) MEC/Racing & Gaming Business((3),(5), (76,683)
(54,763) (124,875) (6)) Eliminations((1)) — (107) (963) $ (52,012)
$ (43,153) $ 6,334 Net income (loss) attributable to MID: Real
Estate $ 24,671 $ 11,717 $ 132,172 Business((4)) MEC/Racing &
Gaming Business((3),(5), (76,683) (54,342) (146,395) (6),(7))
Eliminations((1)) — 336 1,951 $ (52,012) $ (42,289) $ (12,272) Cash
dividends $ 0.50 $ 0.60 $ 0.60 declared per share Basic and diluted
earnings (loss) per share from $ (1.11) $ (0.93) $ 0.14 continuing
operations Basic and diluted earnings (loss) per $ (1.11) $ (0.91)
$ (0.26) share Total Assets: Real Estate $1,940,178 $ 1,918,151
$1,887,135 Business MEC/Racing & Gaming 530,575 — 1,054,271
Business((3)) Eliminations((1)) (526,425) (397,297) — $1,944,328 $
1,918,151 $2,544,109 Total Debt: Real Estate $ 279,637 $ 253,204 $
221,922 Business MEC/Racing & Gaming — — 702,711 Business ((3))
Eliminations((1)) — — (336,818) $ 279,637 $ 253,204 $ 587,815 Year
Ended December Mar 31 Jun 30 Sep 30 Dec 31 Total 31, 2010 Revenue:
Real Estate $ 44,563 $ 43,495 $ 42,767 $ 43,655 $ 174,480 Business
Racing & Gaming Business((2), — 69,670 48,414 65,796 183,880
(3)) Eliminations( — — — — (1)) — $ 44,563 $ 113,165 $ 91,181 $
109,451 $ 358,360 Income (loss) from continuing operations
attributable to MID: Real Estate Business( $ 15,129 $ 38,907 $
12,651 $ (42,016) $ 24,671 (4)) Racing & Gaming
Business((3),(5), — (6,215) (23,176) (47,292) (76,683) (6))
Eliminations( — — — (1)) — — $ 15,129 $ 32,692 $ $ (89,308) $
(52,012) (10,525) Net income (loss) attributable to MID: Real
Estate Business( $ 15,129 $ 38,907 $ 12,651 $ (42,016) $ 24,671
(4)) Racing & Gaming Business((3),(5), — (6,215) (23,176)
(47,292) (76,683) (6),(7)) Eliminations( — — — (1)) — — $ 15,129 $
32,692 $ $ (89,308) $ (52,012) (10,525) Basic and diluted earnings
(loss) per $ share from $ 0.32 $ 0.71 $ (0.23) (1.91) $ (1.11)
continuing operations Basic and diluted $ earnings (loss) per $
0.32 $ 0.71 $ (0.23) (1.91) $ (1.11) share FFO: Real Estate
Business( $ 25,658 $ 49,115 $ 24,108 $ (31,445) $ 67,436 (4)) FFO
per share: Real Estate Business( $ 0.55 $ 1.04 $ 0.52 $ (0.67) $
1.44 (4)) Diluted shares 46,708 46,708 46,708 46,708 46,708
outstanding Year Ended December Mar 31 Jun 30 Sep 30 Dec 31 Total
31, 2009 Revenue: Real Estate $ 53,819 $ 55,161 $ 57,012 $ 58,042 $
224,034 Business MEC((2), 152,935 — — — 152,935 (3)) Eliminations(
(9,636) — — (9,636) (1)) — $ 197,118 $ 55,161 $ 57,012 $ 58,042 $
367,333 Income (loss) from continuing operations attributable to
MID: Real Estate Business( $ 25,161 $ 31,329 $ 28,027 $ (72,800) $
11,717 (4)) MEC((3),(5), (54,763) — — — (54,763) (6)) Eliminations(
(107) — — (107) (1)) — $ $ 31,329 $ 28,027 $ (72,800) $ (43,153)
(29,709) Net income (loss) attributable to MID: Real Estate
Business( $ 25,161 $ 31,329 $ 28,027 $ (72,800) $ 11,717 (4))
MEC((3),(5),(6), (54,342) — — — (54,342) (7)) Eliminations( 336 —
336 (1)) — — $ $ 31,329 $ 28,027 $ (72,800) $ (42,289) (28,845)
Basic and diluted earnings (loss) per share from $ (0.64) $ 0.67 $
0.60 $ (1.56) $ (0.93) continuing operations Basic and diluted $
earnings (loss) per $ (0.62) $ 0.67 $ 0.60 (1.56) $ (0.91) share
FFO: Real Estate Business( $ 34,927 $ 41,459 $ 38,347 $ (61,873) $
52,860 (4)) FFO per share: Real Estate Business( $ 0.75 $ 0.89 $
0.82 $ (1.32) $ 1.13 (4)) Diluted shares 46,708 46,708 46,708
46,708 46,708 outstanding (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, December 31, 2010 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, 2010(1) 2009(2) 2010(1)
2009(2) 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 (18,570)
taxes (75,822) (79,718) (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
46,708 46,708 46,708 46,708 diluted 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, 2010(3)
