MI Developments announces 2009 first quarter results
AURORA, ON, May 8 /CNW/ - MI Developments Inc. (TSX: MIM.A, MIM.B; NYSE:
MIM) ("MID" or the "Company") today announced its results for the three months
ended March 31, 2009. All figures are in U.S. dollars.
-------------------------------------------------------------------------
(in thousands, except per share figures) REAL ESTATE BUSINESS(1)
Three months ended
March 31,
-------------------------
2009 2008
------------ ------------
Revenues $ 53,819 $ 54,035
Net income attributable to MID $ 25,161 $ 30,888
Funds from operations ("FFO")(2) $ 34,927 $ 41,935
Diluted FFO per share(2) $ 0.75 $ 0.90
-------------------------------------------------------------------------
(in thousands, except per share figures) MID CONSOLIDATED(1)
Three months ended
March 31,
-------------------------
2009(3) 2008
------------ ------------
Revenues
Real Estate Business $ 53,819 $ 54,035
Magna Entertainment Corp. ("MEC")(3),(4) 152,935 229,485
Eliminations(3) (9,636) (8,108)
------------ ------------
$ 197,118 $ 275,412
------------ ------------
------------ ------------
Net income (loss) attributable to MID
Real Estate Business $ 25,161 $ 30,888
MEC - continuing operations(3) (54,763) (6,995)
Eliminations(3) (107) 266
------------ ------------
Income from continuing operations (29,709) 24,159
MEC - discontinued operations(3),(5) 864 (7,280)
------------ ------------
$ (28,845) $ 6,879
------------ ------------
------------ ------------
Diluted earnings (loss) attributable to
MID per share from continuing operations $ (0.64) $ 0.52
Diluted earnings (loss) attributable
to MID per share $ (0.62) $ 0.15
-------------------------------------------------------------------------
(1) As discussed further below in this press release, the Company adopted
United States generally accepted accounting principles ("U.S. GAAP")
as its primary basis of financial reporting commencing January 1,
2009 on a retrospective basis. In conjunction with the adoption of
U.S. GAAP, the Company also adopted the definition of FFO prescribed
in the United States effective January 1, 2009 on a retrospective
basis. The results of operations for the three months ended March 31,
2008 have been restated to reflect the adoption of U.S. GAAP and the
definition of FFO prescribed in the United States.
(2) FFO and diluted FFO per share are measures widely used by analysts
and investors in evaluating the operating performance of real estate
companies. However, FFO does not have a standardized meaning under
GAAP and therefore may not be comparable to similar measures
presented by other companies. Please refer to "Reconciliation of
Non-GAAP to GAAP Financial Measures" below in this press release.
(3) As discussed further below in this press release, on March 5, 2009,
MEC and certain of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.
As a result of the MEC Chapter 11 filing, the Company has concluded
that, under generally accepted accounting principles ("GAAP"), it
ceased to have the ability to exert control over MEC on or about
March 5, 2009. Accordingly, the Company's investment in MEC has been
deconsolidated from the Company's results beginning on March 5, 2009.
Accordingly, the Company's results of operations for the three months
ended March 31, 2009 include MEC's results of operations for the
period prior to March 5, 2009. Transactions between the Real Estate
Business and MEC have not been eliminated in the presentation of each
segment's results of operations. However, the effects of transactions
between these two segments prior to March 5, 2009 are eliminated in
the consolidated results of operations of the Company.
(4) Excludes revenues from MEC's discontinued operations.
(5) Discontinued operations represent MEC's discontinued operations, net
of certain related consolidation adjustments. MEC's discontinued
operations for the three-month periods ended March 31, 2009 and 2008
include the operations of Remington Park, Thistledown, Portland
Meadows and Magna Racino(TM). In addition, MEC's discontinued
operations for the three months ended March 31, 2008 include the
operations of Great Lakes Downs, which was sold in July 2008.
-------------------------------------------------------------------------
REAL ESTATE BUSINESS FINANCIAL RESULTS
--------------------------------------
Revenues were $53.8 million in the first quarter of 2009 compared to
$54.0 million in the first quarter of 2008. The $0.2 million reduction in
revenues is due to a $5.5 million reduction in rental revenues, partially
offset by a $5.3 million increase in interest and other income earned from
MEC. The decrease in rental revenues is primarily due to foreign exchange,
which had a $5.6 million negative impact as the U.S. dollar strengthened
against the foreign currencies (primarily the Canadian dollar and the euro) in
which the Real Estate Business operates. Property vacancies and lease
replacements and renewals also had a negative impact, reducing revenue for the
quarter by $0.6 million compared to the prior year period. These negative
contributions to rental revenues were partially offset by contractual rent
adjustments, which increased revenues by $0.7 million, primarily due to
cumulative CPI-based increases (being increases that occur every five years or
once a specified cumulative increase in CPI has occurred) and fixed
contractual rent adjustments implemented since first quarter of fiscal 2008.
The increase in interest and other income earned from MEC is primarily due to
(i) $2.1 million of interest and fees earned under the loan provided in
December 2008 (the "MEC 2008 Loan"), (ii) a $2.1 million increase in interest
and fees earned under the bridge loan provided in September 2007 (the "MEC
Bridge Loan") as a result of the increased level of borrowings and arrangement
fees incurred and (iii) a $1.1 million increase in interest and arrangement
fees recognized under the Gulfstream Park project financing.
FFO for the first quarter of 2009 was $34.9 million ($0.75 per share)
compared to $41.9 million ($0.90 per share) in the prior year period,
representing a decrease of 17%. This $7.0 million reduction in FFO is due to a
$0.2 million reduction in revenues, increases of $7.4 million in general and
administrative expenses and $0.2 million in net interest expense, the $0.5
million adjustment to the carrying values of the MEC loan facilities on
deconsolidation of MEC (see "MEC CHAPTER 11 FILING AND PROCESS -
Deconsolidation of MEC") and $3.9 million of other gains associated with a
lease termination fee in the prior year period. These reductions to FFO were
partially offset by a $5.2 million reduction in income tax expense.
General and administrative expenses increased to $11.9 million for the
first quarter of 2009 from $4.6 million in the prior year period. The increase
over the prior year period is primarily due to $7.0 million of advisory and
other costs incurred in the first quarter of 2009 in connection with the
November 2008 Reorganization Proposal (as defined below) and MID's involvement
in MEC's Chapter 11 process (see "MEC CHAPTER 11 FILING AND PROCESS").
The Real Estate Business' income tax expense for the first quarter of
2009 was $3.3 million, representing an effective tax rate of 11.5%, compared
to an effective tax rate for the first quarter of 2008 of 21.4%. Excluding the
$7.0 million of costs associated with the November 2008 Reorganization
Proposal and MID's involvement in MEC's Chapter 11 process, the $3.9 million
lease termination fee in the first quarter of 2008 and the related tax impact
of both items, the Real Estate Business' effective tax rate was 15.9% in the
first quarter of 2009 compared to 20.1% for the first quarter of 2008. As the
jurisdictions in which the Real Estate Business operates have different rates
of taxation, income tax expense is influenced by the proportion of income
earned in each particular country. This 4.2% reduction in the adjusted
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.
The Real Estate Business reported net income of $25.2 million for the
first quarter of 2009 compared to $30.9 million in the prior year period. The
$5.7 million decrease in net income is due to the $7.0 million reduction in
FFO discussed above, partially offset by a $1.3 million reduction in
depreciation and amortization (due primarily to the impact of foreign
exchange).
At March 31, 2009, the Real Estate Business had 27.3 million square feet
of leaseable area, with annualized lease payments of $163.4 million,
representing a return of 10.9% on the gross aggregate carrying value of our
income-producing portfolio.
Dennis Mills, MID's Vice-Chairman and Chief Executive Officer, stated,
"We are clearly experiencing extremely challenging economic conditions. These
conditions have had a particularly significant impact on the automotive
industry, resulting in one of the most difficult periods in the history of
Magna International, our primary tenant, due to exceptionally low production
volumes for Magna's customers. Nevertheless, MID continues to achieve strong
results and will continue to seek out new relationships in order to diversify
its tenant base. In this regard, I am proud to announce that in April 2009 we
signed a long-term lease with Peer 1 Network Enterprises for an MID facility
that had been vacated by Magna upon expiry of the lease."
MEC CHAPTER 11 FILING AND PROCESS
---------------------------------
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.
MID, through a wholly-owned subsidiary (the "MID Lender"), is the largest
secured creditor of MEC. At the Petition Date, the balance of MID's existing
loans to MEC, including accrued interest, was approximately $372 million,
comprised of $171 million under the Gulfstream Park project financing, $23
million under the Remington Park project financing, $125 million under the
2007 MEC Bridge Loan and $53 million under the 2008 MEC Loan. At March 31,
2009, approximately $375 million (including accrued interest subsequent to the
Petition Date) was outstanding under these loan facilities. All of these loans
are secured. In addition, the Company owned approximately 54% of MEC's total
equity, representing approximately 96% of the total votes attached to MEC's
outstanding stock.
DIP Loan
In connection with the Debtors' Chapter 11 filing, MID (through the MID
Lender) originally agreed to provide a six-month secured debtor-in-possession
financing facility (the "DIP Loan") to MEC in the amount of up to $62.5
million. 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 will accrue during
the Chapter 11 process rather than being paid currently in cash.
At March 31, 2009, $13.5 million was due under the DIP Loan. Subsequent
to March 31, 2009, an additional $3.1 million has been drawn under the DIP
Loan.
The DIP Loan is secured by liens on substantially all assets of MEC and
its subsidiaries (subject to prior ranking liens), as well as a pledge of
capital stock of certain guarantors. The terms of the DIP Loan contemplate
that MEC will sell all or substantially all of its assets through an auction
process and use the proceeds from the asset sales to repay its creditors,
including the MID Lender.
MEC Asset Sales
MEC's Chapter 11 filing contemplates MEC selling all or substantially all
of its assets through an auction process. On the Petition Date, and subject to
Court approval, MID entered into an agreement with MEC to purchase MEC's
relevant interests associated with certain assets (the "Stalking Horse Bid").
However, on April 20, 2009, in response to objections raised by a number of
parties in the MEC Chapter 11 process and with the intent of expediting that
process, MID and MEC terminated the Stalking Horse Bid.
Following a hearing on May 4, 2009, the Court approved, subject to entry
of a final order, an order confirming the bid procedures for MEC's interests
associated with the following assets (the "Bid Procedures Assets"): Santa
Anita Park (including MEC's joint venture interest in the Shops at Santa
Anita); Remington Park; Lone Star Park; Thistledown; Portland Meadows;
StreuFex(TM); vacant lands located in Ocala, Florida; and vacant lands located
in Dixon, California. MID has stated that it does not intend to submit a bid
for any of the Bid Procedures Assets; provided, however, that MID intends to
preserve the value of its secured loans to MEC and will take all available
steps to prevent fire sales of the Bid Procedures Assets.
MEC has advised the Court that it is continuing to explore all
alternatives with respect to its remaining assets, and although the Stalking
Horse Bid has been terminated, MID will continue to evaluate whether to bid on
MEC assets during the course of MEC's Chapter 11 sales process.
Mr. Mills noted, "Our priority in the MEC Chapter 11 process continues to
be preserving and protecting the value of MID's secured loan investments in
MEC. MID is fully supportive of a fair and transparent process that is
designed to maximize value for all of MEC's constituents."
Deconsolidation of MEC
As a result of the MEC Chapter 11 filing, the Company has concluded that,
under 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 has been
deconsolidated from the Company's results beginning on the Petition Date.
