(b) FEL Equity Investment The closing of the FEL Equity Investment
occurred on October 29, 2007. FEL purchased 8,888,888 shares of MEC
Class A Stock at a price per share of $2.25, with proceeds to MEC
of $19.6 million net of $0.4 million of transaction costs. The
price per share was set at the greater of (i) 90% of the volume
weighted average price per share of MEC Class A Stock on NASDAQ for
the five trading days commencing on September 13, 2007 (the date of
announcement of the FEL Equity Investment); and (ii) U.S. $1.91,
being 100% of the volume weighted average price per share of MEC
Class A Stock on NASDAQ for the five trading days immediately
preceding September 13, 2007. The shares of MEC Class A Stock
issued pursuant to the subscription agreement were issued and sold
in a private transaction exempt from registration under Section
4(2) of the United States Securities Act of 1933, as amended. As a
result of the FEL Equity Investment, MID's voting interest and
equity stake in MEC were reduced from 96.3% and 58.3%,
respectively, to 95.6% and 53.9%, respectively, and the Company
recorded a $3.5 million dilution loss in the three months and year
ended December 31, 2007, which is included in "dilution and other
gains (losses), net" in the Company's unaudited interim
consolidated statement of income (loss). (c) MEC Real Estate
Acquired by MID During the first quarter of 2007, MID acquired all
of MEC's interests and rights in three real estate properties to be
held for future development: a 34 acre parcel in Aurora, Ontario; a
64 acre parcel of excess land adjacent to MEC's racetrack at Laurel
Park in Howard County, Maryland; and a 157 acre parcel (together
with certain development rights) in Palm Beach County, Florida
adjacent to MEC's Palm Meadows Training Center. MID paid cash
consideration of approximately Cdn. $12.0 million ($10.1 million),
$20.0 million and $35.0 million, respectively, for these interests
and rights. In addition, MID granted MEC a profit participation
right in respect of each property, which entitles MEC to receive
additional cash proceeds equal to 15% of the net proceeds from any
sale or development of the applicable property after MID achieves a
15% internal rate of return. During the second quarter of 2007, MID
acquired all of MEC's interest and rights in a 205 acre parcel of
land located in Bonsall, California for cash consideration of
approximately $24.0 million. The property currently houses the San
Luis Rey Downs Thoroughbred Training Facility operated by MEC. This
property is being held by MID for future development and MID has
agreed to lease the property to MEC on a triple-net basis for
nominal rent while MID pursues the necessary development
entitlements and other approvals. The lease terminates on June 6,
2010, subject to early termination by either party on four months
written notice. At the Real Estate Business and MEC segment levels,
these transactions have been recognized at the exchange amount,
resulting in MEC recognizing a gain in the year ended December 31,
2007 of $48.8 million. The effects of these transactions are
eliminated from the Company's unaudited interim consolidated
results of operations and financial position, except that $1.7
million of costs incurred by the Real Estate Business and MEC in
conjunction with these transactions have been included in the
consolidated "general and administrative" expenses in the year
ended December 31, 2007. (d) Hurricane Katrina Relief Effort In
October 2005, the Real Estate Business purchased 791 acres of land
in Simmesport, Louisiana for $2.4 million. In the fourth quarter of
2005, the Real Estate Business committed to donating approximately
50 acres of this land to a not-for-profit organization established
to assist Hurricane Katrina redevelopment efforts with charitable
funding from Magna and other Canadian sources. In 2007, the Real
Estate Business donated substantially all of the land to the same
not-for-profit organization. As a result, for the year ended
December 31, 2007, $2.0 million of costs, based on the carrying
value of the land donated, have been included in the Real Estate
Business' "general and administrative" expenses. The founding
members and officers of the not-for-profit organization are
officers and employees of MID and Magna. (e) MEC's Sales to Magna
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 for a purchase price of 20.0 million euros
($29.4 million), subject to customary adjustments. The closing of
the transaction is expected to occur during the first quarter of
2008 (note 4(b)). The sale of this property has not been recognized
in the unaudited interim consolidated financial statements and the
property is included in MEC's "assets held for sale" on the
Company's unaudited interim consolidated balance sheet at December
31, 2007. On March 31, 2006, MEC sold a real estate property held
for sale and located in the United States to Magna. A gain on sale
of $2.9 million was recognized based on the cash consideration
received, net of transaction costs, of $5.6 million. MEC used the
net proceeds from this transaction to repay principal amounts
outstanding under the MEC Credit Facility (note 8). (f) MEC's
Option to Acquire The Maryland Jockey Club On September 24, 2007,
MEC exercised its option to acquire the remaining voting and equity
interests in MJC, pursuant to an agreement with certain companies
controlled by Joseph De Francis, a member of MEC's Board of
Directors, and Karin De Francis. Under the terms of the option
agreement, MEC paid $18.3 million plus interest on October 5, 2007.