2009(2) 2010(1) 2009(4) 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") No. 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 No. 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 $ 397,560 transferred or acquired cash) 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: December
31, December 31, As at 2010 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 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 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 2009(5) 2010 2009(5) Revenues $ — $ — $ — $ 21,226 Costs
and expenses — — — 19,937 — — — 1,289 Interest expense, net — — —
505 Income from discontinued — — — 784 operations Eliminations
(note 3(a)) — — — 443 Consolidated income from — — — 1,227
discontinued operations Deduct income attributable to
noncontrolling — — — (363) interest Consolidated income from
discontinued operations attributable to $ — $ — $ — $ 864 MID 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 - (455,034)
(418,922) accumulated depreciation 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 - (817) — accumulated depreciation
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 $38,527 $— of Racing & Gaming Business 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, 50% $32,041 $— LLC 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 Year Ended
December 31, December 31, 2010 2009 2010 2009 MID Expected income
taxes at Canadian statutory rate of $ (23,505) $ (26,308) $ (5,757)
$ 4,420 31% (2009 - 33%) Foreign rate (12,703) (8,567) (21,708)
(30,942) differentials Changes in enacted tax — (1,536) — (1,536)
rates and legislation Reversal of prior years' provisions for
uncertain — (173) — (173) tax positions Non-deductible foreign
currency translation loss on translation of the net — 2,573 — 2,573
investment in a foreign operation Non-deductible expenses 1,329
1,797 1,452 1,818 Equity loss 9,442 — 11,800 — Write-down of
long-lived 15,392 — 15,392 — and intangible assets Losses not
benefited 9,298 — 29,611 — Valuation allowance on provision related
to loans — 25,245 — 25,245 receivable from MEC Impairment recovery
relating to loans — — (3,995) — receivable from MEC Purchase price
— — (8,411) — consideration adjustment Tax resulting from internal
12,745 — 12,745 — amalgamation Other 1,488 51 2,313 273 13,486
(6,918) 33,442 1,678 MEC(1) Expected income taxes at Canadian
statutory rate of — — — (20,254) 31% (2009 - 33%) Foreign rate
differentials — — — 45 Losses not benefited — — — 4,994
Non-deductible expenses — — — 37 Deconsolidation adjustment to the
carrying value of — — — 15,237 MID's investment in, and amounts due
from, MEC — — — 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: December 31, December 31, As at
2010 2009 Tax benefit of operating loss carry $ 40,691 $ 29,835
forwards Tax benefit of capital loss carry forwards 29,273 — Tax
value of assets in excess of book 109,942 9,850 value 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: December 31, December 31, As
at 2010 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: December 31, December
31, As at 2010 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 Year Ended December 31, December 31, 2010 2009
2010 2009 Contributed surplus, beginning $ 58,916 $ 57,128 $ 58,575
$ 57,062 of period Stock-based compensation 104 1,447 445 1,513
Contributed surplus, end of $ 59,020 $ 58,575 $ 59,020 $ 58,575
period 14. ACCUMULATED OTHER COMPREHENSIVE INCOME Changes in the
Company's accumulated other comprehensive income are shown in the
following table: Three Months Ended
Year Ended December 31, December 31, 2010 2009 2010 2009
Accumulated other comprehensive income, $ 177,263 $ 191,692 $
198,182 $ 161,827 beginning of period Change in fair value of
interest rate swaps, net of — — — 92 taxes and noncontrolling
interest Foreign currency translation adjustment, net of (1,160)
(1,308) (22,079) 48,315 noncontrolling interest( (i)) Recognition
of foreign currency translation loss (42) 7,798 (42) 7,798 (gain)
