/FIRST ADD - TO326 - MI Developments Inc./

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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