The purchase price has been allocated to the assets and liabilities
acquired as follows:
---------------------------------------------------------------------
Non-cash working capital $ 1,203 Fixed assets 12,691 Other assets
127 Long-term debt (1,470) Other long-term liabilities (980) Future
tax liabilities (2,224)
---------------------------------------------------------------------
Net assets acquired and total purchase price, net of cash acquired
$ 9,347
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Divestiture of The Meadows On November 14, 2006, MEC completed
the sale of all of the outstanding shares of Washington Trotting
Association, Inc., Mountain Laurel Racing, Inc. and MEC
Pennsylvania Racing, Inc., each an MEC wholly-owned subsidiary
through which MEC owned and operated The Meadows, MEC's
standardbred racetrack in Pennsylvania, to PA Meadows, LLC, a
company jointly owned by William Paulos and William Wortman,
controlling shareholders of Millennium Gaming, Inc., and a fund
managed by Oaktree Capital Management, LLC (together, "Millennium-
Oaktree"). On closing, MEC received cash consideration of $171.8
million, net of transaction costs of $3.2 million, and a $25.0
million holdback note payable to MEC over a five-year period,
subject to offset for certain indemnification obligations (the
"Meadows Holdback Note"). Under the terms of the Meadows Holdback
Note, MEC agreed to release the security requirement for the
holdback amount, defer subordinate payments under the Meadows
Holdback Note, defer receipt of holdback payments until the opening
of the permanent casino at The Meadows and defer receipt of
holdback payments to the extent of available cash flows (as defined
in the terms of the Meadows Holdback Note), in exchange for
Millennium-Oaktree providing an additional $25.0 million of equity
support for PA Meadows, LLC. The parties also entered into a racing
services agreement whereby MEC pays $50 thousand per annum and
continues to operate, for its own account, the racing operations at
The Meadows until at least July 2011. On December 12, 2007, Cannery
Casino Resorts, LLC, the parent company of Millennium-Oaktree,
announced it had entered into an agreement to sell
Millennium-Oaktree to Crown Limited. If the deal is consummated,
either party to the racing services agreement will have the option
to terminate the arrangement. MEC recognized a $115.2 million gain
on this sale transaction in the fourth quarter of 2006. Based on
the indemnification obligations and other terms pertaining to the
Meadows Holdback Note, the Meadows Holdback Note will be recognized
in the consolidated financial statements upon the settlement of the
indemnification obligations and as payments are received. MEC was
required to use the proceeds from the sale of The Meadows to fully
repay the bridge loan between the MID Lender and MEC (the "2005 MEC
Bridge Loan" - note 16), to permanently pay down $39.0 million of
the principal amount outstanding under the MEC Credit Facility
(note 8), to repay $2.0 million of the BE&K Loan (as defined in
note 16) and to place $15.0 million into escrow with the MID Lender
(note 16). (c) Discontinued Operations (i) In connection with the
MEC Debt Elimination Plan, MEC announced that it intends to sell
Great Lakes Downs in Michigan, Thistledown in Ohio and its interest
in Portland Meadows in Oregon. MEC also announced that it intends
to explore the sale of Remington Park, a horseracing and gaming
facility in Oklahoma City. In September 2007, MEC engaged a U.S.
investment bank to assist in soliciting potential purchasers and
managing the sale process for certain assets covered by the MEC
Debt Elimination Plan. In October 2007, the U.S. investment bank
began marketing Thistledown and Remington Park for sale and
initiated an active program to locate potential buyers. In October
2007, the Great Lakes Downs property was listed for sale with a
real estate broker. The race meet at that facility concluded on
November 4, 2007 and the facility was then closed. In order to
facilitate the sale of this property, MEC re- acquired Great Lakes
Downs from Richmond Racing Co., LLC in December 2007 pursuant to a
prior existing option right. In November 2007, MEC began marketing
its interest in Portland Meadows for sale and an active program to
locate a potential buyer was initiated. (ii) On November 1, 2006, a
wholly-owned subsidiary of MEC completed the sale of the Fontana
Golf Club located in Oberwaltersdorf, Austria to a subsidiary of
Magna, a related party, for a sale value of 30.0 million euros
($38.3 million), which included cash consideration of 13.2 million
euros ($16.9 million), net of transaction costs, and 16.8 million
euros ($21.4 million) of debt assumed by Magna. Based on the
exchange amount, MEC recognized a gain on disposition of $20.9
million at the date of disposition. (iii) On August 25, 2006, a
wholly-owned subsidiary of MEC completed the sale of the Magna Golf
Club located in Aurora, Ontario to Magna, a related party, for cash
consideration of Cdn. $51.8 million ($46.4 million), net of
transaction costs. MEC recognized an impairment loss of $1.2
million at the date of disposition equal to the excess of MEC's
carrying value of the assets disposed over their fair values and
exchange amount at the date of disposition. Of the sale proceeds,
Cdn. $32.6 million ($29.3 million) was used to pay all amounts
owing under certain loan agreements with Bank Austria Creditanstalt
AG related to the Magna Golf Club. (iv) On May 26, 2006, MEC
completed the sale of a restaurant and related real estate in the
United States and received cash consideration of $2.0 million, net
of transaction costs, and recognized a gain at the date of
disposition of $1.5 million. MEC was required to use the net
proceeds from this transaction to repay principal amounts
outstanding under the MEC Credit Facility (note 8). MEC's results
of operations related to discontinued operations for the
three-month periods and years ended December 31, 2007 and 2006, and
MEC's assets and liabilities related to discontinued operations as
at December 31, 2007 and 2006, are shown in the following table:
Three Months Ended Year Ended December 31, December 31,
------------------------- ------------------------- 2007 2006 2007
2006
-------------------------------------------------------------------------
Revenues $ 28,860 $ 31,002 $ 122,200 $ 142,534 Costs and expenses
30,056 33,028 121,320 136,860
-------------------------------------------------------------------------
(1,196) (2,026) 880 5,674 Depreciation and amortization 515 1,388
3,976 7,069 Interest expense, net 652 872 2,794 4,984 Impairment
loss recorded on disposition - - - 1,202
-------------------------------------------------------------------------
Loss before undernoted (2,363) (4,286) (5,890) (7,581) Gain on
disposition - 20,892 - 22,387
-------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (2,363)
16,606 (5,890) 14,806 Income tax expense (recovery) - (160) - 1,653
Minority interest (1,090) 6,968 (2,560) 5,467
-------------------------------------------------------------------------
MEC's income (loss) from discontinued operations (1,273) 9,798
(3,330) 7,686
-------------------------------------------------------------------------
Eliminations (note 16) 758 776 3,229 3,121
-------------------------------------------------------------------------
Consolidated income (loss) from dis- continued operations $ (515) $
10,574 $ (101) $ 10,807
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, December 31, As at 2007 2006
---------------------------------------------------------------------
ASSETS Current assets: Cash and cash equivalents $ 9,078 $ 10,636
Restricted cash 7,069 5,133 Accounts receivable 3,424 3,939 Prepaid
expenses and other 1,668 558
---------------------------------------------------------------------
21,239 20,266
---------------------------------------------------------------------
Real estate properties, net 39,094 38,048 Fixed assets, net 11,531
12,408 Other assets 106 1,395
---------------------------------------------------------------------
50,731 51,851
---------------------------------------------------------------------
MEC's assets related to discontinued operations 71,970 72,117
---------------------------------------------------------------------
Eliminations (note 16) (72) (1,418)
---------------------------------------------------------------------
Consolidated assets related to discontinued operations $ 71,898 $
70,699
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES Current liabilities: Accounts payable and accrued
liabilities $ 14,852 $ 13,514 Long-term debt due within one year 23
30 Loan payable to MID 397 285 Deferred revenue 1,257 1,887
---------------------------------------------------------------------
16,529 15,716
---------------------------------------------------------------------
Long-term-debt 115 138 Loan payable to MID, net 26,143 31,427 Other
long-term liabilities 760 708
---------------------------------------------------------------------
27,018 32,273
---------------------------------------------------------------------
MEC's liabilities related to discontinued operations 43,547 47,989
---------------------------------------------------------------------
Eliminations (note 16) (26,540) (31,712)
---------------------------------------------------------------------
Consolidated liabilities related to discontinued operations $
17,007 $ 16,277
---------------------------------------------------------------------
---------------------------------------------------------------------
4. ASSETS HELD FOR SALE (a) In November and December 2007, MEC
entered into sale agreements for three parcels of excess real
estate comprising approximately 825 acres in Porter, New York,
subject to the completion of due diligence by the purchasers and
customary closing conditions. These sale transactions were
completed on December 28, 2007, January 7, 2008 and January 10,
2008, for total cash consideration of $1.8 million, net of
transaction costs. At December 31, 2007, the two parcels of real
estate for which the sale had not been completed are included in
MEC's "assets held for sale" on the Company's consolidated balance
sheets. The net proceeds received on closing were used to repay a
portion of the MEC Bridge Loan (note 16) subsequent to year-end.