in net loss((ii)) Change in net unrecognized actuarial pension
losses, (120) — (120) — net of noncontrolling interest
Reclassification to income upon deconsolidation of MEC — — —
(19,850) (note 1(c)) Accumulated other comprehensive income, end of
$ 175,941 $ 198,182 $ 175,941 $ 198,182 period((iii)) (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: December 31, December 31, As at
2010 2009 Foreign currency translation adjustment $ 176,061 $
198,182 Net unrecognized actuarial pension (120) — losses $ 175,941
$ 198,182 15. NONCONTROLLING INTEREST Changes in the noncontrolling
interest of MEC are shown in the following
table: Three Months Ended
Year Ended December 31, December 31, 2010 2009 2010 2009
Noncontrolling interest, $ — $ — $ — $ 24,182 beginning of period
MEC's stock-based — — — 23 compensation Disgorgement payment
received from noncontrolling — — — 420 interest((i)) Comprehensive
income (loss): Net loss attributable to the noncontrolling — — —
(6,308) interest Other comprehensive income (loss) attributable to
the noncontrolling interest: Change in fair value of interest rate
swaps, net — — — 79 of taxes Foreign currency — — — (74)
translation adjustment Reclassification to income upon
deconsolidation of MEC — — — (18,322) (note 1(c)) 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 Weighted Weighted Average Average Exercise Exercise Price
Price Number (Cdn. $) Number (Cdn. $) Stock options outstanding,
881,544 24.50 494,544 34.83 January 1 Cancelled or forfeited
(121,544) 26.25 (8,000) 39.12 Stock options outstanding, June
760,000 24.22 486,544 34.76 30 and March 31 Granted 95,000 12.90 —
— Cancelled or forfeited (20,000) 35.49 (60,000) 32.15 Stock
options outstanding, 835,000 22.66 426,544 35.12 September 30
Granted — — 455,000 14.54 Stocks options outstanding, 835,000 22.66
881,544 24.50 December 31 Stock options exercisable, 835,000 22.66
624,044 27.47 December 31 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 Year Ended December 31, December 31, 2010 2009 2010
2009 Risk-free interest — 1.4% 1.3% rate 1.4% Expected dividend —
4.3% 3.3% yield 4.3% Expected volatility of MID's Class A — 56.2%
58.7% Subordinate Voting 56.2% Shares Weighted average expected
life — 2.0 2.0 2.0 (years) Weighted average fair $ $ value per
option — $ 3.65 $ 3.40 3.65 granted 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 1 115,939
80,948 Granted 14,000 32,815 Redeemed (11,640) (11,245) DSUs
outstanding, March 31 118,299 102,518 Granted 9,537 21,540 Redeemed
— (25,536) DSUs outstanding, June 30 127,836 98,522 Granted 13,977
15,118 DSUs outstanding, September 30 141,813 113,640 Granted
14,544 10,999 Redeemed — (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 Year Ended
December 31, December 31, 2010((i)) 2009((ii)) 2010((i)) 2009(
(ii)) Continuing operations - Real Estate Business Development
properties - $ 40,646 $ — $ 40,646 $ — Land and improvements
Commercial — 4,498 — 4,498 office 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 Year Ended
December 31, December 31, 2010 2009 2010 2009 Loss from $
continuing $ (89,308) $ (72,800) (52,012) $ (43,153) operations
Income from discontinued — — — 864 operations Net loss attributable
to $ (89,308) $ (72,800) $ (52,012) $ (42,289) MID Weighted average
number of Class A Subordinate Voting and Class B Shares outstanding
46,708 46,708 46,708 46,708 during the period (in thousands)
Diluted earnings (loss) per Class A Subordinate Voting or Class B
Share - from continuing $ (1.91) $ (1.56) $ (1.11) $ (0.93)
operations - from discontinued — — — 0.02 operations $ (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 Year Ended
December 31, December 31, 2010 2009 2010 2009 MID Straight-line
rent $ 535 $ 207 $ 1,069 $ 760 adjustment Interest and other income
— (12,172) — (43,419) from MEC Stock-based compensation 2,783 1,469
3,402 2,734 expense Depreciation and 14,047 10,870 50,437 41,349
