December 31, 2007 and March 31, 2008 46,160,564 $ 1,506,574 547,413
$ 17,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total --------------------- Stated Number Value
----------------------------------------------- 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 and March 31, 2008 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. 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
2007, the Company purchased an aggregate of 1,660,800 Class A
Subordinate Voting Shares for cancellation under these programs.
The price that MID pays for shares purchased pursuant to the bids
is the market price at the time of acquisition. No shares have been
purchased thus far for cancellation in 2008 and the Company remains
authorized to purchase for cancellation up to 1,696,654 Class A
Subordinate Voting Shares under the normal course issuer bid
program ending October 7, 2008. 11. CONTRIBUTED SURPLUS Changes in
the Company's contributed surplus are shown in the following table:
Three Months Ended March 31, 2008 2007
-------------------------------------------------------------------------
Contributed surplus, beginning of period $ 27,517 $ 2,667
Stock-based compensation 131 125 Transfer to share capital on
exercise of stock options - (245)
-------------------------------------------------------------------------
Contributed surplus, end of period $ 27,648 $ 2,547
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. ACCUMULATED OTHER COMPREHENSIVE INCOME Changes in the Company's
accumulated other comprehensive income are shown in the following
table: Three Months Ended March 31, 2008 2007
-------------------------------------------------------------------------
Accumulated other comprehensive income, beginning of period $
241,939 $ 166,553 Change in fair value of interest rate swaps, net
of taxes and minority interest (332) (59) Foreign currency
translation adjustment, net of minority interest(i) 35,171 10,363
Recognition of foreign currency translation gain in net income(ii)
- (652)
-------------------------------------------------------------------------
Accumulated other comprehensive income, end of period(iii) $
276,778 $ 176,205
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) During the three-month periods ended March 31, 2008 and 2007,
the Company reported unrealized foreign currency translation net
gains related to its self-sustaining operations having functional
currencies other than the U.S. dollar. The gain from the
appreciation of the euro against the U.S. dollar in the three
months ended March 31, 2008 was partially offset by unrealized
foreign currency translation losses related to the reporting of the
Company's Canadian operations due to the weakening of the Canadian
dollar against the U.S. dollar during this period. The gain in the
three months ended March 31, 2007 is primarily due to the
strengthening against the U.S. dollar of the euro and the Canadian
dollar. (ii) Included in the Real Estate Business' "other gains,
net" for the three months ended March 31, 2007 is a $0.7 million
currency translation net gain 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: March December As at 31, 2008 31, 2007
------------------------------------------------------------------
Foreign currency translation adjustment, net of minority interest $
277,535 $ 242,369 Fair value of interest rate swaps, net of taxes
and minority interest (757) (430)
------------------------------------------------------------------
$ 276,778 $ 241,939
------------------------------------------------------------------
------------------------------------------------------------------
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: 2008 2007 ---------------------
--------------------- Weighted Weighted Average Average Exercise
Exercise Price Price Number (Cdn. $) Number (Cdn. $)
---------------------------------------------------------------------
Stock options outstanding, January 1 516,544 35.09 465,000 36.08
Exercised - - (38,456) 32.19
---------------------------------------------------------------------
Stock options outstanding, March 31 516,544 35.09 426,544 36.43
---------------------------------------------------------------------
---------------------------------------------------------------------
Stock options exercisable, March 31 326,544 34.66 208,544 34.68
---------------------------------------------------------------------
---------------------------------------------------------------------
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. Effective November
3, 2003, MID established a Non-Employee Director Share-Based
Compensation Plan (the "DSP"), which provides for a deferral of up
to 100% of each outside director's total annual remuneration from
the Company, at specified levels elected by each director, until
such director ceases to be a director of the Company. The amounts
deferred are reflected by notional deferred share units ("DSUs")
whose value reflects the market price of the Company's Class A
Subordinate Voting Shares at the time that the particular
payment(s) to the director is determined. The value of a DSU will
appreciate or depreciate with changes in the market price of the
Class A Subordinate Voting Shares. The DSP also takes into account
any dividends paid on the Class A Subordinate Voting Shares.