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 as to whether
MEC shareholders, including MID, will receive any recovery following MEC's
reorganization, the carrying value of MID's equity investment in MEC has been
reduced to zero. Upon deconsolidation of MEC, the Company recorded an
aggregate $46.7 million reduction to the carrying values of its investment in,
and amounts due from, MEC, which is included in the Company's statement of
income (loss) for the three months ended March 31, 2009. Included in this
aggregate amount is a $0.5 million reduction in the carrying values of the MEC
loan facilities with the MID Lender at the Petition Date. Although, subject to
the uncertainties of MEC's Chapter 11 process, MID management believes that
the MID Lender's claims are adequately secured and therefore has no reason to
believe that the amount of the MEC loan facilities with the MID Lender is
impaired, the $0.5 million reduction in the carrying values of the MEC loan
facilities was required under GAAP, reflecting the fact that certain of the
MEC loan facilities bear interest at a fixed rate of 10.5% per annum, which is
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 Company's unaudited interim consolidated financial statements
attached below have been arranged so as to provide detailed, discrete
financial information on the Real Estate Business and, for the period prior to
the Petition Date, MEC. The deconsolidation of MEC 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 income (loss), consolidated statements of
cash flows and consolidated balance sheets. As a result, the remaining content
of this press release focuses solely on the operating results, financial
condition, cash flows and liquidity of the Real Estate Business.
For further details of MEC's Chapter 11 filing and the treatment of
stockholders and creditors, the DIP Loan and the deconsolidation of MEC,
please refer to notes 1(a) and 19(a)(iv) to the accompanying unaudited interim
consolidated financial statements below.
TERMINATION OF NOVEMBER 2008 REORGANIZATION PROPOSAL
----------------------------------------------------
On November 26, 2008, MID announced that its Special Committee of MID's
Board of Directors (the "Board") had recommended, and the Board had approved,
holding a vote of MID shareholders on a reorganization proposal developed by
MID management (the "November 2008 Reorganization Proposal"). The principal
components of the November 2008 Reorganization Proposal are set out in MID's
press release dated November 26, 2008, which can be found on the Company's
website at www.midevelopments.com and on SEDAR at www.sedar.com.
As a result of, among other things, current global economic conditions,
the continued disruptions in the financial markets and ongoing uncertainty in
the automotive industry, MID determined that it was unlikely that it would be
able to arrange the new debt financing associated with the November 2008
Reorganization Proposal, nor would it be prudent to raise the new debt until
such time as the ongoing uncertainty in the automotive industry has been
resolved. As a result, on February 18, 2009, MID announced that it was not
proceeding with the November 2008 Reorganization Proposal.
ADOPTION OF UNITED STATES STANDARDS
-----------------------------------
In April 2008, the Canadian Accounting Standards Board confirmed the
transition from Canadian GAAP to International Financial Reporting Standards
("IFRS") for all publicly accountable entities no later than fiscal years
commencing on or after January 1, 2011. As a result, in the second half of
2008, management undertook a detailed review of the implications of MID having
to report under IFRS and also examined the alternative available to MID of
filing its primary financial statements in Canada using U.S. GAAP, as
permitted by the Canadian Securities Administrators' National Instrument
52-107, "Acceptable Accounting Principles, Auditing Standards and Reporting
Currency", given that MID is a Foreign Private Issuer in the United States.
As a result of this analysis, management recommended and the Board
determined that MID should adopt U.S. GAAP as its primary basis of financial
reporting commencing January 1, 2009 on a retrospective basis. All comparative
financial information contained in this press release and the accompanying
unaudited interim consolidated financial statements below have been revised to
reflect the Company's results as if they had been historically reported in
accordance with U.S. GAAP.
The adoption of U.S. GAAP did not have a material change on the Company's
accounting policies or current debt covenants, nor did such adoption require
significant changes to the Company's existing internal controls over financial
reporting and disclosure controls and procedures, or information and data
systems. For further details of the differences between U.S. and Canadian GAAP
impacting the Company and a reconciliation of the Company's results of
operations for the three-month periods ended March 31, 2009 and 2008 and
financial position as at March 31, 2009 and December 31, 2008 from U.S. GAAP
to Canadian GAAP, see notes 1(e) and 21 to the accompanying unaudited interim
consolidated financial statements below.
In conjunction with the Company's adoption of U.S. GAAP as its primary
basis of financial reporting, the Company has adopted the definition of FFO
prescribed in the United States by the National Association of Real Estate
Investment Trusts(R) ("NAREIT") effective January 1, 2009 on a retrospective
basis. The Company previously determined FFO using the definition prescribed
in Canada by the Real Property Association of Canada ("REALpac"). Under the
definition of FFO prescribed by NAREIT, the impact of future income taxes and
asset impairments are included in the calculation of FFO whereas such amounts
are excluded in the definition of FFO prescribed by REALpac.
The discussion in this press release is based on the Company's results of
operations as reported under U.S. GAAP and FFO, FFO per share and diluted FFO
per share for all periods presented have been determined in accordance with
the definition prescribed by NAREIT.
DIVIDENDS
---------
MID's Board of Directors has declared a dividend of $0.15 per share on
MID's Class A Subordinate Voting Shares and Class B Shares for the first
quarter ended March 31, 2009. The dividend is payable on or about June 15,
2009 to shareholders of record at the close of business on May 29, 2009.
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. MID holds a majority equity interest in MEC, an owner
and operator of horse racetracks, and a supplier, via simulcasting, of live
horseracing content to the inter-track, off-track and account wagering
markets. As noted in this press release, MEC has filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code.
RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES
REAL ESTATE BUSINESS
RECONCILIATION OF NET INCOME TO FUNDS FROM OPERATIONS
(U.S. dollars in thousands, except per share figures)
(Unaudited)
Three Months Ended
March 31,
-------------------------
2009 2008
-------------------------------------------------------------------------
Net income $ 25,161 $ 30,888
Add back depreciation and amortization 9,766 11,047
-------------------------------------------------------------------------
Funds from operations $ 34,927 $ 43,762
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted funds from operations $ 0.75 $ 0.90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted number of shares
outstanding (thousands) 46,708 46,708
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------
The contents of this press release contain statements that, to the extent
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation, including
the United States Securities Act of 1933 and the United States Securities
Exchange Act of 1934. Forward-looking statements may include, among others,
statements regarding the Company's future plans, goals, strategies,
intentions, beliefs, estimates, costs, objectives, economic performance or
expectations, or the assumptions underlying any of the foregoing. Words such
as "may", "would", "could", "will", "likely", "expect", "anticipate",
"believe", "intend", "plan", "forecast", "project", "estimate" and similar
expressions are used to identify forward-looking statements. Forward-looking
statements should not be read as guarantees of future performance or results
and will not necessarily be accurate indications of whether or the times at or
by which such future performance will be achieved. Undue reliance should not
be placed on such statements. Forward-looking statements are based on
information available at the time and/or management's good faith assumptions
and analyses made in light of our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate in the circumstances, and are subject to known and
unknown risks, uncertainties and other unpredictable factors, many of which
are beyond the Company's control, that could cause actual events or results to
differ materially from such forward-looking statements. Important factors that
could cause such differences include, but are not limited to, the risks and
uncertainties inherent in MEC's Chapter 11 process (see note 1(a) to the
accompanying financial statements below), including in relation to the
treatment of stockholders and creditors and the auction of MEC's assets, and
the risks set forth in the "Risk Factors" section in MID's Annual Information
Form for 2008, filed on SEDAR at www.sedar.com and attached as Exhibit 1 to
MID's Annual Report on Form 40-F for the year ended December 31, 2008, which
investors are strongly advised to review. The "Risk Factors" section also
contains information about the material factors or assumptions underlying such
forward-looking statements. Forward-looking statements speak only as of the
date the statement was made and unless otherwise required by applicable
securities laws, MID expressly disclaims any intention and undertakes no
obligation to update or revise any forward-looking statements contained in
this MD&A to reflect subsequent information, events or circumstances or
otherwise.
MI Developments Inc. ("MID")
Consolidated Statements of Income (Loss)
(U.S. dollars in thousands, except per share figures)
(Unaudited)
Consolidated (notes 1, 19(a)) Real Estate Business
----------------------------- --------------------
(restated (restated
Three Months Ended - note 1(e)) - note 1(e))
March 31, 2009(1) 2008 2009 2008
-------------------------------------------------------------------------
Revenues
Rental revenue $ 40,363 $ 45,927 $ 40,363 $ 45,927
Interest and other
income from MEC
(note 19(a)) 3,820 - 13,456 8,108
Racing and other
revenue 152,935 229,485 - -
-------------------------------------------------------------------------
197,118 275,412 53,819 54,035
-------------------------------------------------------------------------
Operating costs
and expenses
Purses, awards
and other 82,150 121,228 - -
Operating costs 55,274 74,461 - -
General and
administrative
(notes 3, 19) 12,103 18,560 11,936 4,559
Foreign exchange
losses 8,819 325 172 203
Depreciation and
amortization 16,751 22,060 9,766 11,047
Interest expense, net 8,461 10,513 3,011 2,801
Equity loss (income) (65) 836 - -
Write-down of MEC's
long-lived assets
(note 6) - 5,000 - -
-------------------------------------------------------------------------
Operating income
(loss) 13,625 22,429 28,934 35,425
Deconsolidation
adjustment to the
carrying values of
MID's investment
in, and amounts
due from, MEC
(note 1(a)) (46,677) - (504) -
Other gains
(notes 19, 20) - 5,905 - 3,892
-------------------------------------------------------------------------
Income (loss) before
income taxes (33,052) 28,334 28,430 39,317
Income tax expense 3,328 10,163 3,269 8,429
-------------------------------------------------------------------------
Income (loss) from
continuing
operations (36,380) 18,171 25,161 30,888
Income (loss) from
discontinued
operations (note 4) 1,227 (32,730) - -
-------------------------------------------------------------------------
Net income (loss) (35,153) (14,559) 25,161 30,888
Add net loss
attributable to
the noncontrolling
interest 6,308 21,438 - -
-------------------------------------------------------------------------
Net income (loss)
attributable to MID $ (28,845) $ 6,879 $ 25,161 $ 30,888
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income (loss)
attributable to
MID from
- continuing
operations $ (29,709) $ 24,159 $ 25,161 $ 30,888
- discontinued
operations
(note 4) 864 (17,280) - -
-------------------------------------------------------------------------
Net income (loss)
attributable to MID $ (28,845) $ 6,879 $ 25,161 $ 30,888
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss)
attributable to
each MID Class A
Subordinate Voting
or Class B Share
(note 7)
- Continuing
operations $ (0.64) $ 0.52
- Discontinued
operations
(note 4) 0.02 (0.37)
-----------------------------------------------
Total $ (0.62) $ 0.15
-----------------------------------------------
-----------------------------------------------
Basic and diluted
average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in thousands)
(note 7) 46,708 46,708
-----------------------------------------------
-----------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
Three Months Ended - note 1(e))
March 31, 2009(1) 2008
-----------------------------------------------
Revenues
Rental revenue $ - $ -
Interest and other
income from MEC
(note 19(a)) - -
Racing and other
revenue 152,935 229,485
-----------------------------------------------
152,935 229,485
-----------------------------------------------
Operating costs
and expenses
Purses, awards
and other 82,150 121,228
Operating costs 55,274 74,461
General and
administrative
(notes 3, 19) 157 14,008
Foreign exchange
losses 8,647 122
Depreciation and
amortization 7,014 11,056
Interest expense, net 14,960 16,036
Equity loss (income) (65) 836
Write-down of MEC's
long-lived assets
(note 6) - 5,000
-----------------------------------------------
Operating income
(loss) (15,202) (13,262)
Deconsolidation
adjustment to the
carrying values of
MID's investment
in, and amounts
due from, MEC
(note 1(a)) (46,173) -
Other gains
(notes 19, 20) - 2,013
-----------------------------------------------
Income (loss) before
income taxes (61,375) (11,249)
Income tax expense 59 1,734
-----------------------------------------------
Income (loss) from
continuing
operations (61,434) (12,983)
Income (loss) from
discontinued
operations (note 4) 784 (33,493)
-----------------------------------------------
Net income (loss) (60,650) (46,476)
Add net loss
attributable to
the noncontrolling
interest 6,308 21,438
-----------------------------------------------
Net income (loss)
attributable to MID $ (54,342) $ (25,038)
-----------------------------------------------
-----------------------------------------------
Income (loss)
attributable to
MID from
- continuing
operations $ (54,763) $ (6,995)
- discontinued
operations
(note 4) 421 (18,043)
-----------------------------------------------
Net income (loss)
attributable to MID $ (54,342) $ (25,038)
-----------------------------------------------
-----------------------------------------------
See accompanying notes
--------------------------
(1) The three-month period ended March 31, 2009 includes the results of
MEC up to March 5, 2009 (note 1(a)).