amortization Write-down of long-lived and 44,159 4,498 44,159 4,498
intangible assets Impairment provision — 90,800 (9,987) 90,800
(recovery) related to loans receivable from MEC Equity loss 23,605
— 29,501 — Deconsolidation adjustment — — — 504 to the carrying
values of amounts due from MEC Future income taxes (287) (10,369)
11,011 (11,645) Loss (gain) on disposal of — 57 1,205 (206) real
estate Other losses (gains), net 16 7,798 16 7,798 Purchase price
consideration — — (21,027) — adjustment Other 522 84 898 310 85,380
93,242 110,684 93,483 MEC(1) Stock-based compensation — — — 23
expense Depreciation and — — — 7,014 amortization Amortization of
debt — — — 3,346 issuance costs Equity income — — — (65)
Deconsolidation adjustment — — — 46,173 to the carrying value of
the investment in MEC 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 Year Ended
December 31, December 31, 2010 2009 2010 2009 MID Restricted cash $
1,321 $ — $ 801 $ — Accounts receivable (6,049) 1,817 30,855 571
Receivable from 2,500 — 41,299 — Reorganized MEC Inventories 832 —
(234) — Loans receivable from — (51) (613) (771) MEC, net Prepaid
expenses and 80 1,137 1,522 (5) other Accounts payable and 673
2,128 (52,294) 7,392 accrued liabilities Income taxes 14,017 2,305
2,981 12,940 Deferred revenue (409) 2,107 (4,145) 1,542 12,965
9,443 30,131 11,710 MEC(1) Restricted cash — — — 189 Accounts
receivable — — — (18,624) Prepaid expenses and — — — (2,076) other
Accounts payable and — — — 11,289 accrued liabilities Income taxes
— — — 48 Loans payable to MID, — — — 653 net Deferred revenue — — —
217 — — — (8,304) Eliminations (note 3 — — — (43) (a)) 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:
December December As at 31, 31, 2009 2010 Derivatives not
designated as hedging instruments Foreign exchange forward
contracts - included in accounts payable and accrued liabilities $
— $ 10 Location of Amount of Losses Losses (Gains) (Gains)
Recognized in Recognized in Income on Income on Derivatives Three
Months Ended December 31 Derivatives 2010 2009 Derivatives not
designated as hedging instruments Foreign Foreign exchange forward
Exchange contracts Losses (Gains) $ — $ 10 Location of Amount of
Losses Losses (Gains) (Gains) Recognized Recognized in in Income on
Income on Derivatives Year Ended December 31 Derivatives 2010 2009
Derivatives not designated as hedging instruments Foreign Foreign
exchange forward Exchange contracts 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. Fair value determined using significant observable
Level 2: inputs, generally either quoted prices in active markets
for similar assets or liabilities or quoted prices in markets that
are not active. Fair value determined using significant
unobservable Level 3: 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: Quoted Prices in Active Markets Significant
Significant for Identical Other Unobservable Assets or Observable
Inputs Inputs As at December 31, Liabilities (Level 2) (Level 3)
2010 (Level 1) ASSETS CARRIED AT FAIR VALUE ON A RECURRING BASIS
Assets carried at fair value Cash and cash $ 85,407 $ — $ —
equivalents Restricted cash 9,334 — — ASSETS CARRIED AT FAIR VALUE
ON A NONRECURRING BASIS Trademark((i)) $ — $ — $ 3,800 Goodwill((i)
) ( )—( ) ( )—( ) ( )7,191 Development properties - Land — — 39,449
and improvements( (ii)) Quoted Prices in Active Markets Significant
Significant for Identical Other Unobservable Assets or Observable
Inputs Inputs As at December 31, Liabilities (Level 2) (Level 3)
2009 (Level 1) ASSETS AND LIABILITIES CARRIED AT FAIR VALUE ON A
RECURRING BASIS Assets carried at fair value Cash and cash $
135,163 $ — $ — equivalents Restricted cash 458 — — Loans
receivable from MEC, net — — 362,404 (note 3(a))( (iii))
Liabilities carried at fair value Foreign exchange forward
contracts — 10 — ((iv)) ASSETS CARRIED AT FAIR VALUE ON A
