Demand Letter Format by 2620

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									                 Non­certified translation of French Demand letter.

June 9th, 2008

Without Prejudice

By e­mail and by messenger

Société des loteries du Quebec
500 Sherbrooke Street West, 16th floor
Montreal, Quebec
H3A 3G6

Attention: Mr. Alain Cousineau, President

RE: Attractions Hippiques (Montréal) L.P.
    Attractions Hippiques (Québec) L.P.
    Attractions Hippiques (Trois­Rivières) L.P.
    Attractions Hippiques (Aylmer) L.P.
    (collectively referred to as “AHQ”)

Dear Sir:

We represent AHQ, who, as you know, was awarded the Request For Proposals of August
2005 issued by Société nationale du cheval de course (‘’SONACC’’) in collaboration with
the Government of Quebec in respect of the purchase of the SONACC assets and the
operations of the four major race tracks and Hippo Clubs in the Province of Quebec (the
“RFP”).

The goal of the RFP was to find a party who in collaboration with Loto Quebec (“LQ”)
was prepared to make the necessary financial investment and devote the necessary
management to develop the horse racing industry in the Province of Quebec into a viable
industry.

To this end AHQ undertook, in the contracts which emanated, to rebuild and renovate the
race tracks at Quebec City, Three Rivers and Aylmer, and to move and build a new race
track for Montreal in the area defined as the Couronne Nord.

LQ undertook to build and manage new gaming halls adjacent to all race tracks other than
Aylmer from which AHQ was to derive 22% of the net revenues from 1900 Video Lottery
Terminals (“VLT”) located in there gaming halls. Pursuant to the RFP the new gaming
halls were to contain gaming areas, restaurants and bars with animation and other
activities specific for each site. This was referred to as LQ’s “innovative solution” to insure
the viability of operating the race tracks and the horse racing industry in Quebec.

The RFP clearly indicated that the gambling controls and preventative measures in the
new gaming halls would be the same as those in use with respect to the existing VLTs in
use in the Province of Quebec. LQ’s 2004­2007 development plan indicated that the
expected payment from the 1900 VLT machines would be $32.6 million per year.

In addition to the above the new Couronne Nord site was to be selected by AHQ in
collaboration with LQ and each would co­operate with each other to insure the
construction of the new Montreal race track and adjacent gaming hall within stipulated
delays. The gaming hall would contain 1300 VLT machines to be operated in accordance
with the above provisions and this was to be the effective motor for the entire investment.

       Events to date with respect to Gaming Halls and Couronne Nord site

AHQ has proceeded to renovate and rebuild the race track buildings and sites in Quebec
City, Three Rivers and Aylmer at a cost in excess of $40,000,000. LQ has proceeded to
build its new gaming halls at the Quebec City and Three Rivers race tracks (the
“Ludoplex”). Both locations have been fully operational for several months.

Without consultation with AHQ, LQ has changed the format under which its VLT
machines are operated in the Ludoplex locations. The competing VLT machines which
are operated in locations in the remainder of Quebec do not use this new format. In the
Ludoplex locations LQ has put in place a system that obliges every VLT customer to
possess a Ludoplex card. The Ludoplex card is required to start a gaming session with a
VLT machine and a maximum betting amount and time is established. Once the
maximum is reached the Ludoplex card is deactivated and the customer can no longer
play the VLT machine.

The Ludoplex card is not used anywhere else in Québec other than the Ludoplex
locations. Moreover, to AHQ’s knowledge, the Ludoplex card has not been tested with
respect to its commercial acceptance. The decision to implement the Ludoplex card system
was made by LQ without consultation or advice to AHQ and was not contemplated or
mentioned as part of the RFP and clearly constitutes a material change in the business
venture contemplated by the RFP.

 AHQ’s gaming experts believe that the Ludoplex card restrictive system is one of the
major causes of the reduction in projected revenue. The Ludoplex card encourages
customers to go to the bars and restaurants and other locations where no Ludoplex card
system exists. Added to this is the fact that the Ludoplex gaming halls are non enticing,
and lack in animation.

The result of the foregoing is that AHQ only receives approximately 35% of the forecasted
revenue from the VLT machines located in Trois­Rivières and Quebec Ludoplex.

By simple comparison the 65 VLT machines in Three Rivers and the 100 VLT machines in
Quebec City managed by AHQ (both in temporary sites without Ludoplex card restraints
in 2007) generated more revenue than the 200 VLT machines in the Three Rivers Ludoplex
and the 335 VLT machines in the Quebec City Ludoplex managed by LQ (both subject to
Ludoplex card system).

This material change in operations constitutes a fundamental breech of LQ’s obligations to
manage and market its Ludoplex VLT operations in the manner set forth in the RFP and of
AHQ’s reasonable expectation at the time of submitting its proposal that no material
change would be made to same which could have a dramatic impact on its main source of
revenue.

To date, the Ludoplex operation has proved to be a financial disaster and LQ has publicly
declared same to be a failure. Moreover LQ has clearly given up on this business model
and same has not proven to be its “innovative solution” to success. In April 2008 and after
much publicity as to the construction of a new Ludoplex at Mount Tremblant, LQ
announced it would not build a Ludoplex but would build a full casino in lieu thereof. The
Ludoplex division has furthermore been dissolved and its employees report to the general
VLT division.