MI Developments Inc.
Consolidated Statements of Comprehensive Income (Loss)
(U.S. dollars in thousands)
(Unaudited)
(restated
- note 1(e))
Three Months Ended March 31, 2009 2008
-------------------------------------------------------------------------
Net loss $ (35,153) $ (14,559)
Other comprehensive income (loss):
Change in fair value of interest rate
swaps, net of taxes (note 14) 171 (616)
Foreign currency translation adjustment
(note 14) (30,520) 36,355
Reclassification to income of MEC's
accumulated other comprehensive income upon
deconsolidation of MEC (notes 1(a) and 14) (19,850) -
-------------------------------------------------------------------------
Comprehensive income (loss) (85,352) 21,180
Add comprehensive loss attributable to the
noncontrolling interest 6,303 20,573
-------------------------------------------------------------------------
Comprehensive income (loss) attributable to MID $ (79,049) $ 41,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MI Developments Inc.
Consolidated Statements of Changes in Deficit
(U.S. dollars in thousands)
(Unaudited)
(restated
- note 1(e))
Three Months Ended March 31, 2009 2008
-------------------------------------------------------------------------
Deficit, beginning of period $ (120,855) $ (80,558)
Net income (loss) attributable to MID (28,845) 6,879
Dividends (7,006) (7,006)
-------------------------------------------------------------------------
Deficit, end of period $ (156,706) $ (80,685)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MI Developments Inc.
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
Consolidated (notes 1, 19(a)) Real Estate Business
----------------------------- --------------------
(restated (restated
Three Months Ended - note 1(e)) - note 1(e))
March 31, 2009(1) 2008 2009 2008
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ (36,380) $ 18,171 $ 25,161 $ 30,888
Items not involving
current cash flows
(note 17) 59,245 30,045 3,073 12,097
Changes in non-cash
balances (note 17) (5,495) (2,803) 2,852 4,672
-------------------------------------------------------------------------
Cash provided by
(used in) operating
activities 17,370 45,413 31,086 47,657
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Real estate and fixed
asset additions (4,786) (14,870) (2,325) (4,382)
Proceeds on disposal
of real estate and
fixed assets, net - 1,492 - -
Decrease (increase)
in other assets (9,708) (1,333) (577) 43
Loan advances to
MEC, net (12,998) - (69,069) (20,034)
Loan repayments
from MEC 26 - 30,918 2,478
Reduction in cash from
deconsolidation
of MEC (31,693) - - -
-------------------------------------------------------------------------
Cash used in
investing activities (59,159) (14,711) (41,053) (21,895)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 18,048 23,127 - -
Repayment of bank
indebtedness (18,597) (22,594) - -
Issuance of
long-term debt, net - 2,731 - -
Repayment of
long-term debt (4,959) (3,301) (3,195) (115)
Loan advances from
MID, net - - - -
Loan repayments to MID - - - -
Disgorgement payment
received from
noncontrolling
interest (note 15) 420 - - -
-------------------------------------------------------------------------
Cash provided by
(used in) financing
activities (5,088) (37) (3,195) (115)
-------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents (2,848) 3,365 (2,542) 3,308
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
continuing
operations (49,725) 34,030 (15,704) 28,955
-------------------------------------------------------------------------
DISCONTINUED
OPERATIONS
Cash provided by
(used in) operating
activities 1,788 (442) - -
Cash used in
investing activities (230) (908) - -
Cash provided by
(used in) financing
activities - (29) - -
-------------------------------------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations 1,558 (1,379) - -
-------------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents
during the period (48,167) 32,651 (15,704) 28,955
Cash and cash
equivalents,
beginning of period 154,874 154,338 122,411 110,945
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period 106,707 186,989 106,707 139,900
Less: cash and cash
equivalents of
discontinued
operations, end
of period - (9,631) - -
-------------------------------------------------------------------------
Cash and cash
equivalents, of
continuing
operations end
of period $ 106,707 $ 177,358 $ 106,707 $ 139,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Magna Entertainment Corp.
-------------------------
(restated
Three Months Ended - note 1(e))
March 31, 2009(1) 2008
-----------------------------------------------
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ (61,434) $ (12,983)
Items not involving
current cash flows
(note 17) 56,511 19,145
Changes in non-cash
balances (note 17) (8,304) (7,686)
-----------------------------------------------
Cash provided by
(used in) operating
activities (13,227) (1,524)
-----------------------------------------------
INVESTING ACTIVITIES
Real estate and fixed
asset additions (2,461) (10,488)
Proceeds on disposal
of real estate and
fixed assets, net - 1,492
Decrease (increase)
in other assets (9,131) (1,376)
Loan advances to
MEC, net - -
Loan repayments
from MEC - -
Reduction in cash from
deconsolidation
of MEC (31,693) -
-----------------------------------------------
Cash used in
investing activities (43,285) (10,372)
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank
indebtedness 18,048 23,127
Repayment of bank
indebtedness (18,597) (22,594)
Issuance of
long-term debt, net - 2,731
Repayment of
long-term debt (1,764) (3,186)
Loan advances from
MID, net 56,000 19,074
Loan repayments to MID (28,834) (2,215)
Disgorgement payment
received from
noncontrolling
interest (note 15) 420 -
-----------------------------------------------
Cash provided by
(used in) financing
activities 25,273 16,937
-----------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents (306) 57
-----------------------------------------------
Net cash flows
provided by (used in)
continuing
operations (31,545) 5,098
-----------------------------------------------
DISCONTINUED
OPERATIONS
Cash provided by
(used in) operating
activities 1,370 (1,162)
Cash used in
investing activities (230) (908)
Cash provided by
(used in) financing
activities (2,058) 668
-----------------------------------------------
Net cash flows
provided by (used in)
discontinued
operations (918) (1,402)
-----------------------------------------------
Net increase
(decrease) in cash
and cash equivalents
during the period (32,463) 3,696
Cash and cash
equivalents,
beginning of period 32,463 43,393
-----------------------------------------------
Cash and cash
equivalents, end
of period - 47,089
Less: cash and cash
equivalents of
discontinued
operations, end
of period - (9,631)
-----------------------------------------------
Cash and cash
equivalents, of
continuing
operations end
of period $ - $ 37,458
-----------------------------------------------
-----------------------------------------------
See accompanying notes
--------------------------
(1) The three-month period ended March 31, 2009 includes the results of
MEC up to March 5, 2009 (note 1(a)).
MI Developments Inc.
Consolidated Balance Sheets
(Refer to note 1 - Basis of Presentation)
(U.S. dollars in thousands)
(Unaudited)
Consol- Magna
Consol- idated Real Enter-
idated (notes 1, Estate tainment
(notes 1, 19(a)) Business Corp(1)
19(a)) --------------------------------------
March 31, December 31, 2008
As at 2009 (restated - note 1(e))
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 106,707 $ 144,764 $ 122,411 $ 22,353
Restricted cash 458 20,255 946 19,309
Accounts receivable 2,844 33,915 2,256 31,659
Loans receivable
from MEC, net
(note 19) 385,676 - 247,075 -
Due from MID
(note 19) - - - 946
Income taxes
receivable 1,049 1,887 1,887 -
Prepaid expenses
and other 1,602 20,724 930 19,837
Assets held for
sale (note 5) - 21,732 - 21,732
Assets held for sale
from discontinued
operations (note 4) - 94,461 - 94,533
-------------------------------------------------------------------------
498,336 337,738 375,505 210,369
Real estate
properties, net
(note 8) 1,304,913 2,024,183 1,397,819 681,701
Fixed assets, net 210 71,206 244 70,962
Other assets (note 9) 1,659 35,200 1,110 34,090
Loans receivable
from MEC (note 19) - - 93,824 -
Deferred rent
receivable 12,690 13,001 13,001 -
Future tax assets 5,359 62,781 5,632 57,149
-------------------------------------------------------------------------
Total assets $ 1,823,167 $ 2,544,109 $ 1,887,135 $ 1,054,271
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND EQUITY
Current liabilities:
Bank indebtedness
(note 10) $ - $ 39,460 $ - $ 39,460
Accounts payable
and accrued
liabilities
(note 11) 17,541 121,471 12,411 109,060
Dividends payable 7,006 - - -
Income taxes payable 8,034 10,363 7,638 2,725
Loans payable to MID,
net (note 19) - - - 246,428
Due to MEC (note 19) 458 - 946 -
Long-term debt due
within one year 175 82,649 3,309 79,340
Note obligation due
within one year, net - 74,601 - 74,601
Deferred revenue 630 9,368 3,254 6,114
Liabilities related
to assets held
for sale (note 5) - 876 - 876
Liabilities related
to discontinued
operations
(note 4) - 51,943 - 75,960
-------------------------------------------------------------------------
33,844 390,731 27,558 634,564
Long-term debt 1,951 17,173 2,063 15,110
Senior unsecured
debentures, net 211,641 216,550 216,550 -
Note obligation, net - 149,015 - 149,015
Loans payable to MID,
net (note 19) - - - 66,373
Other long-term
liabilities (note 12) - 18,973 - 18,973
Future tax liabilities 39,771 105,497 40,933 63,233
-------------------------------------------------------------------------
Total liabilities 287,207 897,939 287,104 947,268
-------------------------------------------------------------------------
Equity:
MID 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) 17,866 17,866
Contributed surplus
(note 13) 57,089 57,062
Deficit (156,706) (120,855)
Accumulated other
comprehensive
income (note 14) 111,623 161,827
-------------------------------------------------------------------------
Total MID
shareholders' equity 1,535,960 1,621,988 1,600,031 82,821
Noncontrolling
interest (note 15) - 24,182 - 24,182
-------------------------------------------------------------------------
Total equity 1,535,960 1,646,170 1,600,031 107,003
-------------------------------------------------------------------------
Total liabilities
and equity $ 1,823,167 $ 2,544,109 $ 1,887,135 $ 1,054,271
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (note 20)
See accompanying notes
-------------------------
(1) MEC's net assets were deconsolidated from the Company's balance sheet
as of March 5, 2009 (note 1(a)).
MI Developments Inc.
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 March 31, 2009 and December 31, 2008 and for the
three-month periods ended March 31, 2009 and 2008 are unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim consolidated financial statements include the
accounts of MI Developments Inc. and its subsidiaries (collectively,
"MID" or the "Company"). MID is a real estate operating company 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 ("Magna") in North America and Europe. MID also acquires land that
it intends to develop for mixed-use and residential projects.
(a) Magna Entertainment Corp.
The Company also holds a majority equity interest in Magna
Entertainment Corp. ("MEC"), an owner and operator of horse
racetracks and a supplier of live horseracing content to the inter-
track, off-track and account wagering markets. At March 31, 2009 and
December 31, 2008, the Company owned approximately 54% of MEC's total
equity, representing approximately 96% of the total votes attached to
MEC's outstanding stock.
Chapter 11 Filing and Process
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. At the Petition Date, MEC owed
$371.7 million to a wholly-owned subsidiary of MID (the "MID Lender")
under various loan facilities (note 19(a)).
MEC filed for Chapter 11 protection in order to implement a
comprehensive financial restructuring and conduct an orderly sales
process for its assets (see note 2 for further details of the MEC
asset sales process). Under Chapter 11, the Debtors are operating 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 are authorized under
Chapter 11 to continue to operate as an ongoing business, but may 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 MEC's 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 has not guaranteed any of MEC's
debt obligations or other commitments.