NONRECURRING BASIS Real estate $ — $ — $ 10,000 property((v))
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 (i) 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. 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 (ii) 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. The following
table reconciles the beginning and ending (iii) 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, $ 362,404 $ — beginning of period Loan advances to MEC
13,804 — Loan repayments from MEC (60,794) — Non-cash settlement of
loan receivable (326,012) — from MEC (note 3(a)) Impairment
recovery related to loans 9,987 — receivable from MEC (note 3(a))
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)). Foreign
exchange forward contracts are a Level 2 fair value (iv)
measurement as the fair value of the contracts are determined based
on foreign exchange rates in effect at December 31, 2009. 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 (v) 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. The fair value of the
senior unsecured debentures is determined using the quoted market
price of the senior (vi) 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,
2010(1) 2009(2) 2010(1) 2009(2) Revenues Real Estate Business $
43,655 $ 58,042 $ 174,480 $ 224,034 Racing & Gaming 65,796
183,880 152,935 Business — 109,451 58,042 358,360 376,969
Eliminations (note 3 — — (9,636) (a)) — 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 (47,292) (76,683)
(54,342) Business — (89,308) (72,800) (52,012) (42,625)
Eliminations (note 3 — — 336 (a)) — Net loss attributable $
(89,308) $ (52,012) $ (42,289) to MID $ (72,800) 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
Year Ended 31, December 31, 2010 2009 2010 2009 Net loss
attributable to MID $ (89,308) $ (72,800) $ (52,012) $ (42,289)
under U.S. GAAP Interest expense on subordinated notes( — — — 6,570
* (i)) Depreciation and amortization( — — — (340)* (ii))
Stock-based compensation( — — — 3,204 * (iii)) Foreign currency
translation losses( (8,004) — (8,004) (28,241) (iv)) Net loss
attributable to MID $ (97,312) $ (72,800) $ (60,016) $ (61,096)
under Canadian GAAP Basic and diluted earnings (loss) attributable
to each MID Class A Subordinate Voting or Class B Share -
continuing $ (2.08) $ (1.56) $ (1.28) $ (1.33) operations -
discontinued — — — 0.02 operations $ (2.08) $ (1.56) $ (1.28) $
(1.31) Comprehensive loss attributable to $ (90,630) $ (66,310) $
(74,253) $ (5,934) MID under U.S. GAAP Net adjustments to U.S. GAAP
net loss — — — (18,807) per above table Translation of development
102 111 380 210 property carrying costs((v)) Foreign currency
translation losses( 8,004 — 8,004 28,241 (iv)) Employee defined
benefit and 120 — 120 (728) * postretirement plans((vi))
Comprehensive $ (82,404) $ (66,199) $ (65,749) $ 2,982 income
(loss) attributable to MID under Canadian GAAP * 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: Property As at December 31, U.S.
Joint Benefit Carrying Canadian 2010 GAAP Ventures Plans Costs 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 (2,137) liabilities 4,340 7,500 — 9,703
Future tax — liabilities 66,551 1,319 1,413 69,283 Shareholders'
2,137 equity 1,492,380 — 3,228 1,497,745 Property As at December
31, U.S. Carrying Canadian 2009 GAAP Costs GAAP Real estate
$1,389,845 properties, net $ 4,325 $ 1,394,170 Future tax assets
9,850 (218) 9,632 Future tax 37,824 liabilities 1,258 39,082 MID
shareholders' 1,589,542 equity 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)). (3)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)). (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)). To view this news release in
HTML formatting, please use the following URL:
http://www.newswire.ca/en/releases/archive/March2011/11/c9251.html
pJohn Simonetti, Interim Chief Financial Officer, at 905-726-7133/p
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