(b) On December 21, 2007, MEC entered into an agreement to sell 225
acres of excess real estate located in Ebreichsdorf, Austria to a
subsidiary of Magna, a related party, for a purchase price of 20.0
million euros ($29.4 million), subject to customary closing
adjustments. The closing of the transaction is expected to occur by
the end of the first quarter of 2008 following the satisfaction of
customary closing conditions, including the receipt of all
necessary regulatory approvals. MEC is required to use 7.5 million
euros of the net proceeds to be received on closing to repay a
portion of a 15.0 million euro term loan facility (note 8) and to
use the remaining portion of the net proceeds to repay a portion of
the MEC Bridge Loan (note 16). (c) On August 9, 2007, MEC announced
its intention to sell real estate properties located in Dixon,
California and Ocala, Florida. MEC has initiated an active program
to locate potential buyers for these properties and has listed the
properties for sale. Under the terms of the MEC Bridge Loan, MEC is
required to use the net proceeds from the sale of these properties
to pay down principal amounts outstanding under the MEC Bridge Loan
and the amount of such net proceeds will permanently reduce the
committed amount of the MEC Bridge Loan. (d) The MEC Debt
Elimination Plan also contemplates the sale of real estate
properties located in Aventura and Hallandale, Florida, both
adjacent to Gulfstream Park, and Anne Arundel County, Maryland,
adjacent to Laurel Park. MEC has also announced that it intends to
explore selling its membership interests in the mixed-use
developments at Gulfstream Park racetrack in Florida and Santa
Anita Park racetrack in California that it is pursuing under joint
venture arrangements with Forest City Enterprises, Inc. ("Forest
City") and Caruso Affiliated ("Caruso"), respectively. MEC has also
announced that it intends to explore other strategic transactions
involving other racing, gaming and technology operations. These
potential transactions may include: partnerships or joint ventures
in respect of the existing gaming facility at Gulfstream Park;
partnerships or joint ventures in respect of potential alternative
gaming operations at other MEC racetracks that currently do not
have gaming operations; and transactions involving MEC's technology
operations, which may include one or more of the assets that
comprise MEC's PariMax business. At December 31, 2007, all of the
criteria required to classify an asset as held for sale, or
operations as discontinued operations (note 3), in accordance with
GAAP were not met in relation to the assets and operations
described in the preceding paragraph and, accordingly, these assets
and operations continue to be classified as held and in use. MEC's
assets classified as held for sale and corresponding liabilities,
related to the transactions described in sections (a), (b) and (c)
above, at December 31, 2007 and 2006, are shown in the table below.
December 31, December 31, As at 2007 2006
---------------------------------------------------------------------
ASSETS Current assets: Real estate properties, net Porter, New York
$ 1,493 $ -
---------------------------------------------------------------------
Real estate properties, net Dixon, California 19,139 18,711 Ocala,
Florida 8,407 8,427 Ebreichsdorf, Austria 6,619 5,935 Porter, New
York - 2,990
---------------------------------------------------------------------
34,165 36,063
---------------------------------------------------------------------
$ 35,658 $ 36,063
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES Current liabilities: Future tax liabilities $ 171 $ -
---------------------------------------------------------------------
Future tax liabilities 876 1,047
---------------------------------------------------------------------
$ 1,047 $ 1,047
---------------------------------------------------------------------
---------------------------------------------------------------------
5. WRITE-DOWN OF MEC'S LONG-LIVED ASSETS MEC's long-lived assets,
which consist of fixed assets and real estate properties, are
tested for recoverability whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. If such events or changes in circumstances are
present, the recoverability of the long-lived assets is assessed by
determining whether the carrying value of such assets can be
recovered through projected undiscounted cash flows. If the sum of
expected future cash flows, undiscounted and without interest
charges, is less than net book value, the excess of the net book
value over the estimated fair value, based on discounted future
cash flows and appraisals, is charged to operations in the period
in which such impairment is determined. Write-downs and impairment
losses relating to long-lived assets have been recognized as
follows: Three Months Ended Year Ended December 31, December 31,
------------------------- ------------------------- 2007 2006 2007
2006
-------------------------------------------------------------------------
Porter, New York(i) $ (136) $ - $ 1,308 $ - Magna Racino(TM)(ii) -
76,166 - 76,166 Development property(iii) - 1,279 - 1,279
-------------------------------------------------------------------------
$ (136) $ 77,445 $ 1,308 $ 77,445
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) In connection with entering into sale agreements for three
parcels of real estate in Porter, New York (note 4), MEC recognized
a non- cash impairment loss of $1.3 million, which represents the
excess of the carrying value over the fair value of this real
estate, less selling costs. (ii) Magna Racino(TM)'s long-lived
assets were tested for impairment upon completion of its 2007
business plan. An expected present value approach of estimated
future cash flows, including a probability-weighted approach in
considering the likelihood of possible outcomes, and external
valuation reports were used to determine the fair value of the
long-lived assets. Based on this analysis, a non-cash impairment
charge of $76.2 million was required of the long-lived assets in
the three months and year ended December 31, 2006. (iii) On
February 7, 2007, MID acquired all of MEC's interests and rights in
a 34 acre parcel of residential development land in Aurora, Ontario
for cash consideration of Cdn. $12.0 million ($10.1 million) (note
16). MEC recognized a non-cash impairment loss of $1.3 million
related to this parcel of residential development land in the three
months and year ended December 31, 2006. 6. EARNINGS (LOSS) PER
SHARE Diluted earnings (loss) per share for the three-month periods
and years ended December 31, 2007 and 2006 are computed as follows:
Three Months Ended Year Ended December 31, December 31,
------------------------- ------------------------- 2007 2006 2007
2006
-------------------------------------------------------------------------
Income from continuing operations $ 12,004 $ 17,942 $ 39,610 $
49,063 Income (loss) from discontinued operations (515) 10,574
(101) 10,807
-------------------------------------------------------------------------
Net income $ 11,489 $ 28,516 $ 39,509 $ 59,870
-------------------------------------------------------------------------
Weighted average number of Class A Subordinate Voting and Class B
Shares outstanding during the period (thousands) 47,249 48,329
48,073 48,301 Stock options (thousands) - 57 10 54
-------------------------------------------------------------------------
47,249 48,386 48,083 48,355
-------------------------------------------------------------------------
Diluted earnings (loss) per Class A Subordinate Voting or Class B
Share - from continuing operations $ 0.25 $ 0.37 $ 0.82 $ 1.02 -
from discontinued operations (0.01) 0.22 - 0.22
-------------------------------------------------------------------------
$ 0.24 $ 0.59 $ 0.82 $ 1.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The computation of diluted earnings per share for the three-month
period and year ended December 31, 2007 excludes the effect of the
potential exercise of 516,544 (2006 - 155,000) and 361,544 (2006 -
155,000) options, respectively, to acquire Class A Subordinate
Voting Shares of the Company because the effect would be
anti-dilutive. 7. REAL ESTATE PROPERTIES (restated - notes 3, 4)
December 31, December 31, As at 2007 2006
-------------------------------------------------------------------------
Real Estate Business Revenue-producing properties Land $ 226,269 $
206,990 Buildings, parking lots and roadways - cost 1,444,241
1,298,073 Buildings, parking lots and roadways - accumulated
depreciation (345,825) (274,931)
-------------------------------------------------------------------------
1,324,685 1,230,132
-------------------------------------------------------------------------
Development properties Land and improvements 226,248 115,910
Properties under development 9,541 648
-------------------------------------------------------------------------
235,789 116,558
-------------------------------------------------------------------------
Properties held for sale 1,447 1,931
-------------------------------------------------------------------------
1,561,921 1,348,621
-------------------------------------------------------------------------
MEC Revenue-producing racetrack properties Land and improvements
178,843 197,838 Buildings - cost 640,451 592,351 Buildings -
accumulated depreciation (193,046) (165,891) Construction in
progress 43,140 25,202
-------------------------------------------------------------------------