Effective January 1, 2005, all directors were required to receive
at least 50% of their Board and Committee compensation fees
(excluding Special Committee fees, effective January 1, 2006) in
DSUs. On January 1, 2008, the DSP was amended such that this 50%
minimum requirement is only applicable to Board retainer fees.
Under the DSP, when a director leaves the Board, the director
receives a cash payment at an elected date equal to the value of
the accrued DSUs at such date. There is no option under the DSP for
directors to receive Class A Subordinate Voting Shares in exchange
for DSUs. A reconciliation of the changes in DSUs outstanding is
presented below: 2008 2007
---------------------------------------------------------------------
DSUs outstanding, January 1 41,452 27,319 Granted 6,012 4,241
---------------------------------------------------------------------
DSUs outstanding, March 31 47,464 31,560
---------------------------------------------------------------------
---------------------------------------------------------------------
During the three months ended March 31, 2008, the Real Estate
Business recognized stock-based compensation expense of $0.2
million (2007 - $0.3 million), which includes $33 thousand (2007 -
$0.2 million) 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. Under a
2005 incentive compensation program (the "MEC Program"), MEC
awarded performance shares of MEC Class A Stock to certain of MEC's
officers and key employees. 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. For 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. Accordingly, for the three months ended March
31, 2007, MEC issued 174,749 of these vested performance share
awards with a stated value of $0.6 million and 6,477 performance
share awards were forfeited. No performance share awards remain to
be issued under the 2005 and 2006 incentive compensation
arrangements subsequent to March 31, 2007. MEC did not continue its
performance share award program subsequent to 2006. During the
three months ended March 31, 2007, MEC issued 30,941 shares of MEC
Class A Stock with a stated value of $0.1 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: 2008 2007
--------------------- --------------------- Weighted Weighted
Average Average Exercise Exercise Number Price $ Number Price $
---------------------------------------------------------------------
MEC Stock Options outstanding, January 1 4,950,000 5.82 4,905,000
6.08 Forfeited or expired (200,000) 5.56 (166,000) 6.74
---------------------------------------------------------------------
MEC Stock Options outstanding, March 31 4,750,000 5.83 4,739,000
6.06
---------------------------------------------------------------------
---------------------------------------------------------------------
MEC Stock Options exercisable, March 31 4,348,334 5.99 4,290,968
6.06
---------------------------------------------------------------------
---------------------------------------------------------------------
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)). During the three months ended
March 31, 2008, MEC recognized total stock-based compensation
expense of $44 thousand (2007 - $0.2 million) relating to
performance share awards, director compensation and stock options
under the MEC Plan. 14. CAPITAL MANAGEMENT AND LIQUIDITY The
capital resources managed by the Company include: - cash and cash
equivalents; - credit facilities; - long-term debt; - additional
borrowing capacity; and - shareholders' equity. Each of the
Company's reportable segments (note 17) has different capital
management objectives. Real Estate Business The Real Estate
Business' objectives when managing capital include ensuring that
there are adequate capital resources to sustain operations and
maintaining a capital structure that allows the Real Estate
Business to take advantage of suitable investment opportunities as
they arise. The Real Estate Business monitors its capital based on
its ratio of debt to total capitalization, which it regards as a
measure of its ability to access additional capital as required.