Under the priority scheme established by the Bankruptcy Code, unless
creditors agree 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. MEC's Class A Subordinate Voting
Stock ("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. The ultimate recovery to MID, as a stockholder of MEC,
if any, in the Debtors' Chapter 11 proceedings will likely not be
determined until confirmation of a plan of reorganization for MEC. In
this regard, however, such a plan is likely to result in MID not
receiving any value for its existing MEC stock and in the
cancellation of such stock.
Furthermore, no assurance can be given as to the treatment the MID
Lender's claims will receive in the Debtors' Chapter 11 proceedings,
although, as a general matter, secured creditors are entitled to
priority over unsecured creditors to the extent of the value of the
collateral securing such claims. Subject to the uncertainties of
MEC's Chapter 11 process, MID management believes that the MID
Lender's claims are adequately secured and therefore has no reason to
believe that the amount of the MEC loan facilities with the MID
Lender is impaired.
DIP Loan
In connection with the Debtors' Chapter 11 filing, MID (through the
MID Lender) is providing to MEC a secured debtor-in-possession
financing facility (the "DIP Loan") of up to $38.4 million (see note
19(a)(iv) for further details of the DIP Loan).
Deconsolidation of MEC
As a result of the MEC Chapter 11 filing, the Company has concluded
that, under generally accepted accounting principles ("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 has been
deconsolidated from the Company's results beginning on the Petition
Date.
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 as to whether MEC shareholders, including MID, will
receive any recovery following MEC's reorganization, the carrying
value of MID's equity investment in MEC has been reduced to zero.
Although, subject to the uncertainties of MEC's Chapter 11 process,
MID management believes that the MID Lender's claims are adequately
secured and therefore has no reason to believe that the amount of the
MEC loan facilities with the MID Lender is impaired, a reduction in
the carrying values of the MEC loan facilities (note 19(a)) at the
Petition Date was required under GAAP, reflecting the fact that
certain of the MEC loan facilities bear interest at a fixed rate of
10.5% per annum, which is 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
is equal to the interest rate charged on the DIP Loan that was
implemented as of the Petition Date, and therefore is considered to
approximate a reasonable market interest rate for the MEC loan
facilities for this purpose. Accordingly, upon deconsolidation of
MEC, the Real Estate Business 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 value 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 will accrete up to the face value of the MEC loan
facilities over the estimated period of time before the loans will be
repaid, with such accretion being recognized in "interest and other
income from MEC" on the Company's consolidated statement of income
(loss).
Prior to the Petition Date, MEC's results are 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 values
of MID's investment in, and amounts due from, MEC $ (46,677)
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Consolidated Financial Statements
The unaudited interim consolidated financial statements have been
prepared in U.S. dollars following GAAP in the United States ("U.S.
GAAP") as further discussed in note 1(e) and the accounting policies
as set out in notes 1 and 25 to the annual consolidated financial
statements for the year ended December 31, 2008.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of 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, 2008.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which are of a normal
recurring nature except as disclosed in note 1(a), necessary to
present fairly the financial position at March 31, 2009 and
December 31, 2008, and the results of operations and cash flows for
the three-month periods ended March 31, 2009 and 2008.
(c) Segmented Information
The Company's reportable segments reflect how the Company is
organized and managed by senior management. Prior to the Petition
Date (note 1(a)), the Company's operations have been segmented in the
Company's internal financial reports between wholly-owned operations
("Real Estate Business") and publicly-traded operations ("Magna
Entertainment Corp."). 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
and executive management have direct responsibility for the key
operating, financing and resource allocation decisions, whereas, in
the case of MEC, such responsibility resides with MEC's separate
Board of Directors and executive management.
Subsequent to the Petition Date, the Company manages and evaluates
its operations as a single "Real Estate Business" reporting segment,
rather than multiple reporting segments, for internal purposes and
for internal decision making.
At March 31, 2009, the Real Estate Business owns income-producing
real estate assets in 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
certain properties that are being held for future development or
sale.
Financial data and related measurements for the periods prior to the
Petition Date are presented on the consolidated statements of income
(loss), consolidated statements of cash flows, and consolidated
balance sheets in two categories, "Real Estate Business" and "Magna
Entertainment Corp.", which correspond to the Company's reporting
segments prior to the Petition Date. Transactions and balances
between the "Real Estate Business" and "Magna Entertainment Corp."
segments have not been eliminated in the presentation of each
segment's financial data and related measurements. However, the
effects of transactions between these two segments, which are further
described in note 19(a), are eliminated in the consolidated results
of operations and financial position of the Company for periods prior
to the Petition Date.
(d) Seasonality
MEC's racing business is seasonal in nature and racing revenues and
operating results for any period will not be indicative of the racing
revenues and operating results for any year. MEC's racing operations
have historically operated at a loss in the second half of the year,
with the third quarter typically generating the largest operating
loss. This seasonality has resulted in large quarterly fluctuations
in MEC's revenues and operating results included in the Company's
consolidated financial statements prior to the Petition Date
(note 1(a)).
(e) Accounting Changes
Adoption of United States Generally Accepted Accounting Principles
In April 2008, the Canadian Accounting Standards Board confirmed the
transition from GAAP in Canada ("Canadian GAAP") to International
Financial Reporting Standards ("IFRS") for all publicly accountable
entities no later than fiscal years commencing on or after January 1,
2011. As a result, during the third and fourth quarters of 2008,
management undertook a detailed review of the implications of MID
having to report under IFRS and also examined the alternative
available to MID of filing its primary financial statements in Canada
using U.S. GAAP, as permitted by the Canadian Securities
Administrators' National Instrument 52-107, "Acceptable Accounting
Principles, Auditing Standards and Reporting Currency", given that
MID is a Foreign Private Issuer in the United States.
In carrying out this evaluation, management considered many factors,
including, but not limited to, (i) the changes in accounting policies
that would be required and the resulting impact on the Company's
reported results and key performance indicators, (ii) the reporting
standards expected to be used by many of the Company's industry
comparables, (iii) the financial reporting needs of the Company's
market participants, including shareholders, lenders, rating agencies
and market analysts, and (iv) the current reporting standards in use
by, and local reporting needs of, MID's material foreign
subsidiaries.
As a result of this analysis, management recommended and the Board
determined that MID should adopt U.S. GAAP as its primary basis of
financial reporting commencing January 1, 2009 on a retrospective
basis. All comparative financial information contained in the
unaudited interim consolidated financial statements has been revised
to reflect the Company's results as if they had been historically
reported in accordance with U.S. GAAP (see note 21 for a
reconciliation to Canadian GAAP).
For details of the cumulative impact of adopting U.S. GAAP on the
Company's consolidated financial position at January 1, 2008, refer
to note 25 to the Company's annual consolidated financial statements
for the year ended December 31, 2008. For details of the cumulative
impact of adopting U.S. GAAP on the Company's consolidated financial
position at March 31, 2009 and December 31, 2008 and on the Company's
consolidated statements of income (loss) for the three-month periods
ended March 31, 2009 and 2008, refer to note 21 to these unaudited
interim consolidated financial statements.
Business Combinations
In December 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141(R),
"Applying the Acquisition Method" ("SFAS 141(R)"), which modifies the
accounting for business combinations occurring in fiscal years
commencing after December 15, 2008. The most significant changes
under SFAS 141(R) are as follows:
- Upon initially obtaining control, an acquirer will recognize 100%
of the fair values of acquired assets, including goodwill, and
assumed liabilities, with only limited exceptions, even if the
acquirer has not acquired 100% of its target.
- Contingent consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase price
consideration.
- Transaction costs are not an element of fair value of the target,
so they are not considered part of the fair value of an
acquirer's interest. Instead, transaction costs will be expensed
as incurred.
- Pre-acquisition contingencies, such as environmental or legal
issues, meeting a "more likely than not" threshold will have to
be accounted for in purchase accounting at fair value.
- In order to accrue for a restructuring plan in purchase
accounting, the requirements in FASB Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", would have to be met at the
acquisition date.
- Acquired research and development value will be capitalized as an
indefinite-lived intangible asset, subjected to impairment
accounting throughout the associated development stage and then
subject to amortization and impairment accounting after
development is completed. Costs incurred to continue these
research and development efforts after acquisition will be
expensed.
The adoption by the Company of SFAS 141(R) effective January 1, 2009
did not have any impact on the Company's unaudited interim
consolidated financial statements.
Noncontrolling Interests
In December 2007, FASB issued Statement of Financial Accounting
Standards No. 160, "Noncontrolling Interests" ("SFAS 160"), which is
effective for fiscal years commencing after December 15, 2008 and
clarifies the classification of noncontrolling interests (previously
referred to as "minority interests") in consolidated balance sheets
and the accounting for and reporting of transactions between the
reporting entity and holders of such noncontrolling interests. The
most significant changes under the new rules are as follows:
- Noncontrolling interests are to be reported as an element of
consolidated equity.
- Net income and comprehensive income will encompass the total of
such amounts of all consolidated subsidiaries and there will be
separate disclosure on the face of the consolidated statements of
income (loss) and statements of comprehensive income (loss) of
the attribution of such amounts between the controlling and
noncontrolling interests.
- Increases and decreases in the noncontrolling ownership interest
amount will be accounted for as equity transactions rather than
those differences being accounted for using step acquisition and
sale accounting, respectively. If an issuance of noncontrolling
interests causes the controlling interest to lose control and
deconsolidate a subsidiary, that transaction will be accounted
for using full gain or loss recognition.
In accordance with the transition rules of SFAS 160, the Company has
adopted SFAS 160 effective January 1, 2009 on a prospective basis,
except that the presentation and disclosure requirements are to be
applied retrospectively for all periods presented. As a result of the
adoption, the Company has reported its noncontrolling interest in MEC
as a component of equity in the consolidated balance sheets and the
net income (loss) attributable to the noncontrolling interest in MEC
has been separately identified in the statements of income (loss).
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, "Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS
161"). SFAS 161 requires enhanced disclosures about (a) how and why
an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for and (c) how derivative
instruments and related hedged items affect an entity's financial
position, financial performance and cash flows. SFAS 161 is effective
for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. SFAS 161 does not require
comparative disclosures for earlier periods at initial adoption.
The Company has adopted SFAS 161 effective January 1, 2009 on a
prospective basis. Disclosures regarding the Company's use of, and
accounting for, derivative financial instruments were previously made
in notes 1, and 21 to the annual consolidated financial statements
for the year ended December 31, 2008 and do not differ materially at
March 31, 2009, except for the disclosures required by SFAS 161 in
note 18 to these unaudited interim consolidated financial statements.
Other than these incremental disclosures, the adoption of SFAS 161
did not have any impact on the Company's unaudited interim
consolidated financial statements.
Useful Life of Intangible Assets
In April 2008, the FASB issued Staff Position FAS 142-3,
"Determination of the Useful Life of Intangible Assets" ("FSP FAS
142-3"), which amends the factors that must be considered in
developing renewal or extension assumptions used to determine the
useful life over which to amortize the cost of a recognized
intangible asset under Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). FSP FAS
142-3 requires an entity to consider its own assumptions about
renewal or extension of the term of the arrangement, consistent with
its expected use of the asset, in an attempt to improve the
consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure
the asset's fair value under Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141"). In current
practice, the useful life is often shorter under SFAS 142 than under
SFAS 141, as SFAS 142 previously specified that renewals should be
considered only if they can be achieved without incurring substantial
cost or materiality modifying the arrangement. FSP FAS 142-3 also
requires several incremental disclosures for renewable intangible
assets.
FSP FAS 142-3 is effective for financial statements for fiscal years
beginning after December 15, 2008. The guidance for determining the
useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective date.
Accordingly, adoption of FSP FAS 142-3 did not have any impact on the
Company's unaudited interim consolidated financial statements.