669,388 649,500
-------------------------------------------------------------------------
Under-utilized racetrack real estate 87,128 91,016
-------------------------------------------------------------------------
Development land and improvements - 20,705
-------------------------------------------------------------------------
Revenue-producing non-racetrack properties Land and improvements
6,498 6,521 Buildings - cost 2,122 3,410 Buildings - accumulated
depreciation (93) (72)
-------------------------------------------------------------------------
8,527 9,859
-------------------------------------------------------------------------
765,043 771,080
-------------------------------------------------------------------------
Eliminations (note 16) (55,387) (4,941)
-------------------------------------------------------------------------
Consolidated $ 2,271,577 $ 2,114,760
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in the Real Estate Business' revenue-producing properties
above at December 31, 2006 was a property which has been
reclassified into development properties during the year ended
December 31, 2007. The net book value of the property at December
31, 2007 is $7.2 million (December 31, 2006 - $5.2 million). During
the year ended December 31, 2007, the Real Estate Business and
Magna entered into discussions to terminate the lease on this
property, retroactive to May 31, 2007, as the Real Estate Business
is seeking to redevelop the property for residential purposes. The
Real Estate Business anticipates paying Magna approximately $2.0
million to terminate the lease and the anticipated termination
payment has been included in the Real Estate Business' "real estate
properties, net" and "accounts payable and accrued liabilities" at
December 31, 2007 on the Company's unaudited interim consolidated
balance sheet. Included in the Real Estate Business' properties
under development above at December 31, 2007 are $8.2 million of
costs paid to Magna as reimbursement for expenditures incurred by
Magna in relation to expansions on two of the Real Estate Business'
revenue-producing properties. 8. BANK INDEBTEDNESS AND LONG TERM
DEBT Real Estate Business The Real Estate Business has an unsecured
senior revolving credit facility in the amount of $50.0 million
that is available by way of U.S. or Canadian dollar loans or
letters of credit. The credit facility expires on December 21,
2008, unless extended with the consent of both parties. Interest on
drawn amounts is calculated based on an applicable margin
determined by the Real Estate Business' ratio of funded debt to
earnings before interest, income tax expense, depreciation and
amortization ("EBITDA"). Currently, the Company is subject to the
lowest applicable margin available, with drawn amounts incurring
interest at the London Interbank Offered Rate ("LIBOR") or bankers'
acceptance rates, in each case plus 1.0%, or the U.S. base or
Canadian prime rate. The credit facility contains negative and
affirmative financial and operating covenants. At December 31,
2007, the Company was in compliance with all of these covenants. At
December 31, 2007, the Company had no borrowings under the
facility, but had issued letters of credit totalling $0.3 million.
MEC MEC's bank indebtedness consists of the following short-term
bank loans: December 31, December 31, As at 2007 2006
-------------------------------------------------------------------------
MEC Credit Facility(a) $ 34,891 $ - SAC Credit Facility(b) 3,499
6,515 AmTote Credit Facility(c) 824 -
-------------------------------------------------------------------------
$ 39,214 $ 6,515
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) During the year ended December 31, 2007, MEC extended the
maturity date of the $40.0 million MEC Credit Facility from March
30, 2007 to January 31, 2008 and modified a financial performance
maintenance covenant relating to EBITDA. The maturity date was
further extended to March 31, 2008 subsequent to year-end.
Borrowings under the MEC Credit Facility are available by way of
U.S. dollar loans and letters of credit, with borrowings bearing
interest at the U.S. base rate plus 5.0% or LIBOR plus 6.0%. Loans
under the MEC Credit Facility are collateralized by a first charge
on the assets of Golden Gate Fields and a second charge on the
assets of Santa Anita Park, and are guaranteed by certain of MEC's
subsidiaries. At December 31, 2007, MEC had borrowed $34.9 million
(December 31, 2006 - nil) under the MEC Credit Facility and had
issued letters of credit totalling $4.3 million (December 31, 2006
- $24.7 million), such that $0.8 million (December 31, 2006 - $15.3
million) was unused and available. The weighted average interest
rate on the borrowings outstanding under the MEC Credit Facility at
December 31, 2007 was 11.0%. (b) On October 2, 2007, MEC's
wholly-owned subsidiary, The Santa Anita Companies, Inc. ("SAC"),
which owns and operates Santa Anita Park, amended and extended its
term and revolving loan agreements with a U.S. financial
institution. The amendments included reducing the amount available
under the revolving loan (the "SAC Credit Facility") from $10.0
million to $7.5 million, requiring the aggregate outstanding
principal under the SAC Credit Facility to be fully repaid for a
period of 60 consecutive days during each year, increasing the
amount available under the term loan from $60.0 million to $67.5
million, reducing the monthly principal repayments under the term
loan to $375 thousand, extending the maturity date for both
facilities from October 8, 2007 to October 31, 2012 and modifying
certain financial covenants. The SAC Credit Facility and term loan
are guaranteed by MEC's wholly- owned subsidiary, The Los Angeles
Turf Club, Incorporated ("LATC"), and are collateralized by a first
deed of trust on Santa Anita Park and the surrounding real
property, an assignment of the lease between LATC and SAC, and a
pledge of all of the outstanding capital stock of LATC and SAC. The
term loan contains cross-default provisions with the MEC Credit
Facility. Borrowings under the SAC Credit Facility and term loan
bear interest at the U.S. prime rate and LIBOR plus 2.0%,
respectively. At December 31, 2007, MEC had borrowed $66.4 million
(December 31, 2006 - $64.2 million) under the fully drawn term loan
and $3.5 million (December 31, 2006 - $6.5 million) under the SAC
Credit Facility such that $4.0 million (December 31, 2006 - $3.5
million) was unused and available. The weighted average interest
rate on the borrowings outstanding under the SAC Credit Facility at
December 31, 2007 was 7.3% (December 31, 2006 - 8.3%). (c) On May
11, 2007, MEC's wholly-owned subsidiary, AmTote (note 3), completed
a refinancing of its existing credit facilities with a new lender
(the "AmTote Lender"). The refinancing included (i) a $3.0 million
revolving credit facility to finance working capital requirements
(the "AmTote Credit Facility"), (ii) a $4.2 million term loan for
the repayment of AmTote's debt outstanding under its existing term
loan facilities, and (iii) a term loan of up to $10.0 million to
finance up to 80% of eligible capital costs related to tote service
contracts (the "AmTote Equipment Term Loan"). The AmTote Credit
Facility matures on May 1, 2008 and borrowings under the facility
are available by way of U.S. dollar loans and letters of credit,
each bearing interest at LIBOR plus 2.8%. The $4.2 million term
loan matures on May 11, 2011 and the AmTote Equipment Term Loan
matures on May 11, 2012, with both facilities bearing interest at
LIBOR plus 3.0%. The AmTote Credit Facility and the two term loan
facilities are collateralized by a first charge on AmTote's assets
and a pledge of the stock of AmTote. At December 31, 2007, AmTote
had borrowed $0.8 million under the AmTote Credit Facility, which
is included in MEC's "bank indebtedness" on the Company's unaudited
interim consolidated balance sheet, such that $2.2 million was
unused and available. At December 31, 2007, $3.3 million and $2.0
million was outstanding under the $4.2 million term loan facility
and the AmTote Equipment Term Loan, respectively, which is included
in MEC's "long-term debt" on the Company's unaudited interim
consolidated balance sheet. At December 31, 2007, the weighted
average interest rates on the borrowings under the AmTote Credit
Facility, the term loan and the AmTote Equipment Term Loan were
7.7%, 7.2% and 7.2%, respectively. (d) On July 24, 2007, one of
MEC's European subsidiaries amended and extended its bank term loan
of up to 3.9 million euros by increasing the amount available under
the bank term loan to 4.0 million euros ($5.7 million), bearing
interest at the Euro Overnight Index Average ("EURONIA") rate plus
3.0% per annum (6.6% at December 31, 2007). See note 18 for details
of certain amendments that were made subsequent to year-end. At
December 31, 2007 and 2006, MEC had borrowings of 2.4 million euros
($3.1 million) and 4.5 million euros ($5.9 million), respectively,
under this bank term loan. (e) On December 16, 2007, another one of
MEC's European subsidiaries amended its 15.0 million euro ($22.1
million) term loan facility which was due to mature on December 31,
2007 by extending the maturity to December 31, 2008 with repayments
of 7.5 million euros, due on each of February 29, 2008 and December
31, 2008. See note 18 for details of certain amendments that were
made subsequent to year- end. Borrowings under the term loan bear