On April 18, 2008 LQ announced in the press that it was removing 100 VLT machines
from the Ludoplex and was replacing same with 10 Texas Hold’em electronic poker
tables. AHQ upon learning of same requested information in respect of the financial
impact of this decision and has yet to receive any reply. AHQ is unable to project its
future revenues or advise its stakeholders, including the racing industry and its bankers as
to the impact of this unilateral decision which once again has a material impact on its
revenue.

Recently AHQ has learned through the media that LQ is closing the Ludoplex restaurants
in Quebec and Three Rivers, once again without consultation or advice to AHQ, and thus
effecting a further material change to the LQ business model stipulated in the RFP as its
“innovative solution”.

LQ’s above actions in the management and operations of the gaming halls are in complete
violation of the spirit and intent of the RFP, the contracts which emanated from same and
the obligations of co­operation and collaborations envisioned in the joint effort to achieve
the goals of the RFP.

To date AHQ in fulfillment of its obligations has invested in excess of $74,000,000 to revive
and develop the horse racing industry in Quebec. LQ is well aware that a key part of the
re­development of the industry was the projected construction of the new Montreal race
track and the Ludoplex facility in the Couronne Nord in which 1300 VLT machines were
to be located and from which AHQ was to receive 22% of the net revenue.

The building of the new facility requires a large assembly of land. AHQ has attempted to
assemble the necessary land in the Couronne Nord to build the new race track and
Ludoplex facility, but has been frustrated in this effort by the lack of necessary support,
co­operation and collaboration of LQ and by the obstruction of a representative of the
Quebec Government.

AHQ has investigated approximately 15 sites on a preliminary basis and pursued detailed
studies in respect of approximately 7 sites. In each case AHQ sought the necessary city
support and the support of LQ and the Government of Quebec to help alleviate concerns
of the various Mayors and their citizens with respect to the Ludoplex. The support of LQ
and the Government of Quebec was never forth coming and moreover in the last three
months there was a constant under current that LQ had no desire to build a new Ludoplex
location in the Couronne Nord due to its failed business plan.

In addition, a representative of the Quebec Government went out of her way to insure that
key sites in her riding would not be used for the race track and Ludoplex location.
However, LQ and the Quebec Government did nothing to counter act these actions.

By way of example AHQ obtained options on various parcels of land in Laval and
Boisbriand. The Mayor of Laval originally supported the proposed sites and project,
however Minister Michelle Courchesne in whose riding the prime site was located
aggressively objected to the sites. She convened meetings with the Mayor and LQ not to
support any sites in her riding.

At no time did LQ show its support and collaborate with AHQ in order to change this
attitude. Moreover the aforesaid Minister went public with a statement in the Courrier
Laval of May 18, 2008 that no hippodrome would be built in Laval or the Couronne Nord.
LQ at no time did anything to correct this position and, to the contrary, seemed to be
content and agree with same as it had abandoned the project to build a new Ludoplex in
the Couronne Nord due to its failed business model. This approach is contrary to the
intent and spirit of the RFP and agreements emanating therefrom and has made it
virtually impossible for AHQ to acquire a site.
Moreover in certain conversations with LQ’s management it appeared to AHQ that
neither LQ nor the Ministry of Finance wished to proceed with the Couronne Nord
project. AHQ was stunned to hear this new preference being put forth by LQ and the
Government. AHQ immediately advised LQ and the Government that if that was their
position that AHQ would be entitled to be compensated for this material change of heart
in respect of the project. LQ’s management agreed with this principal and felt that same
was a reasonable assumption.

Notwithstanding the above LQ and the Government have not authorized a reasonable
settlement of the matter and, to the contrary, have advised AHQ that it must fulfill its
contractual obligations to the racing industry, this notwithstanding LQ’s material changes,
failed business plan, lack of collaboration in respect of the goals set out in the RFP and the
specific obstruction of a member of the Government.

The result of the foregoing is that AHQ which in good faith effected the above stated
major investments and organized itself to make same in respect of the Couronne Nord
now finds itself with a partner (LQ) who has no intention of collaborating with it in
developing the horse racing industry in Quebec, and without limitation has:

(1) made material changes without collaboration with or advice to AHQ in the way VLT
    machines are operated in the Ludoplex locations, resulting in significantly reduced
    revenue to AHQ;

(2) failed in its business plan in respect of its Ludoplex concept and for which it has not
    taken urgently any significant and diligent action to correct;

(3) abandoned its obligation to collaborate with AHQ and is obstructing AHQ in the
    selection of a Couronne Nord site and the building a Ludoplex complex thereon;

(4) not acted in a loyal and good faith manner with AHQ and has not fairly collaborated
    with AHQ in pursuance of the goal and project envisioned by the RFP;

(5) directly and indirectly made it impossible for AHQ to fulfill its contractual obligations;

(6) placed AHQ in a situation whereby it will suffer significant damages as a result of
    LQ’s Bad Faith actions.

Accordingly be advised that AHQ intends to hold LQ fully responsible for all of the
foregoing and advises that the damages suffered by AHQ as a result of LQ’s fault and
negligence or want of skill will be substantial. Failing a resolution of this matter within a
period of one week of these presents AHQ will have no other choice other than to institute
legal proceedings without further notice or delay.
Do govern yourselves accordingly.

Yours very truly,

STEIN & STEIN INC.


Per: Neil H. Stein

cc.    Mr. Paul J. Massicotte
       Mrs. Monique Jérôme Forget, Ministre des Finances
       Mr. Jean Houde, Sous­ministre des Finances

								
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