The Real Estate Business must also comply with the terms of its
debt agreements, including its $50.0 million unsecured revolving
credit facility (the "MID Credit Facility") and the trust indenture
for its Cdn. $265.0 million senior unsecured debentures (the
"Debentures"), which include the following limitations: - secured
indebtedness not to exceed 15% of net tangible assets; - funded
debt not to exceed 40% of total capitalization; and - total
interest coverage of no less than 3:1. At March 31, 2008 and
December 31, 2007, the Company had no borrowings under the MID
Credit Facility, which expires on December 21, 2008, but had issued
letters of credit totalling $0.3 million. As at March 31, 2008, the
Real Estate Business' debt to total capitalization was 14%
(December 31, 2007 - 15%) and the Real Estate Business was in
compliance with all of its covenants. The outstanding total debt at
March 31, 2008 was $264.0 million (December 31, 2007 - $274.7
million), which is comprised of $257.3 million (December 31, 2007 -
$267.6 million) of the Debentures and $6.7 million (December 31,
2007 - $7.1 million) of mortgages payable on two properties. The
Real Estate Business' total capitalization at March 31, 2008 was
$1.91 billion (December 31, 2007 - $1.86 billion). The Real Estate
Business generated cash flows from operating activities of $47.8
million in the three months ended March 31, 2008 and had cash and
cash equivalents of $139.9 million at March 31, 2008. The Real
Estate Business' strategy for managing its liquidity needs includes
(i) using its cash resources and cash flows from operating
activities, (ii) drawing on the MID Credit Facility if and as
needed, and (iii) accessing additional capital by issuing debt,
equity or a combination of securities as required to finance its
operations and capital expenditures. The capital requirements to
finance additional acquisition and development activity will depend
on the availability of suitable investment opportunities and
related funding sources. The proposed reorganization of the Company
disclosed in note 3 contemplates (i) a distribution of $15.50 in
cash per share or approximately $724.0 million in total, and (ii)
an increase in the Company's credit facilities to $1.1 billion.
Such changes would result in a significant increase to the Real
Estate Business' financial leverage, which would materially change
the risk profile of the Real Estate Business and could limit its
financial flexibility to take advantage of certain investment
opportunities. In addition, should these contemplated changes
occur, the Real Estate Business' funded debt may exceed 40% of its
total capitalization, which could trigger a requirement for the
Company to repay the Debentures and potentially pay a prepayment
premium determined in accordance with the terms of the applicable
trust indenture, as described in note 11 to the annual consolidated
financial statements for the year ended December 31, 2007. MEC
MEC's capital is monitored by its separate Board of Directors and
management team based on its level of net debt. MEC must also
comply with the terms of its debt agreements. Many of these debt
arrangements are obligations of individual MEC business units and
require compliance with numerous financial and other covenants. As
at March 31, 2008, MEC's net debt was $583.1 million (December 31,
2007 - $564.5 million) and MEC was in compliance with all of its
covenants except as disclosed in note 9. MID's Real Estate Business
has not guaranteed any of MEC's indebtedness. Under the MEC Debt
Elimination Plan (note 1), MEC's capital management objective is to
eliminate its net debt by December 31, 2008 by generating funds
from the sale of assets (notes 4 and 5), entering into strategic
transactions involving certain of MEC's racing, gaming and
technology operations, and a possible future equity issuance. These
proceeds are to be used to fund MEC's operations and applied to
eliminate MEC's net debt, including amounts owed to the MID Lender
(note 18). The sale of MEC assets under the MEC Debt Elimination
Plan has taken longer than originally contemplated and the success
of the MEC Debt Elimination Plan is not assured. In order for MEC
to fund its ongoing operations and provide sufficient time to
implement the MEC Debt Elimination Plan, MEC will be required to
seek extensions from existing lenders, which may include the