2. MEC ASSET SALES
MEC's Chapter 11 filing (note 1(a)) contemplates MEC selling all or
substantially all of its assets through an auction process. On the
Petition Date, MID entered into an agreement with MEC, subject to Court
approval, to purchase MEC's relevant interests associated with the
following assets (the "Stalking Horse Bid"): Golden Gate Fields;
Gulfstream Park, including MEC's joint venture interest in The Village at
Gulfstream Park(TM); Palm Meadows Training Center and related excess
lands; Lone Star Park; AmTote International, Inc.; XpressBet(R); and a
holdback note associated with MEC's sale of The Meadows in 2006. MID's
aggregate offer price for these assets was approximately $195.0 million,
with $136.0 million to be satisfied through a credit bid of the MID
Lender's existing loans to MEC (note 19(a)), $44.0 million in cash and
$15.0 million through the assumption of a capital lease. However, on
April 20, 2009, MID and MEC terminated the Stalking Horse Bid.
Following a hearing on May 4, 2009, the Court approved, subject to entry
of a final order, an order confirming the bid procedures
for MEC's interests associated with the following assets (the "Bid
Procedures Assets"): Santa Anita Park (including MEC's joint venture
interest in the Shops at Santa Anita); Remington Park; Lone Star Park;
Thistledown; Portland Meadows; StreuFex(TM); vacant lands located in
Ocala, Florida; and vacant lands located in Dixon, California. MID has
stated that it does not intend to submit a bid for any of the Bid
Procedures Assets; provided, however, that MID intends to preserve the
value of its secured loans to MEC and will take all available steps to
prevent fire sales of the Bid Procedures Assets.
MEC has advised the Court that it is continuing to explore all
alternatives with respect to its remaining assets, and although the
Stalking Horse Bid has been terminated, MID will continue to evaluate
whether to bid on MEC assets during the course of MEC's Chapter 11 sales
process.
Post-Chapter 11 Operations; Forbearance Agreement
In conjunction with MEC's Chapter 11 filing, MID announced the following
on March 5, 2009:
(i) If MID acquires any non-racing real estate assets from MEC in the
Chapter 11 auction process, MID would retain and develop these
assets. Any horseracing or gaming assets acquired by MID would be
segregated from MID's real estate business and held in one or more
new wholly-owned subsidiaries of MID ("RaceCo"). Any racing real
estate assets acquired by MID would be leased to RaceCo under
commercial terms on a triple-net basis.
(ii) On closing of any asset purchases, MID would execute a forbearance
agreement providing that, without the prior approval of a majority
of the votes of minority holders of MID Class A Shares, MID would
not (a) make any further debt or equity investment in, or otherwise
give financial assistance to, RaceCo or (b) enter into any
transactions with, or provide any services or personnel to, RaceCo,
except for (i) the triple-net leases referred to above and (ii)
limited administrative and office services. MID would also agree
not to enter into any transactions in the horseracing or gaming
business except through RaceCo.
(iii) By December 31, 2011, MID would either (a) if RaceCo were pro forma
profitable and self-sustaining, sell it or spin it off to its
shareholders, or (b) otherwise, cease racing and gaming operations
at RaceCo and either sell or develop all of RaceCo's remaining
assets.
3. TERMINATION OF NOVEMBER 2008 REORGANIZATION PROPOSAL
On November 26, 2008, MID announced that its special committee of
independent directors had recommended, and MID's Board of Directors (the
"Board") had approved, holding a vote of MID shareholders on a
reorganization proposal developed by MID management (the "November 2008
Reorganization Proposal"). The principal components of the November 2008
Reorganization Proposal are set out in MID's press release dated
November 26, 2008, which can be found on the Company's website at
www.midevelopments.com and on SEDAR at www.sedar.com.
As a result of, among other things, current global economic conditions,
the continued disruptions in the financial markets and ongoing
uncertainty in the automotive industry, MID determined that it was
unlikely that it would be able to arrange the new debt financing
associated with the November 2008 Reorganization Proposal, nor would it
be prudent to raise the new debt until such time as the ongoing
uncertainty in the automotive industry has been resolved. As a result, on
February 18, 2009, MID announced that it was not proceeding with the
November 2008 Reorganization Proposal.
During the three months ended March 31, 2009, MID incurred $7.0 million
of advisory and other costs in connection with the November 2008
Reorganization Proposal and MID's involvement in MEC's Chapter 11 process
(including the Stalking Horse Bid (note 2) and the DIP Loan (note
19(a)), which costs are included in the Real Estate Business' "general
and administrative" expenses on the Company's unaudited interim
consolidated statement of income (loss).
4. DISCONTINUED OPERATIONS
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.
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(TM). 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.
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, assets and liabilities related to
discontinued operations are shown in the following tables:
Three Months Ended March 31, 2009(1) 2008
-------------------------------------------------------------------------
Revenues $ 21,226 $ 29,755
Costs and expenses 19,937 29,269
-------------------------------------------------------------------------
1,289 486
Depreciation and amortization - 605
Interest expense, net 505 1,080
Write-down of long-lived assets (note 6) - 32,294
-------------------------------------------------------------------------
MEC's income (loss) from discontinued operations 784 (33,493)
-------------------------------------------------------------------------
Eliminations (note 19(a)) 443 763
-------------------------------------------------------------------------
Consolidated income (loss) from MEC's
discontinued operations 1,227 (32,730)
Add (deduct) loss (income) attributable to
noncontrolling interest (363) 15,450
-------------------------------------------------------------------------
Consolidated income (loss) from MEC's
discontinued operations attributable to MID $ 864 $ (17,280)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The three-month period ended March 31, 2009 includes the results of
MEC's discontinued operations up to the Petition Date (note 1(a)).
March 31, December 31,
As at 2009(2) 2008
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 10,110
Restricted cash - 7,043
Accounts receivable - 5,306
Prepaid expenses and other - 2,048
Real estate properties, net - 39,052
Fixed assets, net - 12,989
Other assets - 105
Future tax assets - 17,880
-------------------------------------------------------------------------
Assets held for sale from MEC's
discontinued operations - 94,533
-------------------------------------------------------------------------
Eliminations (note 19(a)) - (72)
-------------------------------------------------------------------------
Consolidated assets held for sale from MEC's
discontinued operations $ - $ 94,461
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ - $ 23,318
Income taxes payable - 597
Long-term debt due within one year - 8,367
Loan payable to MID due within one year - 403
Deferred revenue - 746
Loan payable to MID, net - 23,614
Other long-term liabilities - 1,035
Future tax liabilities - 17,880
-------------------------------------------------------------------------
MEC's liabilities related to discontinued
operations - 75,960
-------------------------------------------------------------------------
Eliminations (note 19(a)) - (24,017)
-------------------------------------------------------------------------
Consolidated liabilities related to
discontinued operations $ - $ 51,943
-------------------------------------------------------------------------
-------------------------------------------------------------------------
--------------------------
(2) MEC's net assets were deconsolidated from the Company's consolidated
balance sheet as of the Petition Date (note 1(a)).
5. ASSETS HELD FOR SALE
(a) On August 9, 2007, MEC announced its intention to sell real estate
properties located in Dixon, California and Ocala, Florida. Prior to
the Petition Date, MEC was marketing these properties for sale and
had listed them with real estate brokers.
(b) In March 2008, MEC committed to a plan to sell excess real estate in
Oberwaltersdorf, Austria. 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,
including the excess real estate in Oberwaltersdorf, Austria, for a
purchase price of approximately 4.6 million euros ($6.0 million). The
transaction was completed on April 28, 2009.
MEC's assets classified as held for sale and corresponding liabilities
are shown in the table below.
March 31, December 31,
As at 2009(1) 2008
-------------------------------------------------------------------------
ASSETS
Current assets:
Real estate properties, net
Dixon, California (note 6) $ - $ 9,077
Ocala, Florida - 8,407
Oberwaltersdorf, Austria - 4,248
-------------------------------------------------------------------------
$ - $ 21,732
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Future tax liabilities $ - $ 876
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) MEC's net assets were deconsolidated from the Company's consolidated
balance sheet as of the Petition Date (note 1(a)).
6. WRITE-DOWN OF MEC'S LONG-LIVED ASSETS
When long-lived assets are identified as held for sale, the carrying
value is reduced, if necessary, to the estimated net realizable value.
Net realizable value is evaluated at each interim reporting period based
on discounted net future cash flows of the assets and, if appropriate,
appraisals and/or estimated net sales proceeds from pending offers.
Write-downs relating to MEC's long-lived assets have been recognized as
follows:
Three Months Ended March 31, 2009 2008
-------------------------------------------------------------------------
Assets Held For Sale (note 5)
Dixon, California(i) $ - $ 5,000
-------------------------------------------------------------------------
Discontinued Operations (note 4)
Magna Racino(TM)(ii) - 29,195
Portland Meadows(iii) - 3,099
-------------------------------------------------------------------------
- 32,294
-------------------------------------------------------------------------
$ - $ 37,294
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) As a result of significant weakness in the Northern California real
estate market and the U.S. financial market, MEC recorded an
impairment charge of $5.0 million related to the Dixon, California
real estate property in the three months ended March 31, 2008,
which represented the excess of the carrying value of the asset
over the estimated net realizable value at such time.
(ii) As a result of the classification of Magna Racino(TM) as
discontinued operations in the three months ended March 31, 2008,
MEC recorded an impairment charge, included in discontinued
operations, of $29.2 million, which represented the excess of the
carrying value of the assets over the estimated net realizable
value at such time.
(iii) In June 2003, the Oregon Racing Commission (the "ORC") adopted
regulations that permitted wagering through instant racing
terminals as a form of pari-mutuel wagering at Portland Meadows
(the "Instant Racing Rules"). In September 2006, the ORC granted a
request by Portland Meadows to offer instant racing under its
2006-2007 race meet licence. In June 2007, the ORC, acting under
the advice of the Oregon Attorney General, temporarily suspended
and began proceedings to repeal the Instant Racing Rules. In
September 2007, the ORC denied a request by Portland Meadows to
offer instant racing under its 2007-2008 race meet licence. In
response to this denial, MEC requested the holding of a contested
case hearing, which took place in January 2008. On February 27,
2008, the Office of Administrative Hearings released a proposed
order in MEC's favour, approving instant racing as a legal form of
wager at Portland Meadows. However, on April 25, 2008, the ORC
issued an order rejecting that recommendation. Based primarily on
the ORC's order to reject the Office of Administrative Hearings'
recommendation, MEC recorded an impairment charge of $3.1 million,
included in discontinued operations, in the three months ended
March 31, 2008 related to the instant racing terminals and build-
out of the instant racing facility.
7. EARNINGS (LOSS) PER SHARE
The computation of diluted earnings (loss) per share for the three-month
periods ended March 31, 2009 and 2008 excludes the effect of the
potential exercise of 494,544 and 516,544 options, respectively, to
acquire Class A Subordinate Voting Shares of the Company because the
effect would be anti-dilutive.
8. REAL ESTATE PROPERTIES
(restated -
note 1(e))
March 31, December 31,
As at 2009 2008
-------------------------------------------------------------------------
Real Estate Business
Revenue-producing properties
Land $ 200,696 $ 207,454
Buildings, parking lots and roadways - cost 1,300,851 1,334,858
Buildings, parking lots and roadways
- accumulated depreciation (355,035) (355,360)
-------------------------------------------------------------------------
1,146,512 1,186,952
-------------------------------------------------------------------------
Development properties
Land and improvements(i) 157,009 209,218
Properties under development 906 1,163
-------------------------------------------------------------------------
157,915 210,381
-------------------------------------------------------------------------
Properties held for sale 486 486
-------------------------------------------------------------------------
1,304,913 1,397,819
-------------------------------------------------------------------------
MEC(1)
Revenue-producing racetrack properties
Land and improvements - 171,467
Buildings - cost - 517,012
Assets under capital lease - cost - 45,648
Buildings - accumulated depreciation - (124,748)
Assets under capital lease - accumulated
depreciation - (13,196)
Construction in progress - 7,271
-------------------------------------------------------------------------
- 603,454
-------------------------------------------------------------------------
Under-utilized racetrack real estate - 76,130
-------------------------------------------------------------------------
Revenue-producing non-racetrack properties
Land and improvements - 153
Buildings - cost - 1,972
Buildings - accumulated depreciation - (8)
-------------------------------------------------------------------------
- 2,117
-------------------------------------------------------------------------
- 681,701
-------------------------------------------------------------------------
Eliminations (note 19(a))(i) - (55,337)
-------------------------------------------------------------------------
Consolidated $ 1,304,913 $ 2,024,183
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the year ended December 31, 2007, the Real Estate Business
acquired certain lands included in "development properties" from MEC.