At December 31, 2006, this obligation was reflected in MEC's
"long-term debt due within one year" on the Company's unaudited
interim consolidated balance sheet and was secured by letters of
credit under the MEC Credit Facility (note 8). 17. COMMITMENTS AND
CONTINGENCIES (a) In the ordinary course of business activities,
the Company may be contingently liable for litigation and claims
with, among others, customers, suppliers and former employees.
Management believes that adequate provisions have been recorded in
the accounts where required. Although it is not possible to
accurately estimate the extent of potential costs and losses, if
any, management believes, but can provide no assurance, that the
ultimate resolution of such contingencies would not have a material
adverse effect on the financial position of the Company. (b) On
August 2, 2005, Greenlight Capital, Inc. and certain of its
affiliates ("Greenlight") filed an oppression application in the
Ontario Superior Court of Justice against the Company and certain
of its current and former directors and officers. The hearing of
the application concluded on March 1, 2006 and on October 30, 2006,
the Ontario Superior Court of Justice dismissed the oppression
application. On November 29, 2006, Greenlight filed a Notice of
Appeal with the Ontario Divisional Court and on January 30, 2007,
Greenlight filed its Appellants' factum. The Company and the other
respondents filed their responding facta in July 2007 and the
Company expects the appeal hearing to take place in late April
2008. The Company continues to consider Greenlight's oppression
claim to be without merit and, together with the other respondents,
will vigorously defend against the appeal. (c) MEC generates a
substantial amount of its revenues from wagering activities and is
subject to the risks inherent in the ownership and operation of a
racetrack. These include, among others, the risks normally
associated with changes in the general economic climate, trends in
the gaming industry, including competition from other gaming
institutions and state lottery commissions, and changes in tax laws
and gaming laws. (d) On May 18, 2007, ODS Technologies, L.P., doing
business as TVG Network, filed a summons against MEC, HRTV, LLC and
XpressBet, Inc. seeking an order that the defendants be enjoined
from infringing certain patents relating to interactive wagering
systems and an award of damages to compensate for the infringement.
An Answer to Complaint, Affirmative Defences and Counterclaims have
been filed on behalf of the defendants. At the present time, the
final outcome related to this summons is uncertain. (e) In addition
to the letters of credit issued under the Company's credit
facilities (note 8), the Company had $4.7 million (Real Estate
Business - $3.6 million; MEC - $1.1 million) of letters of credit
issued with various financial institutions at December 31, 2007 to
guarantee various of its construction projects. These letters of
credit are secured by cash deposits of the Company. (f) MEC has
provided indemnities related to surety bonds and letters of credit
issued in the process of obtaining licences and permits at certain
racetracks and to guarantee various construction projects related
to activities of its subsidiaries. At December 31, 2007, these
indemnities amounted to $6.3 million, with expiration dates through
2009. (g) At December 31, 2007, the Company's contractual
commitments related to construction and development projects
outstanding amounted to approximately $7.8 million (Real Estate
Business - $3.6 million; MEC - $4.2 million). (h) At December 31,
2007, MEC had outstanding interest rate swap contracts in
connection with SAC's term loan facility (note 8), entered into on
each of March 1, 2007, April 27, 2007 and July 26, 2007, with each
contract being effective on October 1, 2007 and fixing the rate of
interest at 7.0%, 7.1% and 7.2% per annum, respectively, to October
8, 2009 on a notional amount per contract of $10.0 million.
Additionally, on October 4, 2007, MEC entered into an interest rate
swap contact, with an effective date of October 8, 2009, which
fixes the rate of interest at 7.2% per annum to October 31, 2012 on
a notional amount of $23.4 million. (i) On March 4, 2007, MEC
entered into a series of customer-focused agreements with CDI in
order to enhance wagering integrity and security, to own and
operate HRTV(TM), to buy and sell horseracing content, and to
promote the availability of horseracing signals to customers
worldwide. These agreements involved the formation of a joint
venture, TrackNet Media, a reciprocal content swap agreement and
the purchase by CDI from MEC of a 50% interest in HRTV(TM).
