Filed Pursuant to Rule 424(b)(3)
File No. 333-102889
PROSPECTUS
MAGNA ENTERTAINMENT CORP.
$75,000,000
7 1/4% Convertible Subordinated Notes due December 15, 2009 and
Shares of Class A Subordinate Voting Stock
Issuable upon the Conversion of the Notes
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This prospectus relates to the offer and sale from time to time by the
selling securityholders named in this prospectus of up to $75,000,000
aggregate principal amount of our 7 1/4% Convertible Subordinated Notes due
December 15, 2009 and the shares of our Class A Subordinate Voting Stock
issuable upon the conversion of the notes. Interest on the notes is payable on
June 15 and December 15 of each year, beginning June 15, 2003.
The prices at which the selling securityholders may sell the notes and
the shares of Class A Subordinate Voting Stock will be determined through
privately-negotiated transactions or by the prevailing market prices. We will
not receive any proceeds from the sale of any of the notes or the shares of
Class A Subordinate Voting Stock. We have agreed to bear the expenses of
registering the notes and the shares of Class A Subordinate Voting Stock
covered by this prospectus under federal and state securities laws.
The notes and the shares of Class A Subordinate Voting Stock are being
registered to permit the selling securityholders to sell the notes and the
shares of Class A Subordinate Voting Stock from time to time in the public
market. The selling securityholders may sell the shares of Class A Subordinate
Voting Stock through ordinary brokerage transactions on the Nasdaq National
Market or the Toronto Stock Exchange or, in the case of either the notes or
the shares of Class A Subordinate Voting Stock, through any other means
described in the section titled "Plan of Distribution". We do not know when
the selling securityholders may offer the notes or the shares of Class A
Subordinate Voting Stock for sale. The selling securityholders may sell any,
all or none of the notes and shares of Class A Subordinate Voting Stock
offered by this prospectus.
The notes are redeemable on and after December 21, 2005, at any time in
whole or in part, at our option on not less than 20 and not more than 60 days'
prior notice at a redemption price equal to the principal amount thereof plus
accrued and unpaid interest, if any, to the date of redemption. See
"Description of the Notes -- Optional Redemption".
The notes are convertible at the option of the holder, unless previously
redeemed, at any time prior to the business day preceding the date of
maturity, initially into approximately 117.647 shares of our Class A
Subordinate Voting Stock for each $1,000 principal amount of notes, which is
equivalent to an initial conversion price of $8.50 per share of our Class A
Subordinate Voting Stock.
The notes are unsecured obligations of Magna Entertainment Corp. and are
subordinated in right of payment to all existing and future senior
indebtedness of Magna Entertainment Corp. and, in effect, to all existing and
future obligations of Magna Entertainment Corp.'s subsidiaries.
Our Class A Subordinate Voting Stock is traded on the Nasdaq National
Market under the symbol "MECA" and on the Toronto Stock Exchange under the
symbol "MEC.A". On May 15, 2003, the last sale price on Nasdaq for the
Class A Subordinate Voting Stock was $4.71 per share and the last sale price on
the Toronto Stock Exchange for the Class A Subordinate Voting Stock was $6.50
(in Canadian dollars) per share.
INVESTING IN THE NOTES OR SHARES OF CLASS A SUBORDINATE VOTING STOCK
INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS, AND ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is May 16, 2003.
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OUR COMPANY
We are North America's number one owner and operator of thoroughbred
racetracks and one of the world's leading suppliers, via simulcasting, of live
racing content to the growing inter-track, off-track and account wagering
markets. We currently operate or manage eleven thoroughbred racetracks, two
standardbred racetracks, one racetrack which runs both thoroughbred and
standardbred meets and one greyhound racetrack, as well as the simulcast
wagering venues at these tracks. In addition, we operate off-track betting
("OTB") facilities and a national account wagering business known as
XpressBet(TM), which permits customers to place wagers by telephone and over
the Internet on horse races at approximately 70 racetracks in North America.
We also own and operate HorseRacing TV(TM), a new television network focused
exclusively on horse racing that we launched on the Racetrack Television
Network ("RTN") in July 2002. HorseRacing TV(TM) is currently available to
cable customers in several areas, including, most significantly, the Western
Pennsylvania and San Diego and we are pursuing broader cable and satellite
distribution. RTN, in which we have a one-third ownership interest, telecasts
races from our racetracks and other racetracks, via private direct-to-home
satellite, to paying subscribers.
All references to "we", "us", "our", "MEC" or "Magna Entertainment" in
this prospectus are to Magna Entertainment Corp and its subsidiaries, unless
the context requires otherwise. All references in this prospectus to dollar
amounts are to U.S. dollars, unless otherwise stated.
THE OFFERING
Issuer: Magna Entertainment Corp.
Securities Offered: $75,000,000 in principal amount of 7 1/4% Convertible Subordinated
Notes due December 15, 2009 (which we refer to as the notes). See
"Plan of Distribution".
Maturity: December 15, 2009.
Interest Payment Dates: June 15 and December 15 of each year, beginning June 15, 2003 (or if any
of those days is not a business day, the next succeeding business day
without accrual of additional interest as a result of the delay in
payment).
Conversion: The notes are convertible at the option of the holder, unless previously
redeemed, at any time prior to the business day preceding the date of
maturity, initially into approximately 117.647 shares of our Class A
Subordinate Voting Stock for each $1,000 principal amount of notes,
which is equivalent to an initial conversion price of $8.50 per share of
our Class A Subordinate Voting Stock. The conversion price may be
adjusted as described in this prospectus. See "Description of the
Notes-- Conversion of Notes".
Optional Redemption: The notes are redeemable on and after December 21, 2005, at any time in
whole or in part, at our option on not less than 20 and not more than 60
days' prior notice at a redemption price equal to the principal amount
thereof plus accrued and unpaid interest, if any, to the date of
redemption; provided that, in connection with any redemption of the
notes occurring on or after December 21, 2005 and until December 15,
2007, the closing price of our Class A
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Subordinate Voting Stock has exceeded 125% of the conversion price for
at least 20 trading days in the 30-consecutive-trading day-period ending
on the trading day prior to the mailing of the notice of redemption. See
"Description of the Notes-- Optional Redemption".
Subordination: The notes are our direct unsecured obligations ranking subordinate in
right of payment to all our existing and future senior indebtedness and,
in effect, to all existing and future obligations of our subsidiaries.
At March 31, 2003, our outstanding senior indebtedness was approximately
$62.0 million, and the aggregate outstanding obligations of our
subsidiaries was approximately $250.1 million. See "Description of the
Notes-- Subordination of Notes".
Purchase of Notes at Your Option upon
a Change in Control: If there is a change in control with respect to us, you will have the
right to require us to purchase all or any part of the notes 30 business
days after the occurrence of the change in control at a purchase price
equal to the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase. See "Description of the Notes --
Purchase of Notes at Your Option upon a Change in Control".
Form of the Notes: The notes were issued in book-entry form and are represented by one or
more permanent global securities deposited with a custodian for and
registered in the name of a nominee of The Depository Trust Company.
Trading: The notes are not listed on any exchange and we do not intend to apply
to list the notes on any exchange. The currently outstanding shares of
Class A Subordinate Voting Stock are listed on the Nasdaq National
Market under the symbol "MECA" and on the Toronto Stock Exchange under
the symbol "MEC.A".
Use of Proceeds: We will not receive any of the proceeds from the sale by any selling
securityholder of the notes or shares of Class A Subordinate Voting
Stock offered under this prospectus.
Risk Factors: Before making an investment in the notes or shares of our Class A
Subordinate Voting Stock, you should carefully consider the risks
discussed under the heading "Risk Factors" starting on page 3.
RISK FACTORS
You should carefully consider the following factors in addition to the
other information contained in this prospectus before purchasing any notes or
shares of Class A Subordinate Voting Stock.
If any of the following risks, or any of the risks described in the other
documents we file with the SEC and the Canadian securities regulatory
authorities, actually occur, our business, financial condition, operating
results and prospects could be materially adversely affected. In that case,
the trading price of the notes and shares of our Class A Subordinate Voting
Stock could decline substantially and investors may lose all or part of the
value of the notes and shares of our Class A Subordinate Voting Stock held by
them.
Additional information concerning many of the risks described below is
contained in our Annual Report
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on Form 10-K for the year ended December 31, 2002, which is incorporated into
this prospectus by reference. See "Incorporation by Reference" and "Additional
Information".
Risks Regarding the Notes
The notes are subordinated in right of payment to all existing and future
senior indebtedness of Magna Entertainment Corp. and, in effect, to all
existing and future obligations of Magna Entertainment Corp.'s subsidiaries.
The notes are direct unsecured obligations of Magna Entertainment Corp.
ranking subordinate in right of payment to all existing and future senior
indebtedness of Magna Entertainment Corp. and, in effect, to all existing and
future obligations of Magna Entertainment Corp.'s subsidiaries. As of March
31, 2003, the outstanding senior indebtedness of Magna Entertainment Corp. was
approximately $62.0 million, and the aggregate outstanding obligations of
Magna Entertainment Corp.'s subsidiaries was approximately $250.1 million. In
the event of a bankruptcy, liquidation or reorganization of Magna Entertainment
Corp. or any of its subsidiaries, holders of existing or future secured or
unsecured and unsubordinated obligations of Magna Entertainment Corp. or its
subsidiaries, including trade creditors of the subsidiaries, will be entitled
to payments of their claims prior to any payments to the holders of the notes,
and there may not be sufficient assets remaining to pay amounts due on any or
all of the outstanding notes. In addition, the rights of the holders to
receive payments or to pursue remedies upon an event of default under the
indenture will be substantially limited. See "Description of the Notes --
Subordination of Notes".
An active or liquid trading market for your notes may not develop or
continue; thus, it may be difficult to resell your notes.
There is no established trading market for the notes. BMO Nesbitt Burns
Corp. and CIBC World Markets Corp., the initial purchasers of the notes, may
from time to time make a market in the notes and assist in their resale, but
are not obligated to do so. Any market making activity, if initiated, may be
discontinued at any time, for any reason, without notice. If the initial
purchasers cease to act as market makers for the notes for any reason, we
cannot assure you that another firm or person will make a market in the notes.