interest at the three-month Euro Interbank Offered Rate plus 2.0%
(6.8% at December 31, 2007) and are collateralized by a first and
second mortgage on land in Austria owned by the European
subsidiary. At December 31, 2007, MEC is in compliance with all of
the above noted loan agreements and related covenants. 9. SHARE
CAPITAL Changes in the Company's Class A Subordinate Voting Shares
and Class B Shares are shown in the following table: Class A
Subordinate Voting Shares Class B Shares -------------------------
------------------------- Stated Stated Number Value Number Value
-------------------------------------------------------------------------
Shares issued and outstanding, December 31, 2005, March 31, 2006
and June 30, 2006 47,742,083 $ 1,558,016 548,238 $ 17,893 Issued on
exercise of stock options 30,000 1,043 - -
-------------------------------------------------------------------------
Shares issued and outstanding, December 31, 2006 47,772,083
1,559,059 548,238 17,893 Issued on exercise of stock options 10,000
390 - - Shareholder conversion of Class B Shares to Class A
Subordinate Voting Shares 825 27 (825) (27)
-------------------------------------------------------------------------
Shares issued and outstanding, December 31, 2006 47,782,908
1,559,476 547,413 17,866 Issued on exercise of stock options 38,456
1,303 - -
-------------------------------------------------------------------------
Shares issued and outstanding, March 31, 2007 and June 30, 2007
47,821,364 1,560,779 547,413 17,866 Shares purchased for
cancellation (485,700) (15,853) - -
-------------------------------------------------------------------------
Shares issued and outstanding, September 30, 2007 47,335,664
1,544,926 547,413 17,866 Shares purchased for cancellation
(1,175,100) (38,352) - -
-------------------------------------------------------------------------
Shares issued and outstanding, December 31, 2007 46,160,564 $
1,506,574 547,413 $ 17,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total ------------------------- Stated Number Value
----------------------------------------------- Shares issued and
outstanding, December 31, 2005, March 31, 2006 and June 30, 2006
48,290,321 $ 1,575,909 Issued on exercise of stock options 30,000
1,043 ----------------------------------------------- Shares issued
and outstanding, December 31, 2006 48,320,321 1,576,952 Issued on
exercise of stock options 10,000 390 Shareholder conversion of
Class B Shares to Class A Subordinate Voting Shares - -
----------------------------------------------- Shares issued and
outstanding, December 31, 2006 48,330,321 1,577,342 Issued on
exercise of stock options 38,456 1,303
----------------------------------------------- Shares issued and
outstanding, March 31, 2007 and June 30, 2007 48,368,777 1,578,645
Shares purchased for cancellation (485,700) (15,853)
----------------------------------------------- Shares issued and
outstanding, September 30, 2007 47,883,077 1,562,792 Shares
purchased for cancellation (1,175,100) (38,352)
----------------------------------------------- Shares issued and
outstanding, December 31, 2007 46,707,977 $ 1,524,440
-----------------------------------------------
----------------------------------------------- Pursuant to the
terms of a normal course issuer bid program for which the Company
received approval from the Toronto Stock Exchange ("TSX") on
September 29, 2006, the Company was authorized, from October 4,
2006 to October 3, 2007, to purchase for cancellation, through the
facilities of the TSX and the New York Stock Exchange ("NYSE"), up
to 3,257,895 Class A Subordinate Voting Shares, being 10% of the
Public Float, as such term is defined by the TSX. The Company
purchased 340,400 and 826,100 Class A Subordinate Voting Shares for
cancellation for cash consideration of $11.7 million and $27.1
million (Cdn. $33.41 and Cdn. $32.92 per share on a weighted
average basis) during the three months and year ended December 31,
2007, respectively, under this program. The Company's historical
Canadian carrying value of the shares purchased for cancellation in
excess of the purchase price was $4.3 million and $10.6 million,
for the three months and year ended December 31, 2007,
respectively, which has been credited to "contributed surplus"
(note 10). The aggregate amount of the purchase price and the
amount credited to "contributed surplus", in excess of the
Company's U.S. historical reported carrying value of the shares
purchased for cancellation, was $4.9 million and $10.7 million for
the three months and year ended December 31, 2007, respectively,
and has been charged to "accumulated other comprehensive income"
(note 11). Pursuant to the terms of a normal course issuer bid
program for which the Company received approval from the TSX on
October 2, 2007, the Company is authorized, during the 12-month
period commencing October 8, 2007 and ending October 7, 2008, to
purchase for cancellation, through the facilities of the TSX and
the NYSE, up to 2,531,354 Class A Subordinate Voting Shares, being
10% of the Public Float. During the three months and year ended
December 31, 2007, the Company purchased 834,700 Class A
Subordinate Voting Shares for cancellation for cash consideration
of $25.0 million (Cdn. $29.92 per share on a weighted average
basis) under this program. The Company's historical Canadian
carrying value of the shares purchased for cancellation in excess
of the purchase price was $13.9 million, which has been credited to
"contributed surplus" (note 10). The aggregate amount of the
purchase price and the amount credited to "contributed surplus", in
excess of the Company's U.S. historical reported carrying value of
the shares purchased for cancellation, was $11.7 million and has
been charged to "accumulated other comprehensive income" (note 11).
The price that MID pays for shares purchased pursuant to the bids
is the market price at the time of acquisition. 10. CONTRIBUTED
SURPLUS Changes in the Company's contributed surplus are shown in
the following table: Three Months Ended Year Ended December 31,
December 31, ------------------------- -------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Contributed surplus, beginning of period $ 9,119 $ 2,212 $ 2,667 $
2,112 Carrying value of shares purchased for cancellation in excess
of purchase price (note 9) 18,265 - 24,487 - Stock-based comp-
ensation 133 529 608 817 Transfer to share capital on exercise of
stock options - (74) (245) (262)
-------------------------------------------------------------------------
Contributed surplus, end of period $ 27,517 $ 2,667 $ 27,517 $
2,667
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. ACCUMULATED OTHER COMPREHENSIVE INCOME Changes in the Company's
accumulated other comprehensive income are shown in the following
table: Three Months Ended Year Ended December 31, December 31,
------------------------- ------------------------- 2007 2006 2007
2006
-------------------------------------------------------------------------
Accumulated other comprehensive income, beginning of period $
240,593 $ 155,381 $ 166,399 $ 106,960 Adjustment for change in
accounting policy related to the fair value of interest rate swaps
(note 2) - - 154 - Change in fair value of interest rate swaps, net
of taxes and minority interest (337) - (584) - Foreign currency
translation adjustment, net of minority interest(i) 25,326 11,018
106,043 61,360 Reversal of foreign currency translation gain
related to shares purchased for cancellation (note 9) (16,576) -
(22,354) - Recognition of foreign currency translation gain in net
income(ii) (7,067) - (7,719) (1,921)
-------------------------------------------------------------------------
Accumulated other comprehensive income, end of period(iii) $
241,939 $ 166,399 $ 241,939 $ 166,399
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the three-month periods and years ended December 31,
2007 and 2006, the Company recorded unrealized foreign currency
translation gains related to its net investments in currencies
other than the U.S. dollar, primarily due to the strengthening
against the U.S. dollar of the euro during the three-month periods
and years ended December 31, 2007 and 2006 and the Canadian dollar
during the three months and year ended December 31, 2007. (ii)
Included in the Real Estate Business' "dilution and other gains" is
a $7.1 million (2006 - nil) and $7.7 million (2006 - $1.9 million)
currency translation gain for the three months and year ended
December 31, 2007, respectively, realized from capital transactions
that gave rise to a reduction in the net investment in certain
foreign operations. (iii) Accumulated other comprehensive income
consists of: December 31, December 31, As at 2007 2006
------------------------------------------------------------------
Foreign currency translation adjustment, net of minority interest $
242,369 $ 166,399 Fair value of interest rate swaps, net of taxes
and minority interest (430) -
------------------------------------------------------------------
$ 241,939 $ 166,399
------------------------------------------------------------------
12. INCOME TAXES The Real Estate Business' income tax expense for
the three months and year ended December 31, 2007 includes future
tax recoveries of $3.8 million (2006 - nil) and $5.4 million (2006
- $2.1 million), respectively, realized from the reduction in
future tax rates and changes in tax legislation in a number of
countries in which the Real Estate Business operates. 13.