TrackNet Media is the vehicle through which MEC and CDI horseracing
content is made available to third parties, including racetracks,
OTB facilities, casinos and advance deposit wagering ("ADW")
companies. TrackNet Media purchases horseracing content from third
parties and makes it available through the respective MEC and CDI
outlets. Under the reciprocal content swap agreement, MEC and CDI
exchange their respective horseracing signals. On March 4, 2007,
HRTV, LLC was created, with an effective date of April 27, 2007, in
order to facilitate the sale of 50% of HRTV(TM) to CDI. Both MEC
and CDI are required to make quarterly capital contributions, on an
equal basis, until October 2009 to fund the operations of HRTV,
LLC, however, MEC may, under certain circumstances, be responsible
for additional capital commitments. MEC's share of the required
capital contributions to HRTV, LLC is expected to be approximately
$7.0 million, of which $2.0 million was contributed to December 31,
2007. (j) On November 15, 2006, MEC's wholly-owned subsidiary,
GPRA, opened the slots facility at Gulfstream Park despite an
August 2006 decision rendered by the Florida First District Court
of Appeals that reversed a lower court decision that granted
summary judgment in favour of "Floridians for a Level Playing
Field" ("FLPF"), a group in which GPRA is a member. The Appeal
Court ruled that a trial is necessary to determine whether the
constitutional amendment adopting the slots initiative, approved by
Floridians in the November 2004 election, was invalid because the
petitions bringing the initiative forward did not contain the
minimum number of valid signatures. FLPF filed an application for a
rehearing, a rehearing en banc before the full panel of the Florida
First District Court of Appeals and Certification by the Florida
Supreme Court. On November 30, 2006, in a split decision, the en
banc court affirmed the August 2006 panel decision and certified
the matter to the Florida Supreme Court, which stayed the appellate
court ruling pending its jurisdictional review of the matter. On
September 27, 2007, the Florida Supreme Court ruled that the matter
was not procedurally proper for consideration by the court. Its
order effectively remanded the matter to the trial court for a
trial on the merits. MEC has disclosed that it expects that a trial
on the merits will likely take over a year to fully develop and
that it could take as many as three years to achieve a full factual
record and trial court ruling for an appellate court to review. At
December 31, 2007, the carrying value of MEC's fixed assets related
to the slots facility is approximately $29.6 million. If the matter
is ultimately decided in a manner adverse to MEC, a write-down of
these fixed assets may be required. (k) In May 2005, MEC entered
into a Limited Liability Company Agreement with Forest City
(collectively with MEC, the "Partnership Members") concerning the
planned development of "The Village at Gulfstream Park(TM)". That
agreement contemplates the development of a mixed-use project
consisting of residential units, parking, restaurants, hotels,
entertainment, retail outlets and other commercial use projects on
a portion of the Gulfstream Park property. Under the Limited
Liability Company Agreement, Forest City is required to contribute
up to a maximum of $15.0 million as an initial capital
contribution. MEC is obligated to contribute 50% of any equity
amounts in excess of $15.0 million as and when needed. However, to
December 31, 2007, MEC has not made any such contributions. At
December 31, 2007, approximately $42.3 million of costs have been
incurred by The Village at Gulfstream Park, LLC, which have been
funded by a construction loan from a third party bank, as well as
equity contributions from Forest City. Included in MEC's "accounts
payable and accrued liabilities" is an obligation of approximately
$5.8 million reflecting MEC's share of equity contributions in
excess of $15.0 million. The Limited Liability Company Agreement
also contemplated additional agreements with MEC, including a
ground lease, a reciprocal easement agreement, a development
agreement, a leasing agreement and a management agreement, all of
which have been executed. Upon the opening of The Village at
Gulfstream Park(TM), annual cash receipts (adjusted for certain
disbursements and reserves) will first be distributed to Forest
City, subject to certain limitations, until the initial
contribution accounts of the Partnership Members are equal.