The liquidity of any market for the notes will depend upon the number of
holders of the notes at that time, our results of operations and financial
condition, the market for similar securities, the interest of securities
dealers in making a market in the notes and other factors. An active trading
market for your notes may not develop or be sufficiently liquid to allow you
to resell your notes. Even if a market were to develop, it might not continue
and, in either case, the notes could trade at prices that may be lower than
their initial offering price depending on many factors, including the market
price of our shares of Class A Subordinate Voting Stock into which the notes
are convertible, prevailing interest rates, our operating results and the
market for similar securities.
The notes are not protected by restrictive covenants.
The indenture governing the notes does not contain any financial
covenants or restrictions on the payment of dividends, the incurrence of
indebtedness or the issuance or repurchase of securities by us or our
subsidiaries. The indenture contains no covenants or other provisions to
afford you protection in the event of a change in control except as described
under "Description of the Notes -- Purchase of Notes at Your Option upon a
Change in Control".
We may not have the ability to repurchase the notes in the event of a
change in control.
Upon the occurrence of a change in control, we would be required under
the indenture governing the notes to offer to repurchase all the outstanding
notes. We may not have sufficient financial resources, and may not be able to
arrange financing, to pay the repurchase price for all notes tendered by the
holders. A change in control would also constitute an event of default under
our credit agreement, which would prohibit us from repurchasing any notes. Any
future credit agreements or other agreements relating to other indebtedness to
which we become a party may contain similar restrictions and provisions. If we
do not obtain a consent to the repurchase of the notes
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upon a change in control, we may remain prohibited from repurchasing the
notes. Any failure to repurchase the notes when required following a change in
control would result in an event of default under the indenture, which could
lead to the acceleration of all amounts on the notes, and may also trigger
cross-default provisions, resulting in acceleration of our other indebtedness.
See "Description of the Notes -- Purchase of Notes at Your Option upon a
Change in Control".
Risks Regarding Our Company
We are a relatively new company with a short history of racetrack
operations. We must successfully integrate recent racetrack acquisitions or
our operating results may be adversely affected.
We were incorporated four years ago and acquired our first racetrack in
December 1998. Accordingly, although all our racetracks have been in operation
for some time, we have a relatively short history of owning and operating
racetracks. The acquisition of Santa Anita Park was completed in December
1998, the acquisition of Gulfstream Park was completed in September 1999, the
acquisition of Remington Park and Thistledown was completed in November 1999,
the acquisition of Golden Gate Fields was completed in December 1999, the
acquisition of Great Lakes Downs was completed in February 2000, the
acquisition of Bay Meadows was completed in November 2000, the acquisition of
The Meadows was completed in April 2001, the acquisition of Multnomah
Greyhound Park was completed in October 2001, the acquisition of Lone Star
Park at Grand Prairie was completed in October 2002, the acquisition of
Pimlico Race Course and Laurel Park was completed in November 2002 and the
acquisition of Flamboro Downs was completed in April 2003. The Portland
Meadows facility commenced operations under our management in July 2001 and we
assumed the management of Colonial Downs in November 2002. Prior to their
respective acquisitions, most of these racetracks had been operated separately
under different ownership. Completing the integration of these businesses into
our operations will require a significant dedication of management resources
and further expansion of our information and other operating systems.
If we do not successfully integrate our recent acquisitions and any
future acquisitions, or if this integration consumes a disproportionate amount
of our management's time, then these acquisitions may materially adversely
affect our efficiency and, therefore, significantly harm our business.
We may not be able to obtain financing or may be able to obtain it only
on unfavorable terms, which may affect the viability of our expansion and
improvement projects or make expansion and improvement more costly.
We may require substantial additional financing in order to expand and
improve our operations, including financing related to alternative gaming
facilities, if any such opportunities are available to us. It is possible that
this financing will not be available or, if available, will not be available
on terms that are favorable to us. Our $100 million unsecured revolving credit
facility with a Canadian chartered bank was reduced to $50 million on April
30, 2003, and matures on October 10, 2003. As of December 31, 2002,
indebtedness aggregating $49.5 million and letters of credit totaling $20
million were outstanding under this facility. There can be no assurance that
the amounts, terms and conditions involved in a renewal of the facility will
be favorable, or that the facility will be able to be renewed at all. Our
controlling stockholder, Magna International Inc. has made a commitment to its
shareholders that it will not, before June 1, 2006, make any further debt or
equity investments in, or otherwise provide financial assistance to, us or any
of our subsidiaries without the prior consent of the holders of a majority of
Magna International's subordinate voting shares. If we are unable to obtain
financing on favorable terms, or at all, we may not be able to expand and
improve our operations, which could have a material adverse effect on our
future profitability.
Our revolving credit facility with a Canadian chartered bank imposes
important restrictions on us.
Our revolving credit facility with a Canadian chartered bank requires us
to maintain a debt to earnings before interest, taxes, depreciation and
amortization ratio not greater than 3.5 to 1, and an interest coverage ratio
not lower than 1.7 to 1, each as calculated under the facility. The credit
agreement also contains customary
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covenants relating to our ability to incur additional indebtedness, make
future acquisitions, enter into certain related party transactions, consummate
asset dispositions, incur capital expenditures and make restricted payments.
In addition, the credit agreement requires us to use the first $75 million of
net cash proceeds of any public debt or equity offering to repay the loans
outstanding under the facility. These restrictions may limit our ability to
expand, pursue our business strategies and obtain additional funds. Our
ability to meet these financial ratios and comply with these covenants may be
affected by changes in business conditions or results of operations, adverse
regulatory developments and other events beyond our control. We cannot assure
you that we will meet these financial ratios or continue to comply with these
covenants. Failure to comply with these restrictions may result in the
occurrence of an event of default under the credit facility. Upon the
occurrence of an event of default, the lender may terminate the credit
facility and demand immediate payment of all amounts borrowed by us under that
facility, which could adversely affect our ability to repay our debt
securities and would adversely affect the trading price of our Class A
Subordinate Voting Stock.
We have recruited most of our senior executive officers from outside
the racetrack industry.
Although our management personnel at our racetracks generally have
extensive experience in the racetrack industry, we have recruited most of our
senior executive officers from outside the industry. Our chief executive
officer, chief operating officer and executive vice-presidents, including our
chief financial officer, each joined us during the last three years from
outside the industry. This lack of racetrack industry experience may impede
the implementation of our strategy and slow our growth.
Our recent operating income includes gains from the sale of non-core
real estate, which sales may soon be completed, causing our future operating
income and cash flow to decrease.
Approximately 9% of our earnings before interest, taxes, depreciation
and amortization, before write-downs, for the year ended December 31, 2002
resulted from gains from non-core real estate sales. These gains will likely
be reduced to zero over the next year as we endeavor to sell the balance of
our non-core real estate portfolio. Additionally, our short-term and annual
operating income and cash flow may decline from the prior year due to
decreases in non-core real estate sales. If we do not replace these gains or
offset these decreases with additional operating income and cash flow from our
racetrack operations and other sources, our future operating income and cash
flow will decline.
Our business is heavily concentrated at certain of our racetracks.
Four of our racetracks, Santa Anita Park, Gulfstream Park, Golden
Gate Fields and Bay Meadows, accounted for approximately 64% of our revenue
and 197% of our earnings before interest, taxes, depreciation and
amortization, before write-downs, for the year ended December 31, 2002. If a
business interruption were to occur and continue for a significant length of
time at any of these racetracks, it could adversely affect our operating
results. Additionally, certain of our other racetrack properties have
experienced operating losses before interest, income taxes, depreciation and
amortization over the past three years. The operating performance of these
racetracks may not improve in the future.
We are controlled by Magna International and therefore Magna
International is able to prevent any takeover of us by a third party.
Magna International owns all our Class B Stock, which is generally
entitled to 20 votes per share, and therefore is able to exercise
approximately 96% of the total voting power of our outstanding stock. It is
therefore able to elect all our directors and to control us. As a result,
Magna International is able to cause or prevent a change in our control. See
"Description of Capital Stock--Takeover Protection".
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Our relationship with Magna International is not at "arm's length",
and therefore Magna International may influence us to make decisions that are
not in the best interests of our other stockholders.
Our relationship with Magna International is not at "arm's length".
In addition to the ownership of our stock as described in the preceding risk
factor, two members of our board of directors are also members of Magna
International's board of directors and we have the same chairman. In some
cases, the interests of Magna International may not be the same as those of
our other stockholders, and conflicts of interest may arise from time to time
that may be resolved in a manner detrimental to us or our minority
stockholders. Magna International is able to cause us to effect certain
corporate transactions without the consent of the holders of our Class A
Subordinate Voting Stock, subject to applicable law and the fiduciary duties
of our directors and officers. Consequently, transactions effected between us
and Magna International may not be on the same terms as could be obtained from
independent parties, resulting in the possibility of our minority
stockholders' interests being compromised.
If we do not identify, negotiate and complete a sufficient number of
strategic acquisitions, we may not achieve our business plan and our growth
prospects may suffer.
Our current business plan calls for us to continue to selectively
pursue strategic acquisitions. Our future profitability will depend to some
degree upon the ability of our management to identify, complete and
successfully integrate commercially viable acquisitions. If we do not do so
for any reason, we may not be able to implement our business plan
successfully, or grow as quickly as we anticipate, and this could have a
material adverse effect on our future profitability.
We are exposed to currency exchange rate fluctuations.
Our business outside the United States is generally transacted in
currencies other than U.S. dollars. Fluctuations in currencies relative to the
U.S. dollar may make it more difficult to perform period-to-period comparisons
of our operating results. Moreover, fluctuations in the U.S. dollar relative
to currencies in which earnings are generated outside the United States could
result in a reduction in our profitability as reported in U.S. dollars.
Risks Relating to Our Gaming Operations
A decline in the popularity of horse racing could adversely impact
our business.