Company, the availability of which is not yet determinable. As
discussed in note 1, MEC's ability to continue as a going concern
is in substantial doubt and is dependent on MEC generating cash
flows that are adequate to sustain the operations of the business,
renewing or extending current financing arrangements and meeting
its obligations with respect to secured and unsecured creditors,
none of which is assured. If MEC is unable to repay its obligations
when due or meet required covenants in debt agreements,
substantially all of its current and long- term debt will also
become due on demand as a result of cross-default provisions within
its loan agreements, unless MEC is able to obtain waivers or
extensions. The availability of such waivers or extensions is not
assured and, if available, the terms thereof are not yet
determinable. 15. DETAILS OF CASH FROM OPERATING ACTIVITIES (a)
Items not involving current cash flows: (restated - note 4) Three
Months Ended March 31, 2008 2007
---------------------------------------------------------------------
Real Estate Business Straight-line rent adjustment $ 57 $ 92
Interest and other income from MEC (1,086) (68) Stock-based
compensation expense 164 330 Depreciation and amortization 11,047
9,931 Gain on disposal of real estate - (25) Future income taxes
1,866 1,268 Currency translation gains, net - (652) Other 88 75
---------------------------------------------------------------------
12,136 10,951
---------------------------------------------------------------------
MEC Stock-based compensation expense 44 202 Depreciation and
amortization 10,940 8,526 Amortization of debt issuance costs 2,512
418 Write-down of MEC's long-lived assets 5,000 - Gain on disposal
of real estate - (31,067) Dilution gains - (4) Future income taxes
1,641 (1,378) Minority interest (6,312) 2,202 Other (1,133) (608)
---------------------------------------------------------------------
12,692 (21,709)
---------------------------------------------------------------------
Eliminations (note 18) (1,197) 32,308
---------------------------------------------------------------------
Consolidated $ 23,631 $ 21,550
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Changes in non-cash balances: (restated - note 4) Three Months
Ended March 31, 2008 2007
---------------------------------------------------------------------
Real Estate Business Accounts receivable $ (1,823) $ (442) Loans
receivable from MEC, net (59) - Prepaid expenses and other 527 (78)
Accounts payable and accrued liabilities 3,837 4,468 Income taxes
2,912 2,547 Deferred revenue (722) 1,202
---------------------------------------------------------------------
4,672 7,697
---------------------------------------------------------------------
MEC Restricted cash 2,607 (1,928) Accounts receivable (21,338)
(30,755) Prepaid expenses and other (4,209) (3,961) Accounts
payable and accrued liabilities 11,166 4,557 Income taxes 1,449
(2,192) Loans payable to MID, net 59 - Deferred revenue 2,344 3,227
---------------------------------------------------------------------
(7,922) (31,052)
---------------------------------------------------------------------
Eliminations (note 18) 211 (193)
---------------------------------------------------------------------
Consolidated $ (3,039) $ (23,548)
---------------------------------------------------------------------
---------------------------------------------------------------------
16. FINANCIAL INSTRUMENTS (a) Interest Rate Risk The Company's
consolidated results of operations are primarily exposed to
interest rate risk on its credit facilities and MEC's variable-rate
long-term debt. Based on the balances of these financial
liabilities outstanding as at March 31, 2008, a 50 basis point
change in annual interest rates, with all other variables held
constant, would have impacted consolidated "interest expense, net"
for the three months ended March 31, 2008 by approximately $0.1
million. The Company is also exposed to interest rate risk on
short-term investments with maturities of up to three months from
the date of acquisition that are included in "cash and cash
equivalents" and "restricted cash" on the Company's consolidated
balance sheets. The balance of the Company's short-term investments
fluctuates depending on the timing of the Company's operating cash
flows, capital expenditures and other liquidity requirements.