Thereafter, the cash receipts are generally expected to be
distributed to the Partnership Members equally, provided they
maintain their equal interest in the partnership. The annual cash
payments made to Forest City to equalize the Partnership Members'
initial contribution accounts will not exceed the amount of annual
ground rent otherwise payable to a subsidiary of MEC. (l) On
September 28, 2006, certain of MEC's affiliates entered into
definitive operating agreements with Caruso regarding the proposed
development of The Shops at Santa Anita on approximately 51 acres
of excess land surrounding Santa Anita Park. Westfield Corporation
("Westfield"), a developer of a neighbouring parcel of land, has
challenged the manner in which the entitlement process for such
development has proceeded. On May 16, 2007, Westfield commenced
civil litigation in the Los Angeles Superior Court in an attempt to
overturn the Arcadia City Council's approval and granting of
entitlements related to the construction of The Shops at Santa
Anita. In addition, on May 21, 2007, Arcadia First! filed a
petition against the City of Arcadia to overturn the entitlements
and named MEC and certain of its subsidiaries as parties of
interest. If either Westfield or Arcadia First! is ultimately
successful in its challenge, development efforts could potentially
be delayed or suspended. The first hearings on the merits of the
petitioners' claims are scheduled for April 2008. Under an April
2004 Letter of Intent, MEC is also exploring the possibility of a
joint venture with Caruso to develop excess lands surrounding
Golden Gate Fields. To December 31, 2007, MEC has expended $9.9
million on these development initiatives, of which $3.6 million was
paid in the year ended December 31, 2007. These amounts have been
included in MEC's "real estate properties, net" on the Company's
unaudited interim consolidated balance sheets. Under the terms of
these arrangements, MEC may be responsible to fund additional
costs. However, to December 31, 2007, no such payments have been
made. (m) The Maryland Jockey Club ("MJC") was party to agreements
with the Maryland Thoroughbred Horsemen's Association and the
Maryland Breeders' Association, which expired on December 31, 2007,
under which the horsemen and the breeders each contributed 4.75% of
the costs of simulcasting to MJC. Without similar arrangements in
effect, there would be an increase in costs to MJC of approximately
$2.0 million. At this time, it is uncertain whether these
agreements will be renewed on comparable terms. (n) The Meadows
(note 3) used to participate in a multi-employer defined benefit
pension plan for which the pension plan's total vested liabilities
exceeded the plan's assets. An updated actuarial valuation is in
the process of being obtained, however, based on allocation
information currently provided by the plan, the portion of the
estimated unfunded liability for vested benefits attributable to
The Meadows is approximately $3.7 million. Effective November 1,
2007, the New Jersey Sports & Exposition Authority withdrew
from this plan and, effective December 25, 2007, The Meadows also
withdrew from the plan. As part of the indemnification obligations
provided for in the Meadows Holdback Note (note 3), the withdrawal
liability that has been triggered as a result of The Meadows'
withdrawal from the plan will be set-off against the amount owing
to MEC under the Meadows Holdback Note. 18. SUBSEQUENT EVENTS (a)
Effective January 1, 2008, MEC amended its bank term loan of up to
4.0 million euros (note 8) to reduce the amount available to 3.5
million euros and increase the interest rate to EURONIA plus 3.8%
per annum. (b) On February 12, 2008, MEC amended its 15.0 million
euro term loan facility (note 8) such that the first instalment of
7.5 million euros previously due on February 29, 2008 was extended
until March 15, 2008. (c) On February 12, 2008, MEC received notice
from The Nasdaq Stock Market advising that, in accordance with
Nasdaq Marketplace Rule 4450(e)(2), MEC has 180 calendar days, or
until August 11, 2008, to regain compliance with the minimum bid
price for MEC Class A Stock required for continued listing on the
Nasdaq Global Market, as set forth in Nasdaq Marketplace Rule
4450(a)(5). MEC received this notice because the bid price of the
MEC Class A Stock closed below the $1.00 per share minimum for 30
consecutive business days prior to February 12, 2008. The notice
also states that if, at any time before August 11, 2008, the bid
price of MEC Class A Stock on the Nasdaq Global Market closes at
$1.00 per share or more for a minimum of 10 consecutive trading
days, the Nasdaq staff will provide MEC with written notification
that it has achieved compliance with its listing requirements.
However, the notice states that if MEC cannot demonstrate
compliance with such rule by August 11, 2008 (or such later date as
may be permitted by Nasdaq), the Nasdaq staff will provide MEC with
written notification that the MEC Class A Stock will be delisted.
During this 180 calendar day period, MEC Class A Stock will
continue to trade on the Nasdaq Global Market. This notification
has no effect on the listing of the MEC Class A Stock on the TSX.
DATASOURCE: MI Developments Inc. CONTACT: PRNewswire - - 03/05/2008
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