The continued popularity of horse racing is important to our growth
plans and our operating results. Our business plan anticipates our attracting
new customers to our racetracks, off-track betting facilities and account
wagering operations. Even if we are successful in making acquisitions and
expanding and improving our current operations, we may not be able to attract
a sufficient number of new customers to achieve our business plan. Public
tastes are unpredictable and subject to change. Any decline in interest in
horse racing or any change in public tastes may adversely affect our revenues
and, therefore, our operating results.
Declining on-track attendance and increasing competition in
simulcasting may materially adversely affect our operating results.
There has been a general decline in the number of people attending
and wagering at live horse races at North American racetracks due to a number
of factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance at
live horse racing events has prompted racetracks to rely increasingly on
revenues from inter-track, off-track and account wagering markets. The
industry-wide focus on inter-track, off-track and account wagering markets has
increased competition among racetracks for outlets to simulcast their live
races. A continued decrease in attendance at live events and in on-track
wagering, as well as increased competition in the inter-track, off-track and
account wagering markets, could lead to a decrease in the
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amount wagered at our facilities and on races conducted at our racetracks and
may materially adversely affect our business, financial condition, operating
results and prospects.
Our gaming activities are dependent on governmental regulation and
approvals. Amendments to such regulation or the failure to obtain such
approvals could adversely affect our business.
All our pari-mutuel wagering operations are contingent upon the
continued governmental approval of these operations as forms of legalized
gaming. All our current gaming operations are subject to extensive
governmental regulation and could be subjected at any time to additional or
more restrictive regulation, or banned entirely.
We may be unable to obtain, maintain or renew all governmental
licenses, registrations, permits and approvals necessary for the operation of
our pari-mutuel wagering and other gaming facilities. Licenses to conduct live
horse racing and simulcast wagering must be obtained from each jurisdiction's
regulatory authority, in many cases annually. The denial, loss or non-renewal
of any of our licenses, registrations, permits or approvals may materially
limit the number of races we conduct or the form or types of pari-mutuel
wagering we offer, and could have a material adverse effect on our business.
In addition, we currently devote significant financial and management
resources to complying with the various governmental regulations to which our
operations are subject. Any significant increase in governmental regulation
would increase the amount of our resources devoted to governmental compliance,
could substantially restrict our business, and could materially adversely
affect our operating results.
The passage of legislation permitting alternative gaming at
racetracks, such as slot machines, video lottery terminals and other forms of
non-pari-mutuel gaming, can be a long and uncertain process. A decision to
prohibit, delay or remove alternative gaming rights at racetracks by the
government or the citizens of a state, or other jurisdiction, in which we own
or operate a racetrack, could adversely affect our business or prospects.
There has been speculation, by members of the media, investment
analysts and our employees and other representatives, as to the probability
and potential impact of the passage of legislation permitting alternative
gaming at racetracks in various states in the United States. This has been
especially prevalent in recent months with the conclusion of the mid-term
elections in November 2002, and as alternative gaming at racetracks has become
an issue for consideration in some states.
While certain candidates who publicly advocated alternative gaming at
racetracks were recently elected, there can be no assurance that alternative
gaming at racetracks will become permitted in those states, or if it does,
what the timetable, conditions, terms of income or revenue sharing, or other
feasibility factors will be. It is possible that public reaction or other
factors may cause these persons to change their stance on this issue or call
for a public referendum to determine whether and how to proceed. It is also
difficult to predict accurately which issues will become priority agenda items
during a legislative session.
In the event that alternative gaming legislation is enacted in a
given state or other jurisdiction, there can be no certainty as to the terms
of such legislation or regulations, including the timetable for commencement,
the conditions and feasibility of operation and whether alternative gaming
rights are to be limited to racetracks. If we were to proceed to conduct
alternative gaming in such a situation, there may be significant costs and
other resources to be expended, and there will be significant risks involved,
including the risk of changes in the enabling legislation, that may have a
material adverse effect on the relevant racetrack's operations and
profitability.
The regulatory risks and uncertainties that are inherent in the
conduct of alternative gaming also apply in other jurisdictions outside the
United States. In the province of Ontario, the location of Flamboro Downs,
racetracks are permitted to serve as landlord to slot operations conducted by
a government corporation. Under that arrangement, the racetrack retains 20% of
the "net win" (slot machine revenues minus payout to slot players), with
one-half of that amount distributed to the horsemen and the other half being
retained by the racetrack owner. There can be no assurance as to how long this
arrangement will continue, or if it does, whether the terms will
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remain the same. Similarly, we commenced development of a horse racetrack
combined with a gaming and entertainment center on property located
approximately 15 miles south of Vienna, Austria, in anticipation of concluding
joint venture negotiations with an Austrian third party and receiving the
requisite racing and gaming licenses. Ultimately, those negotiations may not
be successful or we may not obtain the necessary licenses. If we are unable to
complete this development as planned, we may record a substantial write-down
of the carrying value of this property.
Any future expansion of our gaming operations will likely require us
to obtain additional governmental approvals or, in some cases, amendments to
current laws governing such activities.
The high degree of regulation in the gaming industry is a significant
obstacle to our growth strategy, especially with respect to account wagering,
including telephone, interactive television and Internet-based wagering.
Account wagering may currently be conducted only through hubs or bases located
in certain states. Our expansion opportunities in this area will be limited
unless more states amend their laws to permit account wagering or, in the
alternative, if states take action to make such activities unlawful. In
addition, the licensing and legislative amendment processes can be both
lengthy and costly, and we may not be successful in obtaining required
licenses, registrations, permits and approvals.
In the past, certain state attorneys general, district attorneys and
other law enforcement officials have expressed concern over the legality of
interstate account wagering. In December 2000, legislation was enacted in the
United States that amends the Interstate Horseracing Act of 1978. We believe
that this amendment clarifies that inter-track simulcasting, off-track betting
and account wagering, as currently conducted by the U.S. horse racing
industry, are authorized under U.S. federal law. The amendment may not be
interpreted in this manner by all concerned, however, and there may be
challenges to these activities by both state and federal law enforcement
authorities, which could have a material adverse impact on our business,
financial condition, operating results and prospects.
From time to time, the United States Congress has considered
legislation that would either inhibit or restrict Internet gambling in general
or inhibit or restrict the use of certain financial instruments, including
credit cards, to provide funds for account wagering. For example, in May 2001,
the United States Senate Commerce Committee approved a bill, in the form of
the Unlawful Internet Gambling Funding Prohibition Act, which, if enacted,
would have prohibited financial institutions from enforcing credit card debts
if they knew the debts were being incurred in order to gamble illegally
through the Internet. Further, in September 2002, the United States House of
Representatives approved a bill that, if enacted, would have prohibited any
person in a gambling business from knowingly accepting, in connection with the
participation of another person in unlawful Internet gambling, credit, a
check, a draft or the proceeds of credit or an electronic funds transfer.
Similar bills have been introduced this year in both the United States House
of Representatives and the United States Senate. Although it is difficult to
predict the ultimate chances for passage of any given legislation, it is
anticipated that legislation will continue to be introduced in the United
States Congress or elsewhere that will seek to restrict, regulate or
potentially ban altogether Internet gambling. Furthermore, even in the absence
of legislation, certain financial institutions have begun to block the use of
credit cards issued by them for Internet gambling, either voluntarily or as
part of a settlement with the office of the Attorney General for New York.
Legislation or actions of this nature, if enacted or implemented without
providing for a meaningful exception to allow account wagering to be conducted
as it is currently being conducted by the U.S. horse racing industry, could
inhibit account wagering by restricting or prohibiting its use altogether or,
at a minimum, by restricting or prohibiting the use of credit cards and other
commonly used financial instruments to fund wagering accounts. If enacted or
implemented, these, or any other forms of legislation or practices restricting
account wagering, could cause our business and its growth to suffer.
Implementation of some of the recommendations of the National
Gambling Impact Study Commission may harm our growth prospects.
In August 1996, the United States Congress established the National
Gambling Impact Study Commission to conduct a comprehensive study of the
social and economic effects of the gambling industry in the United States.
This commission reviewed existing federal, state and local policy and
practices with respect to the legalization or
9
prohibition of gambling activities with the aim of formulating and proposing
changes in these policies and practices and recommending legislation and
administrative actions for these proposed changes. On April 28, 1999, the
Commission voted to recommend that there be a pause in the expansion of gaming.
On June 18, 1999, the Commission issued a report setting out its findings and
conclusions, together with recommendations for legislation and administrative
actions. Some of the recommendations were:
o prohibiting Internet gambling that was not already authorized within the
United States or among parties in the United States and any foreign
jurisdiction;
o limiting the expansion of gambling into homes through such mediums as
account wagering; and
o banning the introduction of casino-style gambling into pari-mutuel
facilities for the primary purpose of saving a pari-mutuel facility that
the market has determined no longer serves the community or for the
purpose of competing with other forms of gaming.
The recommendations made by the National Gambling Impact Study
Commission could result in the enactment of new laws and/or the adoption of
new regulations in the United States, which would materially adversely impact
the gambling industry in the United States in general or our segment in
particular and consequently may threaten our growth prospects.
We face significant competition from other racetrack operators,
including those in states where more extensive gaming options are authorized,
which could hurt our operating results.
We face significant competition in each of the jurisdictions in which
we operate racetracks and we expect this competition to intensify as new
racetrack operators enter our markets and existing competitors expand their
operations and consolidate management of multiple racetracks. In addition, the
introduction of legislation enabling slot machines or video lottery terminals
to be installed at racetracks in certain states allows those racetracks to
increase their purses and compete more effectively with us for horse owners,
trainers and customers. One of our competitors, Churchill Downs Inc., has been
in operation for a much longer period of time than we have and may have
greater name recognition. Competition from existing racetrack operators, as
well as the addition of new competitors, may hurt our future performance and
operating results.
In addition, Florida tax laws have historically discouraged the three
Miami-area horse racetracks, Gulfstream Park, Hialeah Park (which no longer
hosts live racing) and Calder Race Course, from scheduling concurrent races. A
change in the tax structure, effective as of July 1, 2001, has eliminated this
deterrent. As a result, our Gulfstream Park racetrack may face direct
competition from other Miami-area horse racetracks in the future. This
competition could significantly affect the operating results of Gulfstream
Park which could reduce our overall profitability.