Assuming the balance of short-term investments at March 31, 2008
were outstanding throughout the entire three-month period then
ended, a 50 basis point change in annual interest rates, with all
other variables held constant, would have impacted consolidated
"interest expense, net" for the three months ended March 31, 2008
by approximately $0.2 million. MEC occasionally utilizes interest
rate swap contracts to hedge exposure to interest rate fluctuations
on variable rate debt. At March 31, 2008, MEC had four interest
rate swap contracts outstanding in connection with a LIBOR-based
term loan facility described in note 18(c) to the annual
consolidated financial statements for the year ended December 31,
2007. Based on the interest rate swap contracts in place at March
31, 2008, a 50 basis point change in interest rates would have
impacted other comprehensive income (excluding related minority
interest and tax effects) by approximately $0.6 million. (b)
Currency Risk The Company is structured such that its foreign
operations are self- sustaining. As a result, the Company's
currency risk associated with financial instruments is limited as
its financial assets and liabilities are generally denominated in
the functional currency of the subsidiary that holds the financial
instrument. However, the Real Estate Business' corporate
operations, which utilize the Canadian dollar as the functional
currency, have exposure to U.S. dollar denominated financial assets
and liabilities. Similarly, MEC's operations, which utilize the
U.S. dollar as the functional currency, have exposure to Canadian
dollar denominated financial liabilities. Based on the balance of
these financial instruments at March 31, 2008, a 5% change in the
U.S. to Canadian dollar exchange rate at March 31, 2008 would not
have had a material impact on the Company's consolidated net
income. (c) Credit Risk MEC, in the normal course of business,
settles wagers for racetracks that it does not operate or manage
and is thereby exposed to credit risk. However, these receivables
are generally not a significant portion of the Company's total
assets and are comprised of a large number of accounts. At March
31, 2008, MEC's "accounts receivable" included on the Company's
consolidated balance sheet are net of an allowance for doubtful
accounts of $1.7 million (December 31, 2006 - $1.8 million), which
is estimated based on a review of specific customer balances and
related historical collection experience. For the three months
ended March 31, 2008, MEC incurred a bad debt expense of $0.2
million (2007 - $0.2 million). 17. 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 March
31, 2008, the Real Estate Business owns real estate assets in
Canada, Austria, the United States, Germany, Mexico, the Czech
Republic, the United Kingdom, 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 quarter horse 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 19). A separate joint
venture with CDI also involves the ownership by MEC and CDI of
equal (50%) shares in HorseRacing TV(R) ("HRTV(R)"), 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, 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
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. 18. TRANSACTIONS WITH RELATED
PARTIES Mr. Frank Stronach, the Company's Chairman, the Chairman of
Magna, and the Chairman and Interim 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.
Magna is controlled by M Unicar Inc. ("M Unicar"), a Canadian
holding company whose shareholders consist of the Stronach Trust,
OJSC Russian Machines ("Russian Machines") and certain members of
Magna's management. M Unicar indirectly owns Magna Class A
Subordinate Voting Shares and Class B Shares representing in
aggregate approximately 71% of the total voting power attaching to
all Magna's shares. The Stronach Trust indirectly owns the shares
carrying the majority of the votes of M Unicar. Magna is governed
by a board of directors on which each of the Stronach Trust and
Russian Machines (indirectly through M Unicar) has the right to
designate an equal number of nominees, in addition to Magna's
current co-chief executive officers. 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") completed in October of
2007, is intended to provide short-term funding to MEC as it
implements the MEC Debt Elimination Plan (note 1). 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. (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
between MEC and Forest City and Caruso (note 19). 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% (set at 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% (set at 15.1% at March 31, 2008). 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 is 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. During the three months ended March 31,
2008, $1.8 million of the MEC Bridge Loan was repaid from MEC asset
sales (note 5) and subsequent to March 31, 2008, a further $19.8
million was repaid from MEC asset sales (note 5). 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. At March 31, 2008, $55.0 million (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 consolidated balance sheet, net of $1.1
million (December 31, 2007 - $1.4 million) of unamortized deferred
arrangement fees. MEC's current portion of "loans payable to MID,
net" on the Company's consolidated balance sheet includes
borrowings of $54.5 million (December 31, 2007 - $35.9 million),
net of $1.5 million ($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., 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, the Palm Meadows Training Center and