STOCK-BASED COMPENSATION (a) On August 29, 2003, MID's Board of
Directors approved the Incentive Stock Option Plan (the "MID
Plan"), which allows for the grant of stock options or stock
appreciation rights to directors, officers, employees and
consultants. Amendments to the MID Plan were approved by the
Company's shareholders at the May 11, 2007 Annual and Special
Meeting, and became effective on June 6, 2007. At December 31,
2007, a maximum of 2.61 million MID Class A Subordinate Voting
Shares are available to be issued under the MID Plan. MID has
granted stock options to certain directors and officers to purchase
MID's Class A Subordinate Voting Shares. Such options have
generally been granted with 1/5th of the options vesting on the
date of grant and the remaining options vesting over a period of
four years at a rate of 1/5th on each anniversary of the date of
grant. Options expire on the tenth anniversary of the date of
grant, subject to earlier cancellation in the events specified in
the stock option agreement entered into by MID with each recipient
of options. A reconciliation of the changes in stock options
outstanding is presented below: 2007 2006 -------------------------
------------------------- Weighted Weighted Average Average
Exercise Exercise Price Price Number (Cdn. $) Number (Cdn. $)
-------------------------------------------------------------------------
Stock options outstanding, January 1 465,000 36.08 390,000 33.49
Granted - - 20,000 39.12 Exercised (38,456) 32.19 - -
-------------------------------------------------------------------------
Stock options outstanding, March 31 and June 30 426,544 36.43
410,000 33.77 Granted 125,000 32.21 - - Exercised - - (30,000)
31.85 Cancelled or forfeited (35,000) 41.17 (60,000) 35.62
-------------------------------------------------------------------------
Stock options outstanding, September 30 516,544 35.09 320,000 33.60
Granted - - 155,000 41.17 Exercised - - (10,000) 35.62
-------------------------------------------------------------------------
Stock options outstanding, December 31 516,544 35.09 465,000 36.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options exercisable, December 31 322,544 34.60 243,000 34.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company estimates the fair value of stock options granted at
the date of grant using the Black-Scholes option valuation model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of freely traded options, which are fully
transferable and have no vesting restrictions. In addition, this
model requires the input of subjective assumptions, including
expected dividend yields, future stock price volatility and
expected time until exercise. Although the assumptions used reflect
management's best estimates, they involve inherent uncertainties
based on market conditions outside of the Company's control.
Because the Company's outstanding stock options have
characteristics that are significantly different from those of
traded options, and because changes in any of the assumptions can
materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide the only measure of
the fair value of the Company's stock options. The weighted average
assumptions used in determining the fair value of the MID stock
options granted are shown in the table below. Three Months Ended
Year Ended December 31, December 31, -------------------------
------------------------- 2007 2006 2007 2006
-------------------------------------------------------------------------
Risk-free interest rate - 3.8% 4.3% 3.8% Expected dividend yield -
1.64% 1.92% 1.65% Expected volatility of MID's Class A Subordinate
Voting Shares - 19.4% 18.9% 19.6% Weighted average expected life
(years) - 4.0 4.0 3.9 Weighted average fair value per option
granted - $6.50 $5.51 $6.41
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Effective November 3, 2003, MID established a Non-Employee Director
Share-Based Compensation Plan (the "DSP"), which provides for a
deferral of up to 100% of each outside director's total annual
remuneration from the Company, at specified levels elected by each
director, until such director ceases to be a director of the
Company. The amounts deferred are reflected by notional deferred
share units ("DSUs") whose value reflects the market price of the
Company's Class A Subordinate Voting Shares at the time that the
particular payment(s) to the director is determined. The value of a
DSU will appreciate or depreciate with changes in the market price
of the Class A Subordinate Voting Shares. The DSP also takes into
account any dividends paid on the Class A Subordinate Voting
Shares. Effective January 1, 2005, all directors were required to
receive at least 50% of their Board and Committee compensation fees
(excluding Special Committee fees, effective January 1, 2006) in
DSUs. On January 1, 2008, the DSP was amended such that this 50%
minimum requirement is only applicable to Board retainer fees.
Under the DSP, when a director leaves the Board, the director
receives a cash payment at an elected date equal to the value of
the accrued DSUs at such date. There is no option under the DSP for
directors to receive Class A Subordinate Voting Shares in exchange
for DSUs. During the year ended December 31, 2006, 11,715 DSUs were
redeemed by a former director for $0.4 million. A reconciliation of
the changes in DSUs outstanding is presented below: 2007 2006
-------------------------------------------------------------------------
DSUs outstanding, January 1 27,319 23,092 Granted 4,241 3,984
-------------------------------------------------------------------------
DSUs outstanding, March 31 31,560 27,076 Granted 3,025 3,882
Redeemed - (11,715)
-------------------------------------------------------------------------
DSUs outstanding, June 30 34,585 19,243 Granted 3,568 4,350
-------------------------------------------------------------------------
DSUs outstanding, September 30 38,153 23,593 Granted 3,299 3,726
-------------------------------------------------------------------------
DSUs outstanding, December 31 41,452 27,319
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months and year ended December 31, 2007, the Real
Estate Business recognized stock-based compensation expense of $35
thousand (2006 - $0.6 million) and $0.8 million (2006 - $1.4
million), respectively, which includes a $0.1 million recovery
(2006 - $0.1 million expense) and $0.2 million expense (2006 - $0.6
million expense), respectively, pertaining to DSUs. (b) MEC has a
Long-term Incentive Plan (the "MEC Plan"), adopted in 2000 and
amended in 2007, which allows for the grant of non-qualified stock
options, incentive stock options, stock appreciation rights,
restricted stock, bonus stock and performance shares to MEC's
directors, officers, employees, consultants, independent
contractors and agents. A maximum of 9.2 million shares of MEC
Class A Stock are available to be issued under the MEC Plan, of
which 7.8 million are available for issuance pursuant to stock
options and tandem stock appreciation rights and 1.4 million are
available for issuance pursuant to any other type of award under
the MEC Plan. During 2005, MEC introduced an incentive compensation
program (the "MEC Program") for certain officers and key employees,
which awarded performance shares of MEC Class A Stock (the "2005
Performance Share Awards") as contemplated under the MEC Plan. The
number of shares of MEC Class A Stock underlying the 2005
Performance Share Awards was based either on a percentage of a
guaranteed bonus or a percentage of total 2005 compensation divided
by the market value of the stock on the date the MEC Program was
approved by the Compensation Committee of MEC's Board of Directors.
The 2005 Performance Share Awards vested over a six or eight month
period to December 31, 2005 and were distributed, subject to
certain conditions, in two equal instalments. The first
distribution date occurred in March 2006 and the second
distribution date occurred in March 2007. At December 31, 2005,
there were 199,471 vested 2005 Performance Share Awards outstanding
with a grant-date market value of either $6.26 or Cdn. $7.61 per
share. During the year ended December 31, 2006, 131,751 2005
Performance Share Awards were issued with a stated value of $0.8
million, and 4,812 2005 Performance Share Awards were forfeited. At
December 31, 2006, there were 62,908 vested 2005 Performance Share
Awards outstanding, all of which were issued during the year ended
December 31, 2007, with a stated value of $0.2 million.