Competition from non-racetrack gaming operators may reduce the amount
wagered at our facilities and materially adversely affect our operating
results.
We compete for customers with casinos, sports wagering services and
other non-racetrack gaming operators, including government-sponsored
lotteries, which benefit from numerous distribution channels, including
supermarkets and convenience stores, as well as from frequent and extensive
advertising campaigns. We do not enjoy the same access to the gaming public or
possess the advertising resources that are available to government-sponsored
lotteries as well as some of our other non-racetrack competitors, which may
adversely affect our ability to compete effectively with them.
10
We currently face significant competition from Internet and other
forms of account wagering, which may reduce our profitability.
Internet and other account wagering gaming services allow their
customers to wager on a wide variety of sporting events and casino games from
home. The National Gambling Impact Study Commission's June 1999 report
estimated that there were over 250 on-line casinos, 64 lotteries, 20 bingo
games and 139 sports wagering services offering gambling over the Internet.
Total industry-wide Internet gaming revenues are estimated to have grown from
approximately $1.1 billion in 1999 to approximately $2.5 billion in 2001,
according to Bear, Stearns & Co. Inc. in its 2002-2003 North American Gaming
Almanac. That report also estimates 2002 total industry-wide Internet gaming
revenues at $3.5 billion and projects a 2003 level of $4.2 billion. Although
many on-line wagering services are operating from offshore locations in
violation of U.S. law by accepting wagers from U.S. residents, they may divert
wagering dollars from legitimate wagering venues such as our racetracks and
account wagering operations. Moreover, our racetrack operations generally
require greater ongoing capital expenditures in order to expand our business
than the capital expenditures required by Internet and other account wagering
gaming operators. Currently, we cannot offer the diverse gaming options
provided by many Internet and other account wagering gaming operators and may
face significantly greater costs in operating our business. Our inability to
compete successfully with these operators could hurt our business.
In addition, the market for account wagering is affected by changing
technology. Our ability to anticipate such changes and to develop and
introduce new and enhanced services on a timely basis will be a significant
factor in our ability to expand, remain competitive and attract new customers.
Expansion of gaming conducted by Native American groups may lead to
increased competition in our industry, which may negatively impact our growth
and profitability.
In March 2000, the California state constitution was amended,
resulting in the expansion of gaming activities permitted to be conducted by
Native American groups in California. This may lead to increased competition
and may have an adverse effect on the profitability of Santa Anita Park,
Golden Gate Fields, Bay Meadows and our future growth in California. It may
also affect the purses that those tracks are able to offer and therefore
adversely affect our ability to attract top horses.
Several Native American groups in Florida have recently expressed
interest in opening or expanding existing casinos in southern Florida, which
could compete with Gulfstream Park and reduce its profitability.
Moreover, other Native American groups may open or expand casinos in
other regions of the country where we currently operate, or plan to operate,
racetracks or other gaming operations. Any such competition from Native
American groups could adversely affect our growth and profitability.
Some jurisdictions view our operations primarily as a means of
raising taxes, and therefore we are particularly vulnerable to additional or
increased taxes and fees.
We believe that the prospect of raising significant additional
revenue through taxes and fees is one of the primary reasons that certain
jurisdictions permit legalized gaming. As a result, gaming companies are
typically subject to significant taxes and fees in addition to the normal
federal, state, provincial and local income taxes, and such taxes and fees may
be increased at any time. From time to time, legislators and officials have
proposed changes in tax laws, or in the administration of such laws, affecting
the gaming industry. For instance, U.S. legislators have proposed the
imposition of a U.S. federal tax on gross gaming revenues. It is not possible
to determine with certainty the likelihood of any such changes in tax laws or
their administration; however, if enacted, such changes could have a material
adverse effect on our business.
11
The 2002 Breeders' Cup Pick 6 controversy could cause a decline in
bettor confidence and result in changes to legislation, regulation, or
industry practices of the horse racing industry, which could materially reduce
the amount wagered on horse racing and increase our costs, and therefore
adversely affect our revenue and operating results.
On October 26, 2002, in connection with the Breeders' Cup World
Thoroughbred Championships held at Arlington Park in Chicago, Illinois, only
one person placed winning bets on the Pick 6, a bet to pick the winning horse
in six consecutive races. The bettor purchased all six winning tickets, valued
at more than $2.5 million, through an OTB telephone system. Payment of the
winnings was withheld when an examination of the winning bets revealed an
unusual betting pattern. Scientific Games Corporation ("Scientific Games"),
the parent company of Autotote Systems, Inc. ("Autotote Systems"), later
announced that it had fired an employee who had allegedly accessed the
totalisator system operated by Autotote Systems, altered the winning Pick 6
tickets, and erased the record of his access. The Federal Bureau of
Investigation conducted an investigation, and on November 12, 2002, three
individuals were charged in a complaint by the United States Attorney's office
of White Plains, New York, with conspiracy to commit wire fraud. The three
individuals pleaded guilty in federal court to conspiring to commit fraud and
money laundering. On December 4, 2002, a class-action lawsuit against Autotote
Systems and Scientific Games was filed in Los Angeles Superior Court seeking
unspecified monetary damages suffered by Jimmy Allard and other bettors. In
the suit, the plaintiffs allege that Autotote Systems and Scientific Games
were negligent and engaged in deceptive and unfair practices. In addition, the
pari-mutuel pool for the Breeders' Cup Pick 6 remained frozen for almost five
months in an interest-bearing escrow account, despite legal attempts by
certain entities to have the appropriate payout distributed to ticketholders
with five of six winners. The United States Attorney for the Southern District
of New York authorized the release of the funds on March 20, 2003, following
the sentencing of the three perpetrators.
The National Thoroughbred Racing Association, an industry
association, has formed a task force to examine the Pick 6 controversy and
make recommendations. This task force has retained Ernst & Young LLP to
perform an examination of the internal controls and system security of the
totalisator systems of the three companies that collectively provide
substantially all the totalisator service to the North American horse racing
industry. The mandate of the Ernst & Young LLP examination is to recommend
best practices to be implemented by the totalisator companies concerning the
internal controls and system security of their totalisator systems.
The impact of the Pick 6 controversy is uncertain. A perceived lack
of integrity or security could result in a decline in bettor confidence, and
would likely lead to a decline in the amount wagered on horse racing. Further
negative publicity concerning the Pick 6 controversy, further negative
information being discovered as a result of the FBI or any other
investigation, and any negative information concerning the internal controls
and security of the totalisator systems may materially reduce the amount
wagered on horse racing and the revenue and earnings of companies engaged in
the horse racing industry, including us. The Pick 6 controversy has also
caused the horse racing industry to focus on another area of bettor concern,
late odds changes, which sometimes occur as odds updates in the totalisator
system cause significant changes in the odds after a race has commenced. The
Pick 6 controversy and this industry focus on late odds changes may lead to
changes in legislation, regulation, or industry practices, which could result
in a material reduction in the amount wagered on horse racing and in the
revenue and earnings of companies engaged in the horse racing industry,
including us.
If we pay persons who place fraudulent "winning" wagers, we would
remain liable to pay the holders of the proper winning wagers the full amount
due to them.
As indicated by the Pick 6 controversy described in the preceding
risk factor, we may be subject to fraudulent claims for millions of dollars.
If we paid those claims, we would remain liable to the holders of the proper
winning wagers for the full amount due to them and would have the
responsibility to attempt to recover the money that we paid on the fraudulent
claims. We may not be able to recover that money, which would adversely affect
our operating results.
12
Our operating results fluctuate seasonally and may be impacted by a
reduction in live racing dates due to regulatory factors.
We experience significant fluctuations in quarterly operating results
due to the seasonality associated with the racing schedules at our racetracks.
Generally, our revenues from racetrack operations are greater in the first
quarter of the calendar year than in any other quarter. We have a limited
number of live racing dates at each of our racetracks and the number of live
racing dates varies somewhat from year to year. The allocation of live racing
dates in most of the jurisdictions in which we operate is subject to
regulatory approval from year to year and, in any given year, we may not
receive the same or more racing dates than we have had in prior years. We are
also faced with the prospect that competing racetracks may seek to have some
of our historical dates allocated to them. A significant decrease in the
number of our live racing dates would reduce our revenues and cause our
business to suffer.
Unfavorable weather conditions may result in a reduction in the
number of races we hold.
Since horse racing is conducted outdoors, unfavorable weather
conditions, including extremely high or low temperatures, excessive
precipitation, storms or hurricanes, may cause races to be cancelled or may
reduce attendance and wagering. Since a substantial portion of our operating
expenses is fixed, a reduction in the number of races held or the number of
horses racing due to unfavorable weather would reduce our revenues and cause
our business to suffer.
The current lease of the Bay Meadows property expires on December 31,
2003 and may not be renewed.
The Bay Meadows site lease has been extended at market rates and
expires on December 31, 2003, subject to a further one-year extension at the
landlord's option. We are exploring various alternative venues, including
vacant land that we purchased in Dixon, California for future development, to
conduct the racing dates currently held at Bay Meadows after the expiry of the
lease term (including any extensions). There can be no assurance that we will
be successful in obtaining the necessary regulatory approvals to run these
racing dates at another racetrack operated by us in northern California if the
lease is not extended. If we conduct the Bay Meadows racing dates at another
of our racetracks, we may suffer a reduction in our revenues, which could
materially adversely affect our operating results.
In the state of Maryland, our revenue sharing and operations
agreement with the owner of Rosecroft Raceway may not be assumed by the
intended purchaser of the assets of Rosecroft Raceway, and in any event, such
agreement terminates on March 31, 2004.
The Maryland Jockey Club, the trade name for the entities that own
and operate Pimlico Race Course and Laurel Park, is a party to a Cross-Breed
Horseracing Revenue Sharing and Operations Agreement (the "Maryland Revenue
Sharing Agreement") with Cloverleaf Enterprises, Inc. ("Cloverleaf"), the owner
of Rosecroft Raceway ("Rosecroft"), a standardbred track located in Prince
George's County in Maryland. The Maryland Revenue Sharing Agreement was
effective as of January 1, 2000 and expires March 31, 2004.