Prior to the Petition Date (note (1(a)), the Real Estate Business had
recorded the cost of these lands 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. The remaining portion of the
amount eliminated at December 31, 2008 related to interest incurred
by MEC on project financing facilities with the MID Lender (note
19(a)) that had been capitalized to MEC's real estate properties.
-------------------------
(1) MEC's net assets were deconsolidated from the Company's consolidated
balance sheet as of the Petition Date (note 1(a)).
9. OTHER ASSETS
Other assets consist of:
(restated -
note 1(e))
March 31, December 31,
As at 2009 2008
-------------------------------------------------------------------------
Real Estate Business
Deferred lease acquisition costs $ 1,137 $ 540
Long-term receivables 514 558
Other 8 12
-------------------------------------------------------------------------
1,659 1,110
-------------------------------------------------------------------------
MEC(1)
Equity investments - 28,717
Deposits - 2,500
Deferred development costs - 1,970
Goodwill - 487
Other - 416
-------------------------------------------------------------------------
- 34,090
-------------------------------------------------------------------------
Consolidated $ 1,659 $ 35,200
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------
(1) MEC's net assets were deconsolidated from the Company's consolidated
balance sheet as of the Petition Date (note 1(a)).
10. BANK INDEBTEDNESS
The Real Estate Business has an unsecured senior revolving credit
facility in the amount of $50.0 million that is available by way of U.S.
or Canadian dollar loans or letters of credit (the "MID Credit
Facility"). In January 2009, the maturity date of the MID Credit Facility
was extended from January 21, 2009 to December 18, 2009, unless further
extended with the consent of both parties. Interest on drawn amounts is
calculated based on an applicable margin determined by the Real Estate
Business' ratio of funded debt to earnings before interest, income tax
expense, depreciation and amortization. The Real Estate Business is
subject to the lowest applicable margin available, with drawn amounts
incurring interest at LIBOR or bankers' acceptance rates, in each case
plus 2.75%, or the U.S. base or Canadian prime rate, in each case plus
1.75%. At March 31, 2009 and December 31, 2008, the Real Estate Business
had no borrowings under the MID Credit Facility, but had issued letters
of credit totalling $0.2 million.
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
(restated -
note 1(e))
March 31, December 31,
As at 2009 2008
-------------------------------------------------------------------------
Real Estate Business
Accounts payable $ 2,112 $ 3,094
Accrued salaries and wages 935 902
Accrued interest payable 3,562 356
Other accrued liabilities 10,932 8,059
-------------------------------------------------------------------------
17,541 12,411
-------------------------------------------------------------------------
MEC(1)
Accounts payable - 53,180
Accrued salaries and wages - 8,576
Customer deposits - 2,617
Joint venture funding obligation - 9,092
Other accrued liabilities - 35,595
-------------------------------------------------------------------------
- 109,060
-------------------------------------------------------------------------
Consolidated $ 17,541 $ 121,471
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) MEC's net assets were deconsolidated from the Company's consolidated
balance sheet as of the Petition Date (note 1(a)).
12. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of:
(restated -
note 1(e))
March 31, December 31,
As at 2009 2008
-------------------------------------------------------------------------
MEC(1)
Finance obligation $ - $ 9,039
Deferred revenue - 2,772
Postretirement and pension liabilities - 3,302
Fair value of interest rate swaps (note 18) - 3,162
Other - 698
-------------------------------------------------------------------------
$ - $ 18,973
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------
(1) MEC's net assets were deconsolidated from the Company's balance sheet
as of the Petition Date (note 1(a)).
13. CONTRIBUTED SURPLUS
Changes in the Company's contributed surplus are shown in the following
table:
(restated -
note 1(e))
Three Months Ended March 31, 2009 2008
-------------------------------------------------------------------------
Contributed surplus, beginning of period $ 57,062 $ 46,608
Stock-based compensation 27 131
-------------------------------------------------------------------------
Contributed surplus, end of period $ 57,089 $ 46,739
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in the Company's accumulated other comprehensive income are shown
in the following table:
(restated -
note 1(e))
Three Months Ended March 31, 2009 2008
-------------------------------------------------------------------------
Accumulated other comprehensive income,
beginning of period $ 161,827 $ 251,267
Change in fair value of interest rate swaps,
net of taxes and noncontrolling interest 92 (332)
Foreign currency translation adjustment,
net of noncontrolling interest(i) (30,446) 35,206
Reclassification to income upon
deconsolidation of MEC (note 1(a)) (19,850) -
-------------------------------------------------------------------------
Accumulated other comprehensive income,
end of period(ii) $ 111,623 $ 286,141
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 months ended
March 31, 2009, the Company reported currency translation losses due
to a strengthening of the U.S. dollar against the currencies
(primarily the Canadian dollar and the euro) in which the Company
operates. During the three months ended March 31, 2008, the Company
reported net currency translation gains due primarily to gains from
the appreciation of the euro against the U.S. dollar, partially
offset by losses due to the weakening of the Canadian dollar against
the U.S. dollar.
(ii) Accumulated other comprehensive income consists of:
(restated -
note 1(e))
March 31, December 31,
As at 2009 2008
-------------------------------------------------------------------------
Foreign currency translation adjustment,
net of noncontrolling interest $ 111,623 $ 163,567
Fair value of interest rate swaps, net of
taxes and noncontrolling interest - (1,012)
Unrecognized pension actuarial losses,
net of noncontrolling interest - (728)
-------------------------------------------------------------------------
$ 111,623 $ 161,827
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. NONCONTROLLING INTEREST
Changes in the noncontrolling interest of MEC are shown in the following
table:
(restated -
notes 1(e))
Three Months Ended March 31, 2009 2008
-------------------------------------------------------------------------
Noncontrolling interest, beginning of period $ 24,182 $ 142,037
MEC's stock-based compensation 23 44
Disgorgement payment received from
noncontrolling interest(i) 420 -
Comprehensive income (loss):
Net loss attributable to the
noncontrolling interest (6,308) (21,438)
Other comprehensive income (loss)
attributable to the noncontrolling interest
Change in fair value of interest rate
swaps, net of taxes 79 (284)
Foreign currency translation adjustment (74) 1,148
Reclassification to income upon deconsolidation
of MEC (note 1(a)) (18,322) -
-------------------------------------------------------------------------
Noncontrolling interest, end of period $ - $ 121,507
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 Securities and Exchange Commission
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 March 31, 2009, 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. Such options have
generally been granted with 1/5th of the options vesting on the date of
grant and the remaining options vesting over a period of four years at a
rate of 1/5th on each anniversary of the date of grant. Options expire on
the tenth anniversary of the date of grant, subject to earlier
cancellation in the events specified in the stock option agreement
entered into by MID with each recipient of options.
A reconciliation of the changes in stock options outstanding is presented
below:
2009 2008
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Price Price
Number (Cdn. $) Number (Cdn. $)
-------------------------------------------------------------------------
Stock options
outstanding, January 1 494,544 34.83 516,544 35.09
Cancelled or forfeited (8,000) 39.12 - -
-------------------------------------------------------------------------
Stock options
outstanding, March 31 486,544 34.76 516,544 35.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options
exercisable, March 31 401,544 34.40 326,544 34.66
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company estimates the fair value of stock options granted at the date
of grant using the Black-Scholes option valuation model. The Black-
Scholes option valuation model was developed for use in estimating the
fair value of freely traded options, which are fully transferable and
have no vesting restrictions. In addition, this model requires the input
of subjective assumptions, including expected dividend yields, future
stock price volatility and expected time until exercise. Although the
assumptions used reflect management's best estimates, they involve
inherent uncertainties based on market conditions outside of the
Company's control. Because the Company's outstanding stock options have
characteristics that are significantly different from those of traded
options, and because changes in any of the assumptions can materially
affect the fair value estimate, in management's opinion, the existing
model does not necessarily provide the only measure of the fair value of
the Company's stock options.
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:
2009 2008
-------------------------------------------------------------------------
DSUs outstanding, January 1 80,948 41,452
Granted 32,815 6,012
Redeemed (11,245) -
-------------------------------------------------------------------------
DSUs outstanding, March 31 102,518 47,464
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months ended March 31, 2009, 11,245 DSUs were redeemed
by two directors who left the Board in 2008, for aggregate cash proceeds
of $83 thousand.
During the three months ended March 31, 2009, the Real Estate Business
recognized stock-based compensation expense of $122 thousand (2008 -
$164 thousand), which includes $95 thousand (2008 - $33 thousand)
pertaining to DSUs.
17. DETAILS OF CASH FROM OPERATING ACTIVITIES
(a) Items not involving current cash flows:
(restated
- note 1(e))
Three Months Ended March 31, 2009 2008
---------------------------------------------------------------------
Real Estate Business
Straight-line rent adjustment $ 137 $ 57
Interest and other income from MEC (6,382) (1,086)
Stock-based compensation expense 122 164
Depreciation and amortization 9,766 11,047
Future income taxes (1,145) 1,827
Deconsolidation adjustment to the carrying
values of amounts due from MEC 504 -
Other 71 88
---------------------------------------------------------------------
3,073 12,097
---------------------------------------------------------------------
MEC(1)
Stock-based compensation expense 23 44
Depreciation and amortization 7,014 11,056
Amortization of debt issuance costs 3,346 2,512
Write-down of MEC's long-lived assets - 5,000
Deconsolidation adjustment to the carrying
value of the investment in MEC 46,173 -
Other gains - (2,013)
Future income taxes - 1,521
Equity loss (income) (65) 836
Other 20 189
---------------------------------------------------------------------
56,511 19,145
---------------------------------------------------------------------
Eliminations (note 19(a)) (339) (1,197)
---------------------------------------------------------------------
Consolidated $ 59,245 $ 30,045
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Changes in non-cash balances:
(restated
- note 1(e))
Three Months Ended March 31, 2009 2008
---------------------------------------------------------------------
Real Estate Business
Accounts receivable $ (671) $ (1,823)
Loans receivable from MEC, net (748) (59)
Prepaid expenses and other (681) 527
Accounts payable and accrued liabilities 6,142 3,837
Income taxes 1,342 2,912
Deferred revenue (2,532) (722)
---------------------------------------------------------------------
2,852 4,672
---------------------------------------------------------------------
MEC(1)
Restricted cash 189 2,607
Accounts receivable (18,624) (20,920)
Prepaid expenses and other (2,076) (4,088)
Accounts payable and accrued liabilities 11,289 10,859
Income taxes 48 1,453
Loans payable to MID, net 653 59
Deferred revenue 217 2,344
---------------------------------------------------------------------
(8,304) (7,686)
---------------------------------------------------------------------
Eliminations (note 19(a)) (43) 211
---------------------------------------------------------------------
Consolidated $ (5,495) $ (2,803)
---------------------------------------------------------------------
---------------------------------------------------------------------
--------------------------
(1) The three-month period ended March 31, 2009 includes the results of
MEC up to the Petition Date (note 1(a)).
18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE INFORMATION
The Company periodically purchases foreign exchange forward contracts to
hedge specific anticipated foreign currency transactions. At March 31,
2009, the Company held foreign exchange forward contracts to purchase
15.0 million euros (December 31, 2008 - 4.2 million euros) and sell
$19.6 million (December 31, 2008 - $5.6 million). These contracts were
entered into by a wholly-owned subsidiary of the Real Estate Business
with a U.S. dollar functional currency to mitigate its foreign exchange
exposure under a euro denominated short-term loan payable to another
wholly-owned subsidiary of the Real Estate Business having the euro as
its functional currency.