Accordingly, there are no 2005 Performance Share Awards remaining
to be issued at December 31, 2007. In 2006, MEC continued the MEC
Program as described in the preceding paragraph. The program was
similar in all respects except that the performance shares granted
in 2006 vested over a 12-month period to December 31, 2006 and were
distributed, subject to certain conditions, prior to March 31, 2007
(the "2006 Performance Share Awards"). During the year ended
December 31, 2006, 162,556 2006 Performance Share Awards were
granted under the MEC Program with a weighted average grant-date
market value of either $6.80 or Cdn. $7.63 per share, 1,616 2006
Performance Share Awards were issued with a nominal stated value,
and 42,622 2006 Performance Share Awards were forfeited. At
December 31, 2006, there were 118,318 vested 2006 Performance Share
Awards outstanding, of which 111,841 2006 Performance Share Awards
were issued during the year ended December 31, 2007 with a stated
value of $0.4 million, and 6,477 2006 Performance Share Awards were
forfeited. Accordingly, there are no 2006 Performance Share Awards
remaining to be issued at December 31, 2007. MEC did not continue
its performance share award program in 2007. In the year ended
December 31, 2007, MEC issued 40,942 (2006 - 25,896) shares of MEC
Class A Stock with a stated value of $0.2 million (2006 - $0.2
million) to MEC's directors in payment of services rendered. MEC
grants stock options ("MEC Stock Options") to certain directors,
officers, key employees and consultants to purchase shares of MEC
Class A Stock. All MEC Stock Options give the grantee the right to
purchase MEC Class A Stock at a price no less than the fair market
value of such stock at the date of grant. Generally, MEC Stock
Options under the MEC Plan vest over a period of two to six years
from the date of grant at rates of 1/7th to 1/3rd per year and
expire on or before the tenth anniversary of the date of grant,
subject to earlier cancellation upon the occurrence of certain
events specified in the stock option agreements entered into by MEC
with each recipient of MEC Stock Options. A reconciliation of the
changes in MEC Stock Options outstanding is presented below: 2007
2006 ------------------------- ------------------------- Weighted
Weighted Average Average Exercise Exercise Number Price $ Number
Price $
-------------------------------------------------------------------------
MEC Stock Options outstanding, January 1 4,905,000 6.08 4,827,500
6.14 Forfeited or expired (166,000) 6.74 - -
-------------------------------------------------------------------------
MEC Stock Options outstanding, March 31 4,739,000 6.06 4,827,500
6.14 Forfeited or expired (25,000) 5.71 (64,000) 6.80
-------------------------------------------------------------------------
MEC Stock Options outstanding, June 30 4,714,000 6.07 4,763,500
6.13 Granted 390,000 3.20 - - Forfeited or expired (14,000) 5.20 -
-
-------------------------------------------------------------------------
MEC Stock Options outstanding, September 30 5,090,000 5.85
4,763,500 6.13 Granted - - 200,000 5.25 Forfeited or expired
(140,000) 6.92 (58,500) 7.13
-------------------------------------------------------------------------
MEC Stock Options outstanding, December 31 4,950,000 5.82 4,905,000
6.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MEC Stock Options exercisable, December 31 4,406,334 5.99 4,412,968
6.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of MEC Stock Options granted is estimated at the
date of grant using the Black-Scholes option valuation model, which
requires the use of subjective assumptions and may not necessarily
provide the only measure of the fair value of MEC Stock Options (as
described further in note 13(a)). The weighted average assumptions
used in determining the fair value of the MEC Stock Options granted
are shown in the table below. Three Months Ended Year Ended
December 31, December 31, -------------------------
------------------------- 2007 2006 2007 2006
-------------------------------------------------------------------------
Risk-free interest rate - 4.4% 4.2% 4.4% Expected dividend yield -
- - - Expected volatility of MEC Class A Stock - 51.0% 55.9% 51.0%
Weighted average expected life (years) - 4.0 5.0 4.0 Weighted
average fair value per option granted - $2.26 $1.36 $2.26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months and year ended December 31, 2007, MEC
recognized total stock-based compensation expense of $1.4 million
(2006 - $0.3 million) and $0.7 million (2006 - $2.4 million),
respectively, relating to performance share awards, director
compensation and stock options under the MEC Plan. 14. DETAILS OF
CASH FROM OPERATING ACTIVITIES (a) Items not involving current cash
flows: Three Months Ended Year Ended December 31, December 31,
------------------------- ------------------------- (restated
(restated - note 3) - note 3) 2007 2006 2007 2006
-------------------------------------------------------------------------
Real Estate Business Straight-line rent adjustment $ 10 $ 115 $ 397
$ 224 Stock-based compensation expense 35 644 798 1,407
Depreciation and amortization 10,960 10,200 41,541 39,225 Interest
and other income from MEC (833) (4,629) (1,132) (16,505) Gain on
disposal of real estate - - (1,478) (209) Future income taxes
(2,225) 431 (864) 2,439 Dilution and other gains (7,067) - (7,719)
(1,921) Other 89 77 330 311
-------------------------------------------------------------------------
969 6,838 31,873 24,971
-------------------------------------------------------------------------
MEC Stock-based compensation expense 653 324 1,388 2,393
Depreciation and amortization 12,580 11,373 41,809 39,694 Interest
expense with MID - 3,678 75 12,167 Amortization of debt issuance
costs 2,341 1,956 3,907 7,193 Write-down of MEC's long-lived assets
(136) 77,445 1,308 77,445 Gain on disposal of business - (115,193)
- (115,193) Gain on disposal of real estate (22) - (48,776) (2,883)
Dilution and other losses (gains), net 3,467 (10) 3,463 (195)
Future income taxes (5,804) (11,852) (7,496) (12,426) Minority
interest (18,929) (3,692) (47,496) (32,768) Other (1,110) 1,258
(4,043) 1,644
-------------------------------------------------------------------------
(6,960) (34,713) (55,861) (22,929)
-------------------------------------------------------------------------
Eliminations (note 16) (1,257) (853) 48,196 (1,949)
-------------------------------------------------------------------------
Consolidated $ (7,248) $ (28,728) $ 24,208 $ 93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Changes in non-cash balances: Three Months Ended Year Ended
December 31, December 31, -------------------------
------------------------- (restated (restated - note 3) - note 3)
2007 2006 2007 2006
-------------------------------------------------------------------------
Real Estate Business Accounts receivable $ (1,143) $ 3,562 $ 1,076
$ 1,265 Loans receivable from MEC, net (252) 368 (380) 619 Prepaid
expenses and other 618 1,290 (126) (656) Accounts payable and
accrued liabilities (4,525) (7,092) 861 (4,652) Income taxes 1,258
697 5,834 (294) Deferred revenue 162 (554) (584) (3,667)
-------------------------------------------------------------------------
(3,882) (1,729) 6,681 (7,385)
-------------------------------------------------------------------------
MEC Restricted cash (14,148) (8,249) 797 (7,632) Accounts
receivable (5,942) 2,278 (807) 12,736 Prepaid expenses and other
458 4,921 (1,823) (564) Accounts payable and accrued liabilities
32,186 17,323 4,589 2,295 Income taxes 2,342 2,333 2,926 1,246
Loans payable to MID, net 252 (368) 380 (619) Deferred revenue
2,349 1,198 128 (1,023)
-------------------------------------------------------------------------
17,497 19,436 6,190 6,439
-------------------------------------------------------------------------
Eliminations (note 16) (522) (162) 22 1,539
-------------------------------------------------------------------------
Consolidated $ 13,093 $ 17,545 $ 12,893 $ 593
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. SEGMENTED INFORMATION The Company's reportable segments reflect
how the Company is organized and managed by senior management. The
Company's operations are segmented in the Company's internal
financial reports between wholly-owned operations (Real Estate
Business) and publicly-traded operations (MEC). The segregation of
operations between wholly-owned and publicly-traded operations
recognizes the fact that, in the case of the Real Estate Business,
the Company's Board of Directors and executive management have
direct responsibility for the key operating, financing and resource
allocation decisions, whereas, in the case of MEC, such
responsibility resides with MEC's separate Board of Directors and
executive management. The Company's reporting segments are as
follows: Real Estate Business At December 31, 2007, the Real Estate
Business owns real estate assets in Canada, Austria, the United
States, Germany, Mexico, the United Kingdom, the Czech Republic,
Spain and Poland. Substantially all of these real estate assets are
leased to, or are under development for subsequent lease to,
Magna's automotive operating units. The Real Estate Business also
owns certain properties that are being held for future development
or sale. MEC MEC operates or manages seven thoroughbred racetracks,
one standardbred racetrack and two racetracks that run both
thoroughbred and quarterhorse meets, as well as the simulcast
wagering venues at these tracks. Also, MEC used to manage the
thoroughbred and standardbred racing at Magna Racino(TM), but now
expects that a local operator will manage future meets at that
facility. Three of the racetracks owned or operated by MEC (two in
the United States and one in Austria) include casino operations
with alternative gaming machines. In addition, MEC operates
off-track betting ("OTB") facilities, a United States based
national account wagering business known as XpressBet(R) and a
European account wagering service known as MagnaBet(TM). Under a
series of March 2007 agreements with Churchill Downs Incorporated
("CDI"), MEC owns a 50% interest in a joint venture, TrackNet Media
Group, LLC ("TrackNet Media"), a content management company formed
for distribution of the full breadth of MEC's horseracing content
(note 17). A separate joint venture with CDI also involves the
ownership by MEC and CDI of equal (50%) shares in HorseRacing
TV(TM) ("HRTV(TM)"), a television network focused on horseracing
that MEC initially launched on the Racetrack Television Network.