The Maryland Revenue Sharing Agreement provides for wagering to be
conducted, both day and night, on live and simulcast thoroughbred and harness
races at Pimlico, Laurel Park and Rosecroft and the three Maryland OTBs
operated by them. Under the agreement, wagering revenue from these sources is
pooled and certain expenses and obligations are pooled and paid from those
revenues to generate net wagering revenue. This net wagering revenue is then
distributed 80% to The Maryland Jockey Club and 20% to Rosecroft. This
agreement was entered into to resolve all issues relating to Maryland law
which prevents thoroughbred tracks in Maryland from offering live racing or
accepting simulcast wagering after 6:15 p.m. without Rosecroft's consent and
the federal Interstate Horseracing Act which provides that, without the
consent of The Maryland Jockey Club, Rosecroft cannot accept simulcast
wagering on horse racing during the times that Pimlico or Laurel are running
live races.
13
It has been announced that Centaur, Inc. has contracted with
Cloverleaf to acquire the assets of Rosecroft, subject to certain conditions
(including the approval of the Maryland Racing Commission). Centaur, Inc. may
or may not be assuming the obligations of the Maryland Revenue Sharing
Agreement as part of that sale, which failure to assume may result in
litigation. On April 29, 2003, Centaur reportedly reached an agreement with
Sportsystems Corp., a subsidiary of Delaware North Companies, pursuant to which
Sportsystems agreed to partner with Centaur to finance the purchase of and
provide services at Rosecroft. Upon approval of the sale of Rosecroft to
Centaur, Sportsystems will be granted an option to purchase 75% of Rosecroft.
In the event of the non-assumption by Centaur or Sportsystems or the expiry on
March 31, 2004 of the Maryland Revenue Sharing Agreement, the Company will be
required to renegotiate an agreement with either Centaur or Sportsystems. Such
renegotiation, or the failure to reach a new agreement, may result in a decline
in the revenues of The Maryland Jockey Club that materially adversely affects
our operating results.
We manage the operations at Colonial Downs pursuant to an inherited
management contract which is dependent on third party actions and events over
which we have limited control.
The revenues that we receive from our operations in Virginia through
the management of the Colonial Downs race meets and pari-mutuel wagering
system are highly dependent on the business strategy of Colonial Downs, over
which we have limited control. Moreover, our Virginia operations are highly
dependent on Colonial Downs' ability to maintain the owner's and operator's
licenses issued to it by the Virginia Racing Commission, over which we have
limited control. In addition, our management contract with Colonial Downs
provides for a one-half reduction in the management fee we receive if and to
the extent that non-pari-mutuel gaming activities become authorized and are
conducted by us in Maryland but are not authorized and conducted in Virginia.
The profitability of our racetracks is partially dependent upon the
size of the local horse population in the areas in which our racetracks are
located.
Horse population is a factor in a racetrack's profitability because
it generally affects the average number of horses (i.e., the average "field
size") that run in races. Larger field sizes generally mean increased wagering
and higher wagering revenues due to a number of factors, including the
availability of exotic bets (such as "exacta" and "trifecta" wagers). Various
factors have led to declines in the horse population in certain areas of the
country, including competition from racetracks in other areas, increased costs
and changing economic returns for owners and breeders, and Mare Reproductive
Loss Syndrome, which caused a large number of mares in Kentucky to sustain
late term abortions or early embryonic loss in 2001. If we are unable to
attract horse owners to stable and race their horses at our tracks by offering
a competitive environment, including improved facilities, well-maintained
racetracks, better living conditions for backstretch personnel involved in the
care and training of horses stabled at our tracks, and a competitive purse
structure, our profitability could decrease.
We depend on agreements with our horsemen's industry associations to
operate our business.
The U.S. Interstate Horseracing Act of 1978, as well as various state
racing laws, require that, in order to simulcast races, we have written
agreements with the horsemen at our racetracks, who are represented by
industry associations. In some jurisdictions, if we fail to maintain operative
agreements with the industry associations, we may not be permitted to conduct
live racing or simulcasting at tracks within those jurisdictions. In addition,
our simulcasting agreements are generally subject to the approval of the
industry associations. Should we fail to renew existing agreements with the
industry associations on satisfactory terms or fail to obtain approval for new
simulcast agreements, we would lose revenues and our operating results would
suffer.
14
If we are unable to continue to negotiate satisfactory union
contracts, some of our employees may commence a strike. A strike by our
employees or a work stoppage by backstretch personnel, who are employed by
horse owners and trainers, may lead to lost revenues and could have a material
adverse effect on our business.
As of December 31, 2002, we employed approximately 5,100 full-time
employees, approximately 3,000 of whom were represented by unions. A strike or
other work stoppage by our employees could lead to lost revenues and have a
material adverse effect on our business, financial condition, operating
results and prospects.
Legislation enacted in California could facilitate the organization
of backstretch personnel in that state. A strike by backstretch personnel
could, even though they are not our employees, lead to lost revenues and
therefore hurt our operating results.
An earthquake in California could interrupt our operations at Santa
Anita Park, Golden Gate Fields and Bay Meadows, which would adversely impact
our cash flow from these racetracks.
Three of our largest racetracks, Santa Anita Park, Golden Gate Fields
and Bay Meadows, are located in California and are therefore subject to
earthquake risks. We do not maintain significant earthquake insurance on the
structures at our California racetracks. We maintain fire insurance for fire
risks, including those resulting from earthquakes, subject to policy limits
and deductibles. There can be no assurance that earthquakes or the fires often
caused by earthquakes will not seriously damage our California racetracks and
related properties or that the recoverable amount of insurance proceeds will
be sufficient to fully cover reconstruction costs and other losses. If an
uninsured or underinsured loss occurs, we could lose anticipated revenue and
cash flow from our California racetracks.
Our business depends on providers of totalisator services.
In purchasing and selling our pari-mutuel wagering products, our
customers depend on information provided by each of the three main totalisator
companies operating in North America. These totalisator companies provide the
computer systems that accumulate wagers, record sales, calculate payoffs and
display wagering data. The loss of any of the totalisator companies as a
provider of these critical services would decrease competition in the market
for those services and could result in an increase in the cost to obtain them.
Additionally, the failure of the totalisator companies to keep their
technology current could limit our ability to serve customers effectively,
develop new forms of wagering, or ensure a sufficient level of wagering
security. Because of the highly specialized nature of these services,
replicating these totalisator services would be expensive.
A decline in general economic conditions could adversely affect our
business.
Our operations are affected by general economic conditions, and
therefore our future success is unpredictable. The demand for entertainment
and leisure activities tends to be highly sensitive to consumers' disposable
incomes, and thus a decline in general economic conditions may lead to our
customers having less discretionary income to wager on horse racing. In 2002
and the first quarter of 2003, the weak U.S. economy had a negative impact on
our operating results and if the economy deteriorates further, the consequent
reduction in our revenues could have a material adverse effect on our operating
results.
Real Estate Ownership and Development Risks
Our ownership and development of real estate is subject to risks and
may involve significant ongoing expenditures or losses that could adversely
affect our operating results.
All real estate investments are subject to risks including: general
economic conditions, such as the availability and cost of financing; local
real estate conditions, such as an oversupply of residential, office, retail
or warehousing space, or a reduction in demand for real estate in the area;
governmental regulation, including taxation of property and environmental
legislation; and the attractiveness of properties to potential purchasers or
15
tenants. The real estate industry is also capital intensive and sensitive to
interest rates. Further, significant expenditures, including property taxes,
mortgage payments, maintenance costs, insurance costs and related charges,
must be made throughout the period of ownership of real property, which
expenditures may negatively impact our operating results.
We may not be able to sell or otherwise monetize some of our non-core
real estate, excess racing real estate and revenue-producing non-racing real
estate when we need to or at the price we want, which may materially adversely
affect our financial condition.
At times, it may be difficult for us to dispose of or otherwise
monetize some of our non-core real estate, excess racing real estate and
revenue-producing non-racing real estate . The costs of holding real estate
may be high and, during a recession, we may be faced with ongoing expenditures
with little prospect of earning revenue on our non-core real estate and excess
racing real estate properties. If we have inadequate cash reserves or credit
facilities, we may have to dispose of properties at prices that are
substantially below the prices we desire, and in some cases, below the prices
we originally paid for the properties, which may materially adversely affect
our financial condition and our growth plans.
We require governmental approvals for some of our properties which
may take a long time to obtain or which may not be granted, either of which
could materially adversely affect our existing business or our growth.
Some of our properties will require zoning and other approvals from
local government agencies. The process of obtaining these approvals may take
many months and we might not obtain the necessary approvals. Furthermore, in
the case of certain land to be held by us in Aurora, Ontario, the transfer of
this land to us from Magna International is conditional on our obtaining
permission to sever the land from adjoining properties and other approvals. If
we do not obtain these approvals, we may not ultimately acquire this land.
Holding costs, while regulatory approvals are being sought, and delays may
render a project economically unfeasible. If we do not obtain all of our
necessary approvals, our plans, growth and profitability could be materially
adversely affected.
We may not be able to complete expansion projects successfully and on
time, which would materially adversely affect our growth and our operating
results.
We intend to further develop our racetracks and expand our gaming
activities. Numerous factors, including regulatory and financial constraints,
could cause us to alter, delay or abandon our existing plans. If we proceed to
develop new facilities or enhance our existing facilities, we face numerous
risks that could require substantial changes to our plans. These risks include
the inability to secure all required permits and the failure to resolve
potential land use issues, as well as risks typically associated with any
construction project, including possible shortages of materials or skilled
labor, unforeseen engineering or environmental problems, delays and work
stoppages, weather interference and unanticipated cost overruns. For example,
Santa Anita Park completed certain upgrades to its facilities in 1999. The
disruption caused by these upgrades was greater than anticipated and reduced
the total amount wagered at Santa Anita Park's simulcast wagering facilities
and attendance at The Oak Tree Meet in 1999. Even if completed in a timely
manner, our expansion projects may not be successful, which would affect our
growth and could have a material adverse effect on our future profitability.