Remington Park and over all other assets of Gulfstream Park, the
Palm Meadows Training Center and Remington Park, excluding licences
and permits (which cannot be subject to security under applicable
legislation). In July 2006 and December 2006, the Gulfstream Park
project financing facility was amended to increase the amount
available from $115.0 million (plus costs and capitalized interest)
by adding new tranches of up to $25.8 million (plus costs and
capitalized interest) and $21.5 million (plus costs and capitalized
interest), respectively. Both tranches were established to fund
MEC's design and construction of slot machine facilities located in
the existing Gulfstream Park clubhouse building, as well as related
capital expenditures and start-up costs, including the acquisition
and installation of slot machines. The new tranches of the
Gulfstream Park project financing facility both 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. Since the relevant completion date (or since inception
for the July 2006 and December 2006 tranches of the Gulfstream Park
project financing facility), amounts outstanding under each of the
MEC Project Financing Facilities bear interest at a fixed rate of
10.5% per annum, compounded semi-annually. 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, for which the interest capitalization period was extended
to May 1, 2007). Commencing January 1, 2007 (May 1, 2007 for the
December 2006 tranche of the Gulfstream Park project financing
facility), the MID Lender receives monthly blended payments of
principal and interest based on a 25-year amortization period under
each of the MEC Project Financing Facilities. Since the completion
date for Remington Park, there has also been in place a mandatory
annual cash flow sweep of not less than 75% of Remington Park's
total excess cash flow, after permitted capital expenditures and
debt service, which is used to pay capitalized interest on the
Remington Park project financing facility plus a portion of the
principal under the facility equal to the capitalized interest on
the Gulfstream Park project financing facility. During the three
months ended March 31, 2008, $0.2 million ($2007 - $0.5 million) of
such payments were made. During the three months ended March 31,
2008, Remington Park agreed to purchase 80 Class III slot machines
from GPRA with funding from the Remington Park project financing
facility. Accordingly, $1.0 million was advanced under the existing
Remington Park project financing facility during the three months
ended March 31, 2008. At March 31, 2008, there were balances of
$172.1 million (December 31, 2007 - $172.1 million), and $28.4
million (December 31, 2007 - $27.7 million) due under the
Gulfstream Park project financing facility and the Remington Park
project financing facility, respectively. The current portion of
the MEC Project Financing Facilities included in the Real Estate
Business' "loans receivable from MEC, net" at March 31, 2008 was
$102.0 million (December 31, 2007 - $102.2 million), including the
required $100.0 million repayment discussed above. The current and
non-current portions of the MEC Project Financing Facilities of
$101.7 million (including $0.4 million in MEC's "discontinued
operations" (note 4)) and $94.3 million (including $26.9 million in
MEC's "discontinued operations" (note 4)), respectively, as
reflected in MEC's "loans payable to MID, net" on the Company's
consolidated balance sheet, are net of $0.3 million and $4.2
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. In
connection with the Gulfstream Park project financing facility, MEC
has placed into escrow (the "Gulfstream Escrow") with the MID
Lender proceeds from an asset sale which occurred in fiscal 2005
and certain additional amounts necessary to ensure that any
remaining Gulfstream Park construction costs (including the
settlement of liens on the property) can be funded, which escrowed
amount has been and will be applied against any such construction
costs. At March 31, 2008, the amount held under the Gulfstream
Escrow was $1.2 million (December 31, 2007 - $4.5 million). All
funds in the Gulfstream Escrow are reflected as the Real Estate
Business' "restricted cash" and "due to MEC" on the Company's
consolidated balance sheet. Approximately $8.5 million of external
third party costs have been incurred in association with the MEC
Bridge Loan and the MEC Project Financing Facilities. 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 and each of the MEC Project Financing Facilities. 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 and the MEC Project Financing Facilities,
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. (b) Magna Lease Terminations
During the three months ended March 31, 2008, the Real Estate
Business and Magna completed a lease termination agreement
(retroactive to May 31, 2007) on a property in the United Kingdom
that the Real Estate Business is seeking to redevelop for
residential purposes. The Real Estate Business agreed to pay Magna
$2.0 million to terminate the lease and the termination payment,
which was paid in April 2008, has been included in the Real Estate
Business' "real estate properties, net" and "accounts payable and
accrued liabilities" at March 31, 2008 and December 31, 2007 on the
Company's consolidated balance sheets. The Real Estate Business had
not recognized any revenue under the lease of this property since
May 31, 2007. During the three months ended March 31, 2008, the
Real Estate Business and Magna also agreed to terminate the lease