MEC also owns AmTote, a provider of totalisator services to the
pari-mutuel industry. To support certain of MEC's thoroughbred
racetracks, MEC owns and operates thoroughbred training centres in
Palm Beach County, Florida and in the Baltimore, Maryland area and,
under a triple-net lease agreement with MID (note 16), operates an
additional thoroughbred training centre situated near San Diego,
California. MEC also owns and operates production facilities in
Austria and in North Carolina for StreuFex(TM), a straw-based horse
bedding product. In addition to racetracks, MEC's real estate
portfolio includes a residential development in Austria. As
described in note 1, the Company's unaudited interim consolidated
statements of income (loss), consolidated statements of cash flows
and consolidated balance sheets have been arranged to provide
detailed, discrete financial information on the Real Estate
Business and MEC reporting segments. 16. TRANSACTIONS WITH RELATED
PARTIES Mr. Frank Stronach, the Company's Chairman, the Chairman of
Magna, and the Chairman and Chief Executive Officer of MEC, and
three other members of his family are trustees of the Stronach
Trust. The Stronach Trust controls the Company through the right to
direct the votes attaching to 66% of the Company's Class B Shares.
The Stronach Trust, together with Open Joint Stock Company Russian
Machines ("Russian Machines") and certain members of Magna's
executive management, indirectly holds Magna Class B Shares
representing approximately 71% of the total voting power of all the
outstanding shares of Magna. Furthermore, the Stronach Trust and
Russian Machines each, indirectly, has the right to designate an
equal number of nominees to the Magna board of directors. As a
result, Magna may be considered to be effectively controlled,
indirectly, by the Stronach Trust and Russian Machines. As the
Company and Magna may be considered to be under the common control
of the Stronach Trust, they are considered to be related parties
for accounting purposes. (a) Bridge Loans and Project Financings On
September 13, 2007, MID announced that the MID Lender had agreed to
provide MEC with the MEC Bridge Loan of up to $80.0 million. The
MEC Bridge Loan, together with a $20.0 million private placement of
MEC Class A Stock to FEL (the "FEL Equity Investment") is intended
to provide short-term funding to MEC as it implements the MEC Debt
Elimination Plan. The MID Lender also agreed to amend the MEC
Project Financing Facilities (as defined below) by, among other
things, requiring repayment of at least $100.0 million under the
Gulfstream Park project financing facility on or prior to May 31,
2008 and waiving the make-whole payment, if applicable, for any
repayments made under either of the MEC Project Financing
Facilities prior to that date. Pursuant to a consulting agreement
between MID and MEC, which requires MEC to reimburse MID for its
expenses, MID management is assisting MEC in implementing the MEC
Debt Elimination Plan (note 1). (i) MEC Bridge Loan The MEC Bridge
Loan of up to $80.0 million has been made available through a
non-revolving facility provided by the MID Lender. The MEC Bridge
Loan proceeds may only be used by MEC in accordance with the MEC
Debt Elimination Plan and are available solely to fund: (i)
operations; (ii) payments of principal, interest and costs, fees
and expenses due under the MEC Bridge Loan and the MEC Project
Financing Facilities; (iii) mandatory payments of interest in
connection with permitted debt under the MEC Bridge Loan; (iv)
mandatory capital expenditures; and (v) capital expenditures
required pursuant to the terms of the joint venture arrangements
(note 17) between MEC and Forest City and Caruso. The MEC Bridge
Loan has a maturity date of May 31, 2008 and bore interest at a
rate per annum equal to LIBOR plus 10.0% prior to December 31,
2007, at which time the interest rate on outstanding and subsequent
advances was increased to LIBOR plus 11.0% (16.2% at December 31,
2007). On February 29, 2008, the interest rate on outstanding and
subsequent advances under the MEC Bridge Loan was increased by a
further 1.0%. The MEC Bridge Loan is secured by certain assets of
MEC, including first ranking security over the Dixon and
Thistledown lands, second ranking security over Golden Gate Fields
and the Ocala lands and third ranking security over Santa Anita
Park. In addition, the MEC Bridge Loan is guaranteed by certain MEC
subsidiaries and MEC has pledged the shares and all other interests
MEC has in each of the guarantor subsidiaries (or provided negative
pledges where a pledge was not possible due to regulatory
constraints or due to a pledge to an existing third party lender).
The MEC Bridge Loan is cross-defaulted to all other obligations of
MEC and its subsidiaries to the MID Lender, including the MEC
Project Financing Facilities. The MEC Bridge Loan must be repaid
with, and the commitment will be reduced by, amounts equal to all
net proceeds realized by MEC from asset sales and issuances of
equity (other than the FEL Equity Investment) or debt, subject to
amounts required to be paid to MEC's existing lenders. Amounts
repaid cannot be re- borrowed. The MID Lender received an
arrangement fee of $2.4 million (3% of the commitment) at closing
and received an additional arrangement fee of $0.8 million on
February 29, 2008 (1% of the then current commitment). The MID
Lender also receives an annual commitment fee equal to 1% of the
undrawn facility. All fees, expenses and closing costs incurred by
the MID Lender in connection with the MEC Bridge Loan were paid by
MEC. Pursuant to the terms of the MEC Bridge Loan, advances after
January 15, 2008 are subject to the MID Lender being satisfied that
the MEC Credit Facility will be further extended to at least April
30, 2008 or that a satisfactory refinancing of that facility has
been arranged. As the MEC Credit Facility was extended to March 31,
2008 (note 8), the MID Lender waived this condition for advances
between January 15, 2008 and March 31, 2008. At December 31, 2007,
$36.9 million under the MEC Bridge Loan was included in the Real
Estate Business' current portion of "loans receivable from MEC,
net" on the Company's unaudited interim consolidated balance sheet,
net of $1.4 million of unamortized deferred arrangement fees. MEC's
current portion of "loans payable to MID, net" on the Company's
unaudited interim consolidated balance sheet includes $35.9
million, net of $2.4 million unamortized deferred financing costs.
This net balance is being accreted to its face value over the term
to maturity of the MEC Bridge Loan. (ii) MEC Project Financings The
MID Lender has made available separate project financing facilities
to Gulfstream Park Racing Association, Inc. ("GPRA") and Remington
Park, Inc. ("Remington Park"), the wholly-owned subsidiaries of MEC
that own and/or operate Gulfstream Park and Remington Park,
respectively, in the amounts of $162.3 million and $34.2 million,
respectively, plus costs and capitalized interest in each case as
discussed below (together, the "MEC Project Financing Facilities").