We have deferred a decision on the proposed redevelopment of
Gulfstream Park in Florida. If we proceed with such redevelopment, we will
schedule the project to minimize any interference with Gulfstream Park's
racing season, but there is a risk that the redevelopment will not be
completed according to schedule, in which case it could cause us to disrupt a
racing season and result in a reduction in the revenues and earnings generated
at Gulfstream Park during that season.
We are currently subject to an agreement with the Maryland Racing
Commission that requires us to expend at least $15 million on capital
improvements to the Laurel Park and Pimlico racetracks and the thoroughbred
training facility in Bowie, Maryland, together with their related facilities
and operations, between January 1, 2003 and June 30, 2004. We will endeavor to
schedule the work for these expenditures to minimize
16
interference with the respective racing seasons, but given the short timeline,
that cannot be assured. If there is interference with the racing season of
Pimlico or Laurel Park, or the project plans are not completed according to
schedule, it could result in a reduction in the revenues and earnings
generated at those racetracks.
We face strict environmental regulation and may be subject to
liability for environmental damage, which could materially adversely affect
our financial results.
We are subject to a wide range of requirements under environmental
laws and regulations relating to waste water discharge, waste management and
storage of hazardous substances. Compliance with environmental laws and
regulations can, in some circumstances, require significant capital
expenditures. Moreover, violations can result in significant penalties and, in
some cases, interruption or cessation of operations. We were involved in a
dispute with the United States Environmental Protection Agency involving the
Portland Meadows racetrack, which we currently lease and operate, which
dispute caused us to postpone the planned opening of the 2001-2002 meet at
that facility on September 1, 2001 and also to conclude the 2001-2002 meet
early, on February 10, 2002.
Furthermore, we may not have all required environmental permits and
we may not otherwise be in compliance with all applicable environmental
requirements. Where we do not have an environmental permit but one may be
required, we will determine if one is in fact required and, if so, will seek
to obtain one and address any related compliance issues, which may require
significant capital expenditures.
Various environmental laws and regulations in the United States,
Canada and Europe impose liability on us as a current or previous owner and
manager of real property, for the cost of maintenance, removal and remediation
of hazardous substances released or deposited on or in properties now or
previously owned or managed by us or disposed of in other locations. Our
ability to sell properties with hazardous substance contamination or to borrow
money using that property as collateral may also be uncertain.
Changes to environmental laws and regulations, resulting in more
stringent terms of compliance, or the enactment of new environmental
legislation, could expose us to additional liabilities and ongoing expenses.
Any of these environmental issues could have a material adverse
effect on our business.
Risks Relating to Our Securities
Our stock price may be volatile, and future issuances or sales of our
stock may decrease our stock price.
The trading price of our Class A Subordinate Voting Stock has
experienced, and may continue to experience, substantial volatility. The
following factors have had, and may continue to have, a significant effect on
the market price of our Class A Subordinate Voting Stock:
o our historical and anticipated operating results;
o the announcement of new wagering and gaming opportunities by us or
our competitors;
o the passage or anticipated passage of legislation affecting horse
racing or gaming;
o developments affecting the horse racing or gaming industries
generally;
o sales or other issuances or the perception of potential sales or
issuances, including in connection with our past and future
acquisitions, of substantial amounts of our shares;
17
o sales or the expectation of sales by Magna International of a
portion of our shares held by it, as a result of its previously
stated intention to reduce its majority equity position in us over
time, or by our other significant stockholders; and
o a shift in investor interest away from the gaming industry, in
general.
These factors could have a material adverse effect on the market
price of our Class A Subordinate Voting Stock and other securities, regardless
of our financial condition and operating results.
The trading price of our Class A Subordinate Voting Stock could
decrease as a result of our issuing additional shares as consideration for
future acquisitions.
We may issue our Class A Subordinate Voting Stock as full or partial
consideration in connection with future acquisitions. To the extent that we do
so, the percentage of our common equity and voting stock that our existing
stockholders own will decrease and, particularly if such acquisitions do not
contribute proportionately to our profitability, the trading price of our
shares may also decrease.
Sales of our Class A Subordinate Voting Stock by Magna International
or by certain other of our significant stockholders under our shelf
registration statement could depress our stock price.
As of the date of this prospectus, Magna International owns, directly
or indirectly, 4,362,328 shares of our Class A Subordinate Voting Stock and
58,466,056 shares of our Class B Stock (which are convertible into shares of
our Class A Subordinate Voting Stock on a one-for-one basis). Magna
International has announced its intention at an undetermined time in the
future to convert some shares of our Class B Stock to shares of our Class A
Subordinate Voting Stock and dispose of these shares of our Class A
Subordinate Voting Stock when market conditions for doing so are favorable,
with the ultimate intention of retaining only a minority equity position but
continuing to retain control of us. In addition, we have an effective shelf
registration statement that permits the secondary sale of shares of our Class
A Subordinate Voting Stock by some of our stockholders who received those
shares in connection with our past acquisitions. A total of 857,401 shares
covered by that shelf registration statement remain unsold. Sales of a
substantial number of shares of our Class A Subordinate Voting Stock, either
by Magna International or under our shelf registration statement, could
depress the prevailing market price of our Class A Subordinate Voting Stock.
We do not plan to pay dividends until 2004, if at all.
We have not paid any dividends to date on our Class A Subordinate
Voting Stock, we do not plan to pay any dividends until 2004 and we may not
pay dividends then, or ever. See "Corporate Constitution--Required
Allocations--Dividends".
Our debt securities are subject to risks associated with debt
financing.
Our debt securities are subject to the following risks associated
with debt financing:
o the risk that cash flow from operations will be insufficient to meet
required payments of principal and interest;
o the risk that, to the extent that we maintain floating rate indebtedness,
interest rates will fluctuate; and
o risks resulting from the fact that the indentures or other agreements
governing our debt securities and credit facilities may contain covenants
imposing certain limitations on our ability to acquire and dispose of
assets and otherwise conduct and finance our business.
18
In addition, although we anticipate that we will be able to repay or
refinance any indebtedness that we incur when it matures, we may not be able
to do so, and the terms of any refinancings of our indebtedness may not be
favorable to us. Our leverage may have important consequences including the
following:
o our ability to obtain additional financing for acquisitions, working
capital, capital expenditures or other purposes may be impaired, or such
financing may not be available on terms favorable to us;
o a substantial decrease in our operating cash flow or an increase in our
expenses could make it difficult for us to meet our debt service
requirements and force us to modify our operations; and
o our higher level of debt and resulting interest expense may place us at a
competitive disadvantage with respect to a competitor with lower amounts
of indebtedness and/or higher credit ratings.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements as defined by the
U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934.
These forward-looking statements may include, among others, statements
regarding: expectations as to operational improvements; expectations as to
cost savings, revenue growth and earnings; the time by which certain
objectives will be achieved; estimates of costs relating to environmental
remediation and restoration; proposed new racetracks and other developments,
products and services; expectations that claims, lawsuits, environmental
costs, commitments, contingent liabilities, labor negotiations or agreements,
or other matters will not have a material adverse effect on our consolidated
financial position, operating results, prospects or liquidity; projections,
predictions, expectations, estimates or forecasts as to our financial and
operating results and future economic performance; and other matters that are
not historical facts.
Forward-looking statements should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or the times at or by which such performance or results will be
achieved. Forward-looking statements are based on information available at the
time and/or management's good faith belief with respect to future events, and
are subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in the statements.
Important factors that could cause such differences include, but are
not limited to, the factors discussed above under "Risk Factors" and our
subsequent public filings.
Forward-looking statements speak only as of the date the statement
was made. We assume no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information. If we update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect thereto or with respect to other
forward-looking statements.
DIVIDEND POLICY
The holders of our Class A Subordinate Voting Stock and our Class B
Stock are entitled to receive their proportionate share of dividends declared
by our board of directors, except in the case of some stock dividends. Subject
to applicable law, we intend to pay quarterly dividends starting in 2004. Any
dividends will be declared on our Class A Subordinate Voting Stock and Class B
Stock in accordance with our restated certificate of incorporation, including
our corporate constitution, which sets forth certain dividend entitlements for
our stockholders, subject to applicable law.
We have not declared any dividends since our Class A Subordinate
Voting Stock has been publicly trading.
19
See "Description of Capital Stock--Capital Stock" and "Corporate
Constitution--Required Allocations--Dividends".
EARNINGS RATIOS
Our consolidated ratio of earnings to fixed charges for each of the
periods indicated is as set forth in the table below.
Five
Months
Year Ended
Ended December
July 31, 31, Year Ended December 31,
------------ --------- --------------------------------------------------
1998 1998 1999 2000 2001 2002
------------ --------- ---------- ----------- ---------- -------------
Ratio of earnings to fixed
charges....................... __(1) __(2) 2.18 1.45 3.90 __(3)
- -----------
(1) For this period, losses exceeded fixed charges by $5.2 million.
(2) For this period, losses exceeded fixed charges by $1.7 million.
(3) For this period, losses exceeded fixed charges by $8.9 million.
"Earnings" consist of income from continuing operations before income
taxes and fixed charges. "Fixed charges" consist of interest expense
(including interest cost capitalized) and other financing charges.
SELLING SECURITYHOLDERS
The notes were originally issued by us and sold by BMO Nesbitt Burns
Corp. and CIBC World Market Corp. (the "Initial Purchasers") in transactions
exempt from the registration requirements of the U.S. Securities Act of 1933
(the "Securities Act") to persons reasonably believed by the Initial
Purchasers to be "qualified institutional buyers" as defined by Rule 144A
under the Securities Act or in offshore transactions under Regulation S of the
Securities Act. The selling securityholders may from time to time offer and
sell pursuant to this prospectus any or all of the notes listed below and the
shares of Class A Subordinate Voting Stock issued upon purchase by us, or
conversion, of such notes. When we refer to the "selling securityholders" in
this prospectus, we mean those persons listed in the table below, as well as
the pledgees, donees, assignees, transferees, successors and others who later
hold any of the selling securityholders' interests.
The table below sets forth the name of each selling securityholder,
the principal amount at maturity of notes that each selling securityholder may
offer pursuant to this prospectus and the number of shares of Class A
Subordinate Voting Stock into which such notes are convertible. To our
knowledge, none of the selling securityholders has, or within the past three
years has had, any material relationship with us or any of our predecessors or
affiliates or beneficially owns in excess of 1% of our outstanding Class A
Subordinate Voting Stock.