on a property in Canada. In conjunction with the lease termination,
Magna agreed to pay the Company a fee of $3.9 million, which amount
has been recognized by the Real Estate Business in "accounts
receivable" and "other gains, net" in the Company's unaudited
interim consolidated financial statements for the three months
ended March 31, 2008. (c) MEC Real Estate Acquired by MID During
the three months ended March 31, 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. 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 three
months ended March 31, 2007 of $31.1 million. The effects of these
transactions are eliminated from the Company's consolidated results
of operations and financial position, except that $1.6 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 three months ended
March 31, 2007. (d) 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 ($31.6 million). The closing
of the transaction occurred in April 2008 (note 5(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 consolidated balance
sheet at March 31, 2008. 19. 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) MEC generates a substantial
amount of its revenues from wagering activities and is subject to
the risks inherent in the ownership and operation of its
racetracks. These include, among others, the risks normally
associated with changes in the general economic climate, trends in
the gaming industry, including competition from other gaming
institutions and state lottery commissions, and changes in tax laws
and gaming laws. (c) 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. The final outcome related
to this summons is uncertain. (d) In addition to the letters of
credit issued under the Company's credit facilities (notes 9 and
14), the Company had $4.5 million (Real Estate Business - $3.4
million; MEC - $1.1 million) of letters of credit issued with
various financial institutions at March 31, 2008 to guarantee
various construction projects. These letters of credit are secured
by cash deposits of the Company. (e) 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 March 31, 2008, these indemnities amounted to
$7.4 million, with expiration dates through 2009. (f) At March 31,
2008, the Company's contractual commitments related to construction
and development projects outstanding amounted to approximately $9.0
million (Real Estate Business - $5.5 million; MEC - $2.5 million).
(g) 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(R), 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(R).
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(R) 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 $2.6 million had been contributed prior to
March 31, 2008. (h) On December 8, 2005, legislation authorizing
the operation of slot machines within existing, licensed Broward
County, Florida pari-mutuel facilities that had conducted live
racing or games during each of 2002 and 2003 was passed by the
Florida Legislature. On January 4, 2006, the Governor of Florida
signed the legislation into law and, subsequently, the Division of
Pari-mutuel Wagering developed the governing rules and regulations.
Prior to the opening of the slots facility at Gulfstream Park on
November 15, 2006, MEC was awarded a gaming licence for slot
machine operations at Gulfstream Park in October 2006 despite an
August 2006 decision rendered by the Florida First District Court
of Appeals that ruled that a trial is necessary to determine
whether the constitutional amendment adopting the slots initiative
was invalid because the petitions bringing the initiative forward
did not contain the minimum number of valid signatures. Previously,
a lower court decision had granted summary judgment in favour of
"Floridians for a Level Playing Field" ("FLPF"), a group in which
GPRA is a member. Though FLPF pursued various procedural options in
response to the Florida First District Court of Appeals decision,
the Florida Supreme Court ruled in late September 2007 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 an additional year or more 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 March 31, 2008, the carrying value of MEC's fixed
assets related to the slots facility is approximately $28.7
million. If the matter is ultimately decided in a manner adverse to
MEC, a write-down of these fixed assets may be required. (i) 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 March 31, 2008, MEC has not made any such
contributions. At March 31, 2008, approximately $40.1 million of
net 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 $2.1 million reflecting MEC's share of
equity contributions in excess of $15.0 million. If either of the
Partnership Members fails to make required capital contributions
when due, then the other Partnership Member may advance such funds
to the Limited Liability Company, equal to the required capital
contributions, as a recourse loan or as a capital contribution for
which the capital accounts of the Partnership Members would be
adjusted accordingly. 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. (j) 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 late May 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 March 31, 2008, MEC has expended
$10.1 million on these development initiatives, of which $0.2
million was paid in the three months ended March 31, 2008. These
amounts have been included in MEC's "real estate properties, net"
on the Company's consolidated balance sheets. Under the terms of
these arrangements, MEC may be responsible to fund additional
costs. However, to March 31, 2008, no such payments have been made.