At March 31, 2009, the Company also held a foreign exchange forward
contract to purchase $6.7 million and sell Cdn.$8.3 million. This
contract was entered into by the Company, having a Canadian dollar
functional currency, to mitigate its foreign exchange exposure on its
dividends declared on March 26, 2009 and payable on April 15, 2009.
The following tables summarize the impact of these derivative financial
instruments on the Company's unaudited interim consolidated financial
statements as at March 31, 2009 and for the three months then ended:
March 31,
As at 2009
-------------------------------------------------------------------------
Derivatives not designated as hedging instruments
Foreign exchange forward contracts
(included in "prepaid expenses and other") $ 386
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amount
of Gain
Location of Gain Recognized
Three Months Ended Recognized in Income in Income on
March 31, 2009 on Derivatives Derivative
-------------------------------------------------------------------------
Derivatives not designated
as hedging instruments
Foreign exchange forward
contracts Foreign Exchange Losses $ 104
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table represents information related to the Company's
financial instruments measured at fair value on a recurring basis and the
level within the fair value hierarchy, as prescribed by FASB Statement of
Financial Accounting Standards No. 157, "Fair Value Measurements", in
which the fair value measurements fall:
Quoted Prices
in Active
Markets for Significant
Identical Other Significant
Assets or Observable Unobservable
Liabilities Inputs Inputs
As at March 31, 2009 (Level 1) (Level 2) (Level 3)
-------------------------------------------------------------------------
Assets carried at fair value
Cash and cash equivalents $ 106,707 $ - $ -
Restricted cash 458 - -
Foreign exchange forward contracts - 386 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
19. 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. Magna
is controlled by M Unicar Inc. ("M Unicar"), a Canadian holding company
whose shareholders consist of the Stronach Trust and certain members of
Magna's management. M Unicar indirectly owns Magna Class A Subordinate
Voting Shares and Class B Shares representing in aggregate approximately
65% of the total voting power attaching to all Magna's shares. The
Stronach Trust indirectly owns the shares carrying the substantial
majority of the votes of M Unicar. As the Company and Magna may be
considered to be under the common control of the Stronach Trust, they are
considered to be related parties for accounting purposes.
(a) Loans to MEC
(i) 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 is secured by certain assets of MEC,
including first ranking security over the Dixon, Ocala and
Thistledown lands, second ranking security over Golden Gate
Fields and third ranking security over Santa Anita Park. In
addition, the 2007 MEC Bridge Loan is guaranteed by certain MEC
subsidiaries and MEC has pledged the shares and all other
interests MEC has in each of the guarantor subsidiaries (or
provided negative pledges where a pledge was not possible due
to regulatory constraints or due to a pledge to an existing
third-party lender).
The 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% (set at
12.5% at March 31, 2009 and December 31, 2008).
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 the November 2008 Reorganization Proposal not
proceeding (note 3), 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. Interest on the 2007 MEC Bridge Loan accrues
during MEC's Chapter 11 process rather than being paid
currently 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.
At March 31, 2009, $126.6 million (December 31, 2008 -
$123.5 million, net of $1.8 million of unamortized deferred
arrangement fees) due under the fully drawn 2007 MEC Bridge
Loan was included in the Real Estate Business' current portion
of "loans receivable from MEC, net" on the Company's
consolidated balance sheet. MEC's current portion of "loans
payable to MID, net" on the Company's consolidated balance
sheet at December 31, 2008 includes an aggregate amount of
borrowings and interest payable of $123.4 million, net of
$2.0 million of unamortized deferred financing costs.
(ii) MEC Project Financings
The MID Lender has made available separate project financing
facilities to Gulfstream Park Racing Association, Inc. ("GPRA")
and Remington Park, Inc., the wholly-owned subsidiaries of MEC
that own and/or operate Gulfstream Park and Remington Park,
respectively, in the amounts of $162.3 million and
$34.2 million, respectively, plus costs and capitalized
interest in each case as discussed below (together, the "MEC
Project Financing Facilities"). The MEC Project Financing
Facilities 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 contain cross-guarantee, cross-default and
cross-collateralization provisions. The Remington Park project
financing is secured by all assets of the borrower (including
first ranking security over the Remington Park leasehold
interest), excluding licences and permits, and is guaranteed by
the MEC subsidiaries that own Gulfstream Park and the Palm
Meadows Training Center. The security package also includes
second ranking security over the lands owned by Gulfstream Park
and second ranking security over the Palm Meadows Training
Center and the shares of the owner of the Palm Meadows Training
Center (in each case, behind security granted for the
Gulfstream Park project financing). In addition, the borrower
has agreed not to pledge any licences or permits held by it and
MEC has agreed not to pledge the shares of the borrower or the
owner of Gulfstream Park. The Gulfstream Park project financing
is guaranteed by MEC's subsidiaries that own and operate the
Palm Meadows Training Center and Remington Park and is secured
principally by security over the lands (or, in the case of
Remington Park, over the leasehold interest) forming part of
the operations at Gulfstream Park, the Palm Meadows Training
Center and Remington Park and over all other assets of
Gulfstream Park, the Palm Meadows Training Center and Remington
Park, excluding licences and permits (which cannot be subject
to security under applicable legislation).
In July 2006 and December 2006, the Gulfstream Park project
financing facility was amended to increase the amount available
from $115.0 million (plus costs and capitalized interest) by
adding new tranches of up to $25.8 million (plus costs and
capitalized interest) and $21.5 million (plus costs and
capitalized interest), respectively. Both tranches were
established to fund MEC's design and construction of slot
machine facilities located in the existing Gulfstream Park
clubhouse building, as well as related capital expenditures and
start-up costs, including the acquisition and installation of
slot machines. The new tranches of the Gulfstream Park project
financing facility both 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 continues 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 bear interest at a fixed rate of 10.5% per annum,
compounded semi-annually and require 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
has also been in place a mandatory annual cash flow sweep of
not less than 75% of Remington Park's total excess cash flow,
after permitted capital expenditures and debt service, which is
used to pay capitalized interest on the Remington Park project
financing facility plus a portion of the principal under the
facility equal to the capitalized interest on the Gulfstream
Park project financing facility. For the three months ended
March 31, 2009, $2.0 million (2008 - $0.2 million) of such
payments were made. During the three months ended March 31,
2008, Remington Park agreed to purchase 80 Class III slot
machines from GPRA with funding from the Remington Park project
financing facility. Accordingly, $1.0 million was advanced
under the existing Remington Park project financing facility
during the three months ended March 31, 2008.
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 the November 2008
Reorganization Proposal not proceeding (note 3), 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 MEC's 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.
During MEC's Chapter 11 process, monthly principal and interest
payments under the MEC Project Financing Facilities are stayed
and interest accrues rather than being paid currently in cash.
At March 31, 2009, there were balances of $170.3 million and
$22.7 million (net of $1.8 million and $0.2 million,
respectively, of carrying value adjustments upon the
deconsolidation of MEC - note 1(a)) due under the Gulfstream
Park project financing facility and the Remington Park project
financing facility, respectively. At December 31, 2008, there
were balances of $169.5 million (net of $1.5 million of
unamortized deferred arrangement fees) and $25.0 million due
under the Gulfstream Park project financing facility and the
Remington Park project financing facility, respectively. The
current portion of the MEC Project Financing Facilities
included in the Real Estate Business' "loans receivable from
MEC, net" at December 31, 2008 was $100.7 million (net of
$1.5 million of unamortized deferred arrangement fees),
including the required $100.0 million repayment discussed
above. The current portion of the MEC Project Financing
Facilities, as reflected in MEC's "loans payable to MID, net"
on the Company's consolidated balance sheet at December 31,
2008, is $100.7 million (including $0.4 million in MEC's
"discontinued operations" (note 4)), net of unamortized
deferred financing costs of $1.5 million. The non-current
portion of the MEC Project Financing Facilities, as reflected
in MEC's "loans payable to MID, net" on the Company's
consolidated balance sheet at December 31, 2008, is
$90.0 million, net of unamortized deferred financing costs of
$3.8 million (including $23.6 million, net of $1.0 million of
unamortized deferred financing costs, in MEC's "discontinued
operations" (note 4)).
In connection with the Gulfstream Park project financing
facility, MEC has placed into escrow (the "Gulfstream Escrow")
with the MID Lender proceeds from an asset sale which occurred
in fiscal 2005 and certain additional amounts necessary to
ensure that any remaining Gulfstream Park construction costs
(including the settlement of liens on the property) can be
funded, which escrowed amount has been and will be applied
against any such construction costs. At March 31, 2009, the
amount held under the Gulfstream Escrow was $0.5 million
(December 31, 2008 - $0.9 million). All funds in the Gulfstream
Escrow are reflected as the Real Estate Business' "restricted
cash" and "due to MEC" on the Company's consolidated balance
sheets.
(iii) 2008 MEC Loan
On November 26, 2008, concurrent with the announcement of the
November 2008 Reorganization Proposal (note 3), 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 bears interest at the rate of LIBOR plus
12.0%, is guaranteed by certain subsidiaries of MEC and is
secured by substantially all the assets of MEC (subject to
prior encumbrances). The 2008 MEC Loan has been 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 are 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 November 2008 Reorganization Proposal not
proceeding (note 3), 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)), 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 is 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 are
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
MEC's Chapter 11 filing on March 5, 2009 (note 1(a)), there
is an automatic stay of any action to collect, assert, or
recover on the 2008 MEC Loan.
Interest and fees on the 2008 MEC Loan accrue during MEC's
Chapter 11 process rather than being paid currently in cash. At
March 31, 2009, $53.0 million (December 31, 2008 -
$22.9 million, net of $0.8 million of unamortized deferred
arrangement fees) due under the 2008 MEC Loan was included in
the Real Estate Business' current portion of "loans receivable
from MEC, net" on the Company's consolidated balance sheet.
MEC's current portion of "loans payable to MID, net" on the
Company's consolidated balance sheet at December 31, 2008
includes borrowings of $22.8 million, net of $0.9 million of
unamortized deferred financing costs.
(iv) DIP Loan
In connection with the Debtors' Chapter 11 filing (note 1(a)),
MID (through the MID Lender) originally agreed to provide a
six-month secured 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
will accrue during the Chapter 11 process rather than being
paid currently 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 is required to pay an
arrangement fee of 3% under the DIP Loan (on each tranche as it
is made available) and advances bear interest at a rate per
annum equal to LIBOR plus 12.0%. MEC is also required to pay a
commitment fee equal to 1% per annum on all undrawn amounts.
The DIP Loan is secured by liens on substantially all assets of
MEC and its subsidiaries (subject to prior ranking liens), as
well as a pledge of capital stock of certain guarantors. Under
the DIP Loan, MEC may request funds to be advanced on a monthly
basis and such funds must be used in accordance with an
approved budget. The terms of the DIP Loan contemplate that MEC
will sell all or substantially all of its assets through an
auction process and use the proceeds from the asset sales to
repay its creditors, including the MID Lender.
At March 31, 2009, $13.1 million (net of $0.4 million of
unamortized deferred arrangement fees) due under the DIP Loan
was included in the current portion of "loans receivable from
MEC, net" on the Company's consolidated balance sheet.
Subsequent to quarter-end, an additional $3.1 million has been
drawn under the DIP Loan.
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 are recognized as deferred financing costs at the
MEC segment level and have been amortized into interest expense (of
which a portion has been capitalized in the case of the MEC Project
Financing Facilities) over the respective term of 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 Terminations
During the three months ended March 31, 2008, the Real Estate
Business and Magna completed a lease termination agreement on a
property in the United Kingdom that the Real Estate Business is
seeking to redevelop for residential purposes. The Real Estate
Business paid Magna $2.0 million to terminate the lease and the
termination payment has been included in "real estate properties,
net" at March 31, 2009 and December 31, 2008 on the Company's
consolidated balance sheets.