The principal amounts of the notes provided in the table below is
based on information provided to us by each of the selling securityholders,
and the percentages are based on $75,000,000 aggregate principal amount of
notes outstanding. The number of shares of our Class A Subordinate Voting
Stock that may be sold is based on the current conversion rate of 117.647
shares of our Class A Subordinate Voting Stock for each $1,000 principal
amount of notes.
Since the date on which the selling securityholders provided this
information, each selling securityholder identified below may have sold,
transferred or otherwise disposed of all or a portion of their notes in one or
more
20
transactions exempt from the registration requirements of the Securities Act.
Information concerning the selling securityholders may change from time to
time and any changed information will be set forth in supplements to this
prospectus to the extent required. In addition, the conversion ratio, and
therefore the number of shares of our Class A Subordinate Voting Stock
issuable upon conversion of the notes, is subject to adjustment. Accordingly,
the number of shares of Class A Subordinate Voting Stock issuable upon
conversion of the notes may increase or decrease.
The selling securityholders may from time to time offer and sell any
or all of the securities under this prospectus. Because the selling
securityholders are not obligated to sell the notes or shares of Class A
Subordinate Voting Stock issuable upon conversion of the notes, we cannot
estimate the amount of notes or how many shares of Class A Subordinate Voting
Stock that the selling securityholders will hold upon consummation of any such
sales.
Number of
Aggregate shares of Class
Principal A Subordinate
Amount of Notes Voting Stock
That May Be That May Be Percentage of
Sold Under this Percentage of Sold Under this Shares
Name Prospectus Notes Outstanding Prospectus(1) Outstanding(2)
- -------------------------------------- ------------------- ------------------- ------------------- -------------------
Amaranth L.L.C. $19,750,000 26.333% 2,323,529 4.532%
B.G.I. Global Investors c/o $40,000 * 4,705 *
Forest Investment Mngt. L.L.C.
Casurina Limited Partnership $500,000 * 58,823 *
Casurina Performance Fund $350,000 * 41,176 *
Caxton International Limited $2,000,000 2.667% 235,294 *
Credit Suisse First Boston $15,225,000 20.300% 1,791,176 3.549%
(Europe) Limited
Front Street Investment $150,000 * 17,647 *
Management Inc. - First Wave
Inc. (formerly Tuscarora
Investment Management Inc.)
Forest Fulcrum Fund L.L.P. $130,000 * 15,294 *
Forest Global Convertible Fund $550,000 * 64,705 *
Series A-5
Forest Multi-Strategy Master $160,000 * 18,823 *
Fund SPC, on behalf of Series F,
Multi-Strategy Segregated
Portfolio
Libra Fund LP $464,500 * 54,647 *
Libra Offshore Ltd. $35,500 * 4,176 *
LLT Limited $50,000 * 5,882 *
Lyxor Master Fund c/o Forest $120,000 * 14,117 *
Investment Mngt. L.L.C.
North Pole Capital Master Fund $2,850,000 3.800% 335,294 *
21
Polar Hedge Enhanced Income Trust $150,000 * 17,647 *
Shepherd Investments $10,992,000 14.656% 1,293,176 2.590%
International,Ltd.
Mark Shoom $1,000,000 1.333% 117,647 *
Stark Trading $7,328,000 9.771% 862,117 1.740%
Sunrise Partners Limited $3,480,000 4.640% 409,411 *
Partnership
Zurich Master Hedge Fund c/o $70,000 * 8,235 *
Forest Investment Mngt. L.L.C.
All other holders of the notes or $9,605,000 12.807% 1,130,000 2.269%
future transferees, pledgees,
donees, assignees or successors of
any such holders (3)
Total $75,000,000 100.000% 8,823,529(4) 15.346%
* Less than one percent (1%)
(1) The number of shares of Class A Subordinate Stock beneficially owned
and being offered, as set forth in the table, has been determined in
accordance with Rule 13d-3 under the Securities Exchange Act, include
shares of Class A Subordinate Voting Stock into which the notes are
convertible, and assumes a conversion price of $8.50 per share of
Class A Subordinate Voting Stock and the payment of cash in lieu of
fractional shares. In addition, the conversion price of the notes may
be adjusted under certain circumstances which will change the number
of shares of Class A Subordinate Voting Stock received upon their
conversion. See "Description of the Notes - Conversion of the Notes".
(2) Calculated based on Rule 13d-3(d)(i) of the Securities Exchange Act,
using 48,674,796 shares of Class A Subordinate Voting Stock
outstanding as of March 17, 2003. In calculating this percentage for
each holder, we treated as outstanding the number of shares of Class
A Subordinate Voting Stock issuable upon the conversion of all that
holder's notes, but we did not assume conversion of any other
holders' notes, or include any other shares of Class A Subordinate
Voting Stock that may be held by such holder. Does not include shares
of Class A Subordinate Voting Stock that may be issued by us upon
redemption or purchase of the notes by us at the option of the
holder.
(3) Information concerning other selling securityholders, including
current holders of the notes for which we have not received
information regarding their holdings, will be included in supplements
to this prospectus, if required. For purposes of this table, we have
assumed that any other holders of the notes, or any future pledgees,
donees, assignees, transferees or successors of or from any other
such holders of the notes, do not beneficially own any other shares
of Class A Subordinate Voting Stock, other than the shares of Class A
Subordinate Voting Stock issuable upon the conversion of the notes.
(4) Represents the number of shares of Class A Subordinate Voting Stock
into which $75,000,000 of notes would be convertible at the initial
conversion rate described in footnote 1 above.
DESCRIPTION OF THE NOTES
We issued the notes under an indenture dated as of December 2, 2002,
between us and The Bank of New York, as trustee. The following summarizes
some, but not all, provisions of the notes and the indenture. We urge
22
you to read the indenture because the indenture, and not this description,
defines your rights as a holder of the notes. A copy of the indenture,
including the form of certificate evidencing the notes, is included as an
exhibit to the registration statement of which this prospectus is a part.
In this section of the prospectus entitled "Description of the
Notes," when we refer to "MEC," "we," "our," or "us," we are referring to
Magna Entertainment Corp. and not any of its subsidiaries.
General
The notes are general unsecured obligations of MEC and are
subordinate in right of payment as described under "Subordination of Notes"
below. The notes are convertible into our Class A Subordinate Voting Stock as
described under "Conversion of Notes" below. The aggregate principal amount of
the notes is $75.0 million. The notes were issued in denominations of $1,000
or in multiples of $1,000. The notes will mature on December 15, 2009, unless
earlier redeemed at our option, converted at your option, or purchased by us
at your option upon a change in control.
Neither we nor our subsidiaries are restricted from paying dividends,
incurring debt, or issuing or repurchasing our securities under the indenture.
In addition, there are no financial covenants in the indenture. You are not
protected under the indenture in the event of a highly leveraged transaction
or a change in control of MEC, except to the extent described under "Purchase
of Notes at Your Option Upon a Change in Control" below.
The notes bear interest at the annual rate of 7 1/4%. Interest is
payable on June 15 and December 15 of each year, beginning June 15, 2003,
subject to limited exceptions if the notes are converted, redeemed or
purchased prior to the interest payment date. The record dates for the payment
of interest will be June 1 and December 1. We may, at our option, pay interest
on the notes by check mailed to the holders. However, a holder with an
aggregate principal amount in excess of $1.0 million will be paid by wire
transfer in immediately available funds upon its election if the holder has
provided us with wire transfer instructions at least 10 business days prior to
the payment date. Interest on the notes will be paid on the basis of a 360-day
year comprised of twelve 30-day months. We are not required to make any
payment on the notes due on any day that is not a business day until the next
succeeding business day. The payment made on the next succeeding business day
will be treated as though it were paid on the original due date and no
interest will accrue on the payment for the additional period of time.
We will maintain an office in New York City where the notes may be
presented for registration, transfer, exchange or conversion. This office will
initially be an office or agency of the trustee. Except under limited
circumstances described below, the notes will be, and the initial notes were,
issued only in fully registered book entry form, without coupons, and are
represented by one or more global notes. There will be no service charge for
any registration of transfer or exchange of notes. We may, however, require
holders to pay a sum sufficient to cover any tax or other governmental charge
payable in connection with certain transfers or exchanges.
Conversion of Notes
You have the right, at your option, to convert your notes into shares
of our Class A Subordinate Voting Stock at any time until the close of
business on the last business day prior to maturity, unless previously
redeemed or purchased, at the conversion price of $8.50 per share, subject to
the adjustments described below. This is equivalent to a conversion rate of
approximately 117.647 shares of Class A Subordinate Voting Stock for each
$1,000 principal amount of notes.
Except as described below, we will not make any payment or other
adjustment for accrued interest or dividends on any Class A Subordinate Voting
Stock issued upon conversion of the notes. If you submit your notes for
conversion between a record date and the opening of business on the next
interest payment date (except for notes or portions of notes called for
redemption or subject to purchase following a change in control on a
redemption date or a purchase date, as the case may be, occurring during the
period from the close of business on a record date and ending on the opening
of business on the first business day after the next interest payment date, or
if this interest payment date is not a business day, the second business day
after the interest payment date), you
23
must pay funds equal to the interest payable on the principal amount being
converted. As a result of the foregoing provisions, if the exception described
in the preceding sentence does not apply and you surrender your notes for
conversion on a date that is not an interest payment date, you will not
receive any interest for the period from the interest payment date next
preceding the date of conversion or for any later period.
We will not issue fractional shares of Class A Subordinate Voting
Stock upon conversion of notes. Instead, we will pay cash for the fractional
amount based upon the closing market price of the Class A Subordinate Voting
Stock on the last trading day prior to the date of conversion.
If the notes are called for redemption or are subject to purchase
following a change in control, your conversion rights on the notes called for
redemption or so subject to purchase will expire at the close of business on
the last business day before the redemption date or purchase date, as the case
may be, or such earlier date as the notes are presented for redemption or for
purchase, unless we default in the payment of the redemption price or purchase
price, in which case, your conversion right will terminate at the close of
business on the date the default is cured and the notes are redeemed or
purchased. If you have submitted your notes for purchase upon a change in
control, you may convert your notes only if you withdraw your election in
accordance with the indenture.