The MEC Project Financing Facilities have a term of 10 years
(except as described below for the two slot machine tranches of the
Gulfstream Park project financing facility) from the relevant
completion dates for the construction projects at Gulfstream Park
and Remington Park, which occurred in February 2006 and November
2005, respectively. The Remington Park project financing and the
Gulfstream Park project financing contain cross-guarantee,
cross-default and cross-collateralization provisions. The Remington
Park project financing is secured by all assets of the borrower
(including first ranking security over the Remington Park leasehold
interest), excluding licences and permits, and is guaranteed by the
MEC subsidiaries that own Gulfstream Park and the Palm Meadows
Training Center. The security package also includes second ranking
security over the lands owned by Gulfstream Park and second ranking
security over the Palm Meadows Training Center and the shares of
the owner of the Palm Meadows Training Center (in each case, behind
security granted for the Gulfstream Park project financing). In
addition, the borrower has agreed not to pledge any licences or
permits held by it and MEC has agreed not to pledge the shares of
the borrower or the owner of Gulfstream Park. The Gulfstream Park
project financing is guaranteed by MEC's subsidiaries that own and
operate the Palm Meadows Training Center and Remington Park and is
secured principally by security over the lands (or, in the case of
Remington Park, over the leasehold interest) forming part of the
operations at Gulfstream Park, Palm Meadows and Remington Park and
over all other assets of Gulfstream Park, Palm Meadows and
Remington Park, excluding licences and permits (which cannot be
subject to security under applicable legislation). Prior to the
relevant completion date, amounts outstanding under each of the MEC
Project Financing Facilities (other than the new tranches of the
Gulfstream Park project financing facility described below) bore
interest at a floating rate equal to 2.55% above MID's per annum
notional cost of borrowing under its floating rate credit facility,
compounded monthly. Since the relevant completion date (or since
inception for the new tranches of the Gulfstream Park project
financing facility described below), amounts outstanding under each
of the MEC Project Financing Facilities bear interest at a fixed
rate of 10.5% per annum, compounded semi-annually. Prior to January
1, 2007, payment of interest was capitalized (except in relation to
the December 2006 tranche of the Gulfstream Park project financing
facility described below, for which the interest capitalization
period was extended). However, since the completion date for
Remington Park, there has been in place a mandatory annual cash
flow sweep of not less than 75% of Remington Park's total excess
cash flow, after permitted capital expenditures and debt service,
which is used to pay capitalized interest on the Remington Park
project financing facility plus a portion of the principal under
the facility equal to the capitalized interest on the Gulfstream
Park project financing facility. During the three months and year
ended December 31, 2007, $0.7 million ($2006 - $1.6 million) and
$4.0 million (2006 - $5.0 million), respectively, of such payments
were made. Commencing January 1, 2007, the MID Lender is entitled
to receive monthly blended payments of principal and interest based
on a 25-year amortization period under each of the MEC Project
Financing Facilities (except in relation to the December 2006
tranche of the Gulfstream Park project financing facility described
below, for which the interest capitalization period was extended to
May 1, 2007, at which time monthly payments commenced). In June
2006, the MID Lender consented to the release and transfer to MEC
of up to an aggregate of $10.0 million of funds from the
subsidiaries that operate the racetracks at Gulfstream Park and
Remington Park, subject to approval by MID management over the
amount and timing of such releases. Such funds, which would
ordinarily be "trapped" at the applicable subsidiaries pursuant to
the terms of the MEC Project Financing Facilities, were in excess
of the existing cash requirements of the applicable subsidiaries
and were used by MEC solely to fund payments that were necessary in
connection with the operation of the business of MEC and that could
not be deferred on a commercially reasonable basis. The MID Lender
received waiver fees of $0.1 million (1% of the full amount
released), which fees were capitalized under the applicable project
financing facility. In July 2006 and December 2006, the Gulfstream
Park project financing facility was amended to increase the amount
available from $115.0 million (plus costs and capitalized interest)
by adding new tranches of up to $25.8 million (plus costs and
capitalized interest) and $21.5 million (plus costs and capitalized
interest), respectively. Both tranches were established to fund
MEC's design and construction of slot machine facilities located in
the existing Gulfstream Park clubhouse building, as well as related
capital expenditures and start-up costs, including the acquisition
and installation of slot machines. The new tranches of the
Gulfstream Park project financing facility both mature on December
31, 2011. Interest under the December 2006 tranche was capitalized
until May 1, 2007, at which time monthly blended payments of
principal and interest became payable to the MID Lender based on a
25-year amortization period commencing on such date. Advances
relating to the slot machine tranches are made available by way of
progress draws and there is no make-whole payment associated with
the new tranches. Also in July 2006, the Gulfstream Park project
financing facility was further amended to introduce a mandatory
annual cash flow sweep of not less than 75% of Gulfstream Park's
total excess cash flow, after permitted capital expenditures and
debt service, which will be used to repay the additional principal
amounts being made available under the new tranches. The July 2006
and December 2006 amendments did not affect the fact that the
Gulfstream Park project financing facility continues to be
cross-guaranteed, cross-defaulted and cross-collateralized with the
Remington Park project financing facility. The consideration for
the July 2006 and December 2006 amendments was an arrangement fee
of 1% of the amount of each new tranche, which amounts are
capitalized under the Gulfstream Park project financing facility.
In September 2007, the terms of the Gulfstream Park project
financing facility were amended such that: (i) MEC was added as a
guarantor under that facility; (ii) the borrower and all of the
guarantors agreed to use commercially reasonable efforts to
implement the MEC Debt Elimination Plan (including the sale of
specific assets by the time periods listed in the MEC Debt
Elimination Plan); and (iii) the borrower became obligated to repay
at least $100.0 million under the Gulfstream Park project financing
facility on or prior to May 31, 2008. In consideration of these
amendments and subject to certain conditions, the MID Lender agreed
to waive the make-whole payment for any repayments made under the
MEC Project Financing Facilities on or prior to May 31, 2008 and
adjust the amortization schedule for the Gulfstream Park project
financing facility following receipt of the $100.0 million
repayment, provided that (i) repayments under the Gulfstream Park
project financing facility are first applied to the July 2006 slots
tranche, then to the December 2006 slots tranche (for each of which
there is no make-whole payment), and then to the original tranche
and (ii) no event of default exists under the MEC Project Financing
Facilities. At December 31, 2007, there were balances of $133.5
million (December 31, 2006 - $134.8 million), $24.7 million
(December 31, 2006 - 19.4 million) and $13.9 million (December 31,
2006 - nil) due under the initial tranche, the July 2006 slots
tranche and the December 2006 slots tranche, respectively, of the
Gulfstream Park project financing facility. A balance of $27.7
million (December 31, 2006 - $31.7 million) was due under the
Remington Park project financing facility. The current portion of
the MEC Project Financing Facilities included in the Real Estate
Business' "loans receivable from MEC, net" at December 31, 2007 was
$102.2 million (December 31, 2006 - $3.1 million), including the
required $100.0 million repayment discussed above. The current and
non-current portions of the MEC Project Financing Facilities of
$137.4 million (including $0.4 million in MEC's "discontinued
operations" (note 3)) and $93.2 million (including $26.1 million in
MEC's "discontinued operations" (note 3)), respectively, as
reflected in MEC's "loans payable to MID, net" on the Company's
unaudited interim consolidated balance sheet, are net of $0.7
million and $4.3 million, respectively, of unamortized deferred
financing costs. These net balances are being accreted to their
face values over the terms to maturity of the MEC Project Financing
Facilities. Subsequent to year-end, Remington Park agreed to
purchase 80 Class III slot machines from GPRA with funding from the
Remington Park project financing facility. Accordingly, $1.0
million was advanced under the existing Remington Park project
financing facility subsequent to year-end. In connection with the
Gulfstream Park project financing facility, MEC has placed into
escrow (the "Gulfstream Escrow") with the MID Lender proceeds from
an asset sale which occurred in fiscal 2005 and certain additional
amounts necessary to ensure that any remaining Gulfstream Park
construction costs (including the settlement of liens on the
property) can be funded, which escrowed amount has been and will be
applied against any such construction costs. In addition, in
November 2006, MEC deposited into the Gulfstream Escrow sufficient
proceeds from the sale of The Meadows to repay all remaining
indebtedness under a loan from BE&K, Inc. ("BE&K"), the
parent company of Suitt Construction Co. Inc., the general
contractor for the Gulfstream Park redevelopment project (the
"BE&K Loan"). At December 31, 2007, the amount held under the
Gulfstream Escrow (including accrued interest) was $4.5 million
(December 31, 2006 - $6.5 million). All funds in the Gulfstream
Escrow are reflected as the Real Estate Business' "restricted cash"
and "due to MEC" on the Company's unaudited interim consolidated
balance sheet. (iii) 2005 MEC Bridge Loan In July 2005, the MID
Lender provided MEC with the 2005 MEC Bridge Loan of up to $100.0
million, expiring August 31, 2006. The amount of available funding
under the 2005 MEC Bridge Loan was subsequently increased to $119.0
million and the term was extended to December 5, 2006. On November
14, 2006, MEC used part of the proceeds received in connection with
the sale of The Meadows to repay in full the 2005 MEC Bridge Loan.
Accordingly, the 2005 MEC Bridge Loan was terminated. Approximately
$12.7 million of external third party costs have been incurred,
including $1.3 million and $2.4 million in the three months and
year ended December 31, 2007, respectively, in association with the
MEC Bridge Loan, the MEC Project Financing Facilities and the 2005
MEC Bridge Loan. At the MEC segment level, these costs are
recognized as deferred financing costs and are being amortized into
interest expense (of which a portion has been capitalized in the
case of the MEC Project Financing Facilities) over the respective
term of the MEC Bridge Loan, each of the MEC Project Financing
Facilities and the 2005 MEC Bridge Loan. At a consolidated level,
such costs are charged to "general and administrative" expenses in
the periods in which they are incurred. All interest and fees
charged by the Real Estate Business relating to the MEC Bridge
Loan, the MEC Project Financing Facilities and the 2005 MEC Bridge
Loan, including any capitalization and subsequent amortization
thereof by MEC, and any adjustments to MEC's related deferred
financing costs, are eliminated from the Company's consolidated
results of operations and financial position. DATASOURCE: MI
Developments Inc. CONTACT: PRNewswire - - 03/05/2008
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