(k) In November 2006, MEC sold its wholly-owned interest in The
Meadows, a standardbred racetrack in Pennsylvania, to PA Meadows,
LLC, a company jointly owned by William Paulos and William Wortman,
controlling shareholders of Millennium Gaming, Inc., and a fund
managed by Oaktree Capital Management, LLC (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"). 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. 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. $5.6 million of the
gain from the sale of The Meadows was initially deferred and
included in MEC's "other long-term liabilities" representing the
estimated net present value of the future operating losses expected
over the term of the racing services agreement. Such amount is
being recognized as a reduction of "general and administrative"
expenses in MEC's results of operations over the term of the racing
services agreement. Effective January 1, 2008, The Meadows entered
into an agreement with the Meadows Standardbred Owners Association,
which expires on December 31, 2009, whereby the horsemen will make
contributions to subsidize backside maintenance and marketing
expenses at The Meadows. As a result, the estimated operating
losses expected over the remaining term of the racing services
agreement have been revised, resulting in an additional $2.0
million of previously deferred gains being recognized in MEC's
"other gains, net" for the three months ended March 31, 2008. Until
December 25, 2007, The Meadows participated in a multi-employer
defined benefit pension plan for which the pension plan's total
vested liabilities exceeded the plan's assets. The New Jersey
Sports & Exposition Authority previously withdrew from the
pension plan effective November 1, 2007. As the only remaining
participant in the pension plan, The Meadows withdrew from the
pension plan effective December 25, 2007, which constituted a mass
withdrawal. An updated actuarial valuation is in the process of
being obtained, however, based on allocation information provided
by the plan, the estimated withdrawal liability of The Meadows is
approximately $6.2 million. This liability may be satisfied by
annual payments of approximately $0.3 million. As part of the
indemnification obligations provided for in the Meadows Holdback
Note, the mass 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.
(l) 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, costs are expected to increase by approximately $2.0
million for the year ending December 31, 2008. At this time, it is
uncertain whether these agreements will be renewed on comparable
terms. (m) As a result of the bid price of MEC Class A Stock
closing below the $1.00 per share minimum for 30 consecutive days,
on February 12, 2008, MEC received notice from the Nasdaq Stock
Market ("Nasdaq") advising that, in accordance with Nasdaq
Marketplace Rule 4450(e)(2), MEC has until August 11, 2008 (or such
later date as may be permitted by Nasdaq) to regain compliance with
the minimum bid price for MEC Class A Stock required for continued
listing on the Nasdaq Global Market. The notice further stated that
MEC will receive further notification from Nasdaq staff (i) stating
that MEC has regained compliance, in the event 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, or (ii)
indicating that the MEC Class A Stock will be delisted, in the
event the minimum bid price requirement is not satisfied. During
this 180 calendar day period, MEC Class A Stock will continue to
trade on the Nasdaq Global Market. The Nasdaq notice has no effect
on the listing of the MEC Class A Stock on the TSX. In order to
provide MEC with flexibility in addressing market-related issues
affecting its capitalization and to address the Nasdaq continuous
listing requirements, MEC's Board of Directors adopted a
resolution, subject to the approval of MEC's stockholders, to amend
MEC's Certificate of Incorporation to permit a reverse stock split
of MEC's Class A Stock and Class B Stock. MEC stockholder approval
was obtained on May 6, 2008, giving MEC's Board of Directors
discretion to implement the reverse stock split for one time only,
prior to May 6, 2009, in any whole number consolidated ratio from
1:10 to 1:20. Because the proposed reverse stock split would apply
to all issued shares of MEC's Class A Stock and Class B Stock, it
would not alter the relative rights and preferences of MEC's
existing stockholders nor affect any MEC stockholder's
proportionate equity or voting interest in MEC, except to the
extent the reverse stock split would result in fractional shares
that are cashed out. DATASOURCE: MI Developments Inc. CONTACT:
PRNewswire - - 05/07/2008
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