During the three months ended March 31, 2008, the Real Estate
Business and Magna also agreed to terminate the lease on a property
in Canada. In conjunction with the lease termination, Magna agreed to
pay the Company a fee of $3.9 million, which amount has been
recognized by the Real Estate Business in "other gains, net" in the
Company's unaudited interim statement of income (loss) for the
three months ended March 31, 2008.
(c) 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 Austria (note
5(b)) for a purchase price of approximately 4.6 million euros
($6.0 million). The transaction was completed on April 28, 2009.
20 COMMITMENTS AND CONTINGENCIES
(a) In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with, among others,
customers, suppliers and former employees. Management believes that
adequate provisions have been recorded in the accounts where
required. Although it is not possible to accurately estimate the
extent of potential costs and losses, if any, management believes,
but can provide no assurance, that the ultimate resolution of such
contingencies would not have a material adverse effect on the
financial position of the Company.
(b) In addition to the letters of credit issued under the MID Credit
Facility (note 10), the Company had $2.5 million of letters of credit
issued with various financial institutions at March 31, 2009 to
guarantee various development projects. These letters of credit are
secured by cash deposits of the Company.
(c) At March 31, 2009, the Company's contractual commitments related to
construction and development projects outstanding amounted to
approximately $1.9 million.
(d) In November 2006, MEC sold its wholly-owned interest in The Meadows,
a standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a
company jointly owned by William Paulos and William Wortman,
controlling shareholders of Millennium Gaming, Inc., and a fund
managed by Oaktree Capital Management, LLC. The parties also entered
into a racing services agreement whereby MEC pays $50 thousand per
annum and continues to operate, for its own account, the racing
operations at The Meadows until at least July 2011. $5.6 million of
the gain from the sale of The Meadows was initially deferred and
included in MEC's "other long-term liabilities" representing the
estimated net present value of the future operating losses expected
over the term of the racing services agreement. Such amount has been
recognized as a reduction of "general and administrative" expenses in
MEC's results of operations over the term of the racing services
agreement. Effective January 1, 2008, The Meadows entered into an
agreement with the Meadows Standardbred Owners Association, which
expires on December 31, 2009, whereby the horsemen make contributions
to subsidize backside maintenance and marketing expenses at The
Meadows. As a result, the estimated operating losses expected over
the remaining term of the racing services agreement were revised,
resulting in $2.0 million of previously deferred gains being
recognized in MEC's "other gains" in the three months ended
March 31, 2008.
21. CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(a) Recently Adopted Canadian GAAP Accounting Standards
(i) Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered
Accountants (the "CICA") issued Handbook Section 3064,
"Goodwill and Intangible Assets", amended Handbook Section
1000, "Financial Statement Concepts", and Accounting Guideline
11, "Enterprises in the Development Stage", and withdrew
Handbook Section 3062, "Goodwill and Other Intangible Assets",
and Handbook Section 3450, "Research and Development Costs".
Handbook Section 3064 clarifies that costs may only be deferred
when they relate to an item that meets the definition of an
asset. The concept of matching revenues and expenses remains
appropriate only for allocating the cost of an asset that is
consumed in generating revenue over multiple reporting periods.
Handbook Section 3064 also provides extensive guidance on when
expenditures qualify for recognition as intangible assets.
These changes are effective for fiscal years beginning on or
after October 1, 2008. The Company's adoption of these
accounting standards for Canadian GAAP purposes on January 1,
2009 did not have any impact on the Company's unaudited interim
consolidated financial statements, nor did it create any
reconciling differences between Canadian and U.S. GAAP in the
Company's consolidated balance sheets, statements of income
(loss) or statements of comprehensive income (loss).
(ii) Business Combinations and Noncontrolling Interests
In January 2009, the CICA issued Handbook Section 1582,
"Business Combinations", Handbook Section 1601, "Consolidated
Financial Statements", and Handbook Section 1602, "Non-
controlling Interests" and withdrew Handbook Section 1581,
"Business Combinations", and Handbook Section 1600,
"Consolidated Financial Statements".
Handbook Section 1582 applies to a transaction in which the
acquirer obtains control of one or more businesses. The term
"business" is more broadly defined than in the existing
standard. Most assets acquired and liabilities assumed,
including contingent liabilities that are considered to be
improbable, will be measured at fair value. Any interest in the
acquiree owned prior to obtaining control will be re-measured
at fair value at the acquisition date, eliminating the need for
guidance on step acquisitions. Contingent consideration
arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration. A
bargain purchase will result in recognition of a gain.
Acquisition costs must be expensed.
Similar to the requirements of SFAS 160 (note 1(e)), under
Handbook Section 1602, any noncontrolling interest is
recognized as a separate component of shareholder's equity. Net
income (loss) is calculated without deduction for the
noncontrolling interest. Rather, net income (loss) is allocated
between the controlling and noncontrolling interests.
Handbook Section 1601 carries forward the requirements of
Handbook Section 1600, other than those relating to
noncontrolling interests.
These changes are effective for fiscal years beginning on or
after January 1, 2011 but may be adopted early at the beginning
of a fiscal year. The Company's adoption of these accounting
standards for Canadian GAAP purposes on January 1, 2009 did not
have any impact on the Company's unaudited interim consolidated
financial statements, nor did it create any reconciling
differences between Canadian and U.S. GAAP in the Company's
consolidated balance sheets, statements of income (loss) or
statements of comprehensive income (loss).
(b) Reconciliation to Canadian GAAP
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 income (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:
Three Months Ended March 31, 2009 2008
---------------------------------------------------------------------
Net income (loss) attributable to MID under
U.S. GAAP $ (28,845) $ 6,879
Interest expense on subordinated notes (i) 6,570(*) (310)
Depreciation and amortization (ii) (340)(*) (67)
Development property carrying costs (iii) - 95
Stock-based compensation (iv) 3,204(*) -
---------------------------------------------------------------------
Net income (loss) attributable to MID under
Canadian GAAP $ (19,411) $ 6,597
---------------------------------------------------------------------
---------------------------------------------------------------------
(*) 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(a)).
Three Months Ended March 31, 2009 2008
---------------------------------------------------------------------
Basic and diluted earnings (loss)
attributable to each MID Class A Subordinate
Voting or Class B Share
- continuing operations $ (0.43) $ 0.51
- discontinued operations 0.02 (0.37)
---------------------------------------------------------------------
` $ (0.41) $ 0.14
---------------------------------------------------------------------
---------------------------------------------------------------------
Three Months Ended March 31, 2009 2008
---------------------------------------------------------------------
Comprehensive income (loss) attributable to
MID under U.S. GAAP $ (79,049) $ 41,753
Net adjustments to U.S. GAAP net income
(loss) per above table 9,434 (282)
Translation of development property
carrying costs (iii) (24) (35)
Employee defined benefit and postretirement
plans (v) (728)(*) -
---------------------------------------------------------------------
Comprehensive income (loss) attributable to
MID under Canadian GAAP $ (70,367) $ 41,436
---------------------------------------------------------------------
---------------------------------------------------------------------
(*) 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(a)).
(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 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 is 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 and 2007. 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) 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,
FASB Statement of Financial Accounting Standards No. 67,
"Accounting for Costs and Initial Rental Operations of Real
Estate Projects", is more restrictive than CICA Handbook
Section 3061, "Property, Plant and Equipment", in regards 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.
(iv) 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(a)), $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.
(v) Employee Defined Benefit and Postretirement Plans
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS
158"). SFAS 158 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 minority interest impact. No such adjustment is required
under Canadian GAAP.
(vi) Joint Ventures
Under U.S. GAAP, MEC's investments in joint ventures are
accounted for using the equity method of accounting, resulting
in MEC's 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 income (loss). Similarly, MEC's
investment in joint ventures is included in a single line
"other assets" on the Company's consolidated balance sheets.
Only cash invested by MEC into its interests in joint ventures
are reflected in the Company's consolidated statements of cash
flows. Under Canadian GAAP, MEC's investments in joint ventures
are accounted for using the proportionate consolidation method.
MEC's proportionate share of the joint ventures in which it has
an interest is added to the consolidated balance sheets,
consolidated statements of income (loss) and consolidated
statements of cash flows on a line-by-line basis.
The following tables indicate the items in the consolidated balance
sheets that would have been affected had the consolidated financial
statements been prepared under Canadian GAAP:
As at March 31, 2009
-------------------------------------------------------------------------
Property
U.S. Carrying Canadian
GAAP Costs GAAP
-------------------------------------------------------------------------
Real estate properties, net $ 1,304,913 $ 3,995 $ 1,308,908
Future tax assets 5,359 (218) 5,141
Future tax liabilities 39,771 1,162 40,933
MID shareholders' equity 1,535,960 2,615 1,538,575
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
Long- Sale
U.S. term Benefit of The
GAAP Debt Plans Meadows
-------------------------------------------------------------------------
Cash and cash
equivalents $ 144,764 $ - $ - $ -
Accounts receivable 33,915 - - -
Prepaid expenses and
other 20,724 - - -
Non-current restricted
cash - - - -
Real estate
properties, net 2,024,183 - - (6,035)
Fixed assets, net 71,206 - - (181)
Other assets 35,200 - - -
Future tax assets 62,781 - - (400)
Accounts payable and
accrued liabilities 121,471 (96) - -
Income taxes payable 10,363 - - -
Long-term debt due
within one year 82,649 - - -
Note obligation due
within one year, net 74,601 (875) - -
Note obligation, net 149,015 (2,723) - -
Other long-term
liabilities 18,973 - (1,357) (7,216)
Future tax liabilities 105,497 544 - -
MID shareholders'
equity 1,621,988 (6,570) 728 340
Noncontrolling
interest 24,182 9,720 629 260
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008
-------------------------------------------------------------------------
Property Stock-
Carrying based Joint Canadian
Costs Comp. Ventures GAAP
-------------------------------------------------------------------------
Cash and cash
equivalents $ - $ - $ 1,012 $ 145,776
Accounts receivable - - 363 34,278
Prepaid expenses and
other - - 463 21,187
Non-current restricted
cash - - 9,651 9,651
Real estate
properties, net 4,029 - 52,845 2,075,022
Fixed assets, net - - 62 71,087
Other assets - - (25,151) 10,049
Future tax assets (218) - - 62,163
Accounts payable and
accrued liabilities - - 9,615 130,990
Income taxes payable - - 5 10,368
Long-term debt due
within one year - - 22,125 104,774
Note obligation due
within one year, net - - - 73,726
Note obligation, net - - - 146,292
Other long-term
liabilities - - 7,500 17,900
Future tax liabilities 1,172 - - 107,213
MID shareholders'
equity 2,639 (3,204) - 1,615,921
Noncontrolling
interest - 3,204 - 37,995
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. GAAP permits assets held for sale and assets of discontinued
operations, as well as liabilities related to such assets, to be
classified as current items on the balance sheet. Canadian GAAP only
permits such items to be classified as current items if the sale of such
items has occurred prior to the date of completion of the financial
statements.
The following table indicates the impact this difference between U.S and
Canadian GAAP had on the Company's consolidated balance sheet at
December 31, 2008 with respect to the classification of MEC's assets held
for sale (note 5) and assets held for sale from discontinued operations
(note 4), and liabilities related to such assets:
U.S. Canadian
As at December 31, 2008 GAAP GAAP
-------------------------------------------------------------------------
ASSETS
Current assets:
Assets held for sale $ 21,732 $ -
Assets held for sale from discontinued
operations 94,461 24,507
Assets held for sale - 21,732
Assets held for sale from discontinued operations - 69,954
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Liabilities related to assets held for sale $ 876 $ -
Liabilities related to discontinued operations 51,943 33,028
Liabilities related to assets held for sale - 876
Liabilities related to discontinued operations - 18,915
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For further information: Richard J. Smith, Executive Vice-President and
Chief Financial Officer, at (905) 726-7507
RSS
Share
Tell a friend
Printer friendly
Subscribe to Portfolio e-mail