The conversion price will be adjusted upon the occurrence of:
(1) the issuance of shares of our Class A Subordinate Voting Stock as
a dividend or distribution on our Class A Subordinate Voting Stock;
(2) the subdivision or combination of our outstanding Class A
Subordinate Voting Stock;
(3) the issuance to all or substantially all holders of our Class A
Subordinate Voting Stock of rights or warrants entitling them for a period of
not more than 60 days to subscribe for or purchase our Class A Subordinate
Voting Stock, or securities convertible into our Class A Subordinate Voting
Stock, at a price per share or a conversion price per share less than the then
current market price per share; provided that the conversion price will be
readjusted to the extent that such rights or warrants are not exercised prior
to the expiration;
(4) the distribution to all or substantially all holders of our Class
A Subordinate Voting Stock of shares of our capital stock, evidences of
indebtedness or other non-cash assets, or rights or warrants, excluding:
o dividends, distributions and rights or warrants referred to in
clause (1) or (3) above; and
o distribution of rights to all holders of Class A Subordinate
Voting Stock pursuant to an adoption of a shareholder rights
plan;
(5) the dividend or distribution to all or substantially all holders
of our Class A Subordinate Voting Stock of all-cash distributions in an
aggregate amount that together with (A) any cash and the fair market value of
any other consideration payable in respect of any tender offer by us or any of
our subsidiaries for our Class A Subordinate Voting Stock consummated within
the preceding 12 months not triggering a conversion price adjustment and (B)
all other all-cash distributions to all or substantially all holders of our
Class A Subordinate Voting Stock made within the preceding 12 months not
triggering a conversion price adjustment, exceeds an amount equal to 10% of
our market capitalization on the business day immediately preceding the day on
which we declare such distribution; and
(6) the purchase of our Class A Subordinate Voting Stock pursuant to
a tender offer made by us or any of our subsidiaries to the extent that the
same involves aggregate consideration that together with (A) any cash and the
fair market value of any other consideration payable in respect of any tender
offer by us or any of our subsidiaries for our Class A Subordinate Voting
Stock consummated within the preceding 12 months nottriggering a conversion
price
24
adjustment and (B) all-cash distributions to all or substantially all holders
of our Class A Subordinate Voting Stock made within the preceding 12 months
not triggering a conversion price adjustment, exceeds an amount equal to 10%
of our market capitalization on the expiration date of such tender offer.
If we implement a shareholders rights plan, we are required under the
indenture to provide that the holders of notes will receive the rights upon
conversion of the notes, whether or not these rights were separated from the
Class A Subordinate Voting Stock prior to conversion, subject to certain
limited exceptions.
In the event of:
o any reclassification of our Class A Subordinate Voting Stock;
o a consolidation, merger or combination involving MEC; or
o a sale or conveyance to another person of the property and
assets of MEC as an entirety or substantially as an entirety;
in which holders of our outstanding Class A Subordinate Voting Stock would be
entitled to receive stock, other securities, other property, assets or cash
for their Class A Subordinate Voting Stock, holders of notes will generally be
entitled to convert their notes into the same type of consideration received
by Class A Subordinate Voting Stock holders immediately prior to one of these
types of events.
You may, in some circumstances, be deemed to have received a
distribution or dividend subject to United States federal income tax as a
result of an adjustment or the nonoccurrence of an adjustment to the
conversion price. See "Certain United States Federal Income Tax Considerations
- -- U.S. Holders--Constructive Dividends Upon Adjustment of Conversion Price".
We are permitted to reduce the conversion price of the notes by any
amount for a period of at least 20 days if our board of directors determines
that such reduction would be in our best interest. We are required to give at
least 15 days prior notice of any reduction in the conversion price. We may
also reduce the conversion price to avoid or diminish income tax to holders of
our Class A Subordinate Voting Stock in connection with a dividend or
distribution of stock or similar event.
No adjustment in the conversion price is required unless it would
result in a change in the conversion price of at least one percent. Any
adjustment not made will be taken into account in subsequent adjustments.
Except as stated above, we will not adjust the conversion price for the
issuance of our Class A Subordinate Voting Stock or any securities convertible
into or exchangeable for our Class A Subordinate Voting Stock or the right to
purchase our Class A Subordinate Voting Stock or such convertible or
exchangeable securities.
Subordination of Notes
The notes are subordinate in right of payment to all our existing and
future Senior Debt. The indenture does not restrict the amount of Senior Debt
or other Indebtedness that we or any of our subsidiaries may incur. As of
March 31, 2003, the notes were subordinated to approximately $62.0 million
in aggregate principal amount of our Senior Debt. As of March 31, 2003,
our subsidiaries had $250.1 million in aggregate outstanding obligations. We
have approximately $134.3 million in aggregate principal amount of Indebtedness
as of March 31, 2003.
The indenture provides that in the event of any insolvency or
bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings relative to MEC or to its property or assets, or in
the event of any proceedings for voluntary liquidation, dissolution or other
winding-up of MEC, whether or not involving insolvency or bankruptcy, or any
marshalling of the assets and liabilities of MEC, then holders of Senior Debt
will receive payment in full before the holders of the notes receive any
payment or distribution of any kind or character, whether in cash, property or
securities, which may be payable or deliverable in any such event in respect
of the notes. The indenture also provides that MEC shall not make any payment,
and the holders of the notes shall not be
25
entitled to receive any payment or benefit (including without limitation by
compensation, set-off, combination of accounts or realization of security or
otherwise in any manner whatsoever), on account of indebtedness represented by
the notes at any time when a default or an event of default, as defined in the
agreement or instrument pursuant to which such indebtedness is incurred (or
any condition, event or act which with notice, lapse of time or both would
constitute an event of default) has occurred under any Senior Debt that is
continuing and the notice of such default or event of default has been given
to MEC by or on behalf of the holders of any Senior Debt, unless such Senior
Debt has been repaid in full or unless and until such default or event of
default has been cured or waived or has ceased to exist.
Upon any distribution of our assets in connection with any
dissolution, winding-up, liquidation or reorganization of us or acceleration
of the principal amount due on the notes because of any event of default, all
Senior Debt must be paid in full in cash before the holders of the notes are
entitled to any payments whatsoever.
As a result of these subordination provisions, in the event of our
insolvency, holders of the notes may recover ratably less than the holders of
our Senior Debt and our general creditors. Such subordination will not prevent
the occurrence of any Event of Default under the indenture.
If the trustee or any holder of notes receives any payment or
distribution of our assets of any kind in contravention of any of the terms of
the indenture, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of the notes before all
Senior Debt is paid in full in cash, then the payment or distribution will be
held by the recipient in trust for the benefit of holders of Senior Debt, and
will be immediately paid over or delivered to the holders of Senior Debt or
their representative or representatives to the extent necessary to make
payment in full of all Senior Debt remaining unpaid, after giving effect to
any concurrent payment or distribution, or provision therefor, to or for the
holders of Senior Debt.
The notes are our exclusive obligations. Since a significant amount
of our operations are conducted through our subsidiaries, our cash flow and
our consequent ability to service debt, including the notes, will depend in
part upon the earnings of our subsidiaries and the distribution of those
earnings to, or under loans or other payments of funds by those subsidiaries
to, us. The payment of dividends and the making of loans and advances to us by
our subsidiaries may be subject to statutory or contractual restrictions, will
depend upon the earnings of those subsidiaries and are subject to various
business considerations.
Our right to receive assets of any of our subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
notes to participate in those assets) will be effectively subordinated to the
claims of that subsidiary's creditors (including trade creditors), except to
the extent that we are recognized as a creditor of that subsidiary, in which
case our claims would still be in effect subordinate to any obligations
secured by the assets of that subsidiary and any indebtedness of that
subsidiary senior to that held by us.
The indenture does not limit the amount of additional indebtedness,
including Senior Debt, that we can create, incur, assume or guarantee, nor
will the indenture limit the amount of indebtedness and other liabilities that
any subsidiary may create, incur, assume or guarantee.
Definitions:
"Credit Agreement" means the Amended and Restated Credit Agreement
dated as of December 2, 2002, between MEC, the Guarantors named therein, Bank
of Montreal, acting through its Chicago lending office and BMO Nesbitt Burns,
a division of Bank of Montreal, as arranger, as such facility may be further
amended, extended, renewed, restated, supplemented or otherwise modified (in
whole or in part, and without limitation as to amount, terms, conditions,
covenants and other provisions) from time to time, and any agreement (and
related document) governing Indebtedness incurred to refinance, in whole or in
part, the borrowings and commitments then outstanding or permitted to be
outstanding under such facility or a successor facility, whether by the same
or any other lender of group of lenders.
"Exchange Rate Contract" means, with respect to any person, any
currency swap agreements, forward
26
exchange rate agreements, foreign currency futures or options, exchange rate
collar agreements, exchange rate insurance and other agreements or
arrangements, or combination thereof, the principal purpose of which is to
provide protection against fluctuations in currency exchange rates. An
Exchange Rate Contract may also include an Interest Rate Agreement.
"Indebtedness" means, with respect to any person, any indebtedness of
such person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, the notes or similar instruments or letters of
credit, bank guarantees or bankers' acceptances, or reimbursement agreements
in respect thereof, or representing the balance deferred and unpaid of the
purchase price of any property, including pursuant to capital leases and
sale-and-leaseback transactions, or representing our obligations and
liabilities, contingent or otherwise, in respect of leases required, in
conformity with GAAP, to be accounted for as capitalized lease obligations on
our balance sheet, or representing any hedging obligations under an Exchange
Rate Contract or an Interest Rate Agreement, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of
the foregoing indebtedness, other than obligations under an Exchange Rate
Contract or an Interest Rate Agreement, would appear as a liability upon a
balance sheet of such person prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the guarantee of items that
would be included within this definition. The amount of any Indebtedness
outstanding as of any date shall be the accreted value thereof, in the case of
any Indebtedness issued with original issue discount. Indebtedness shall not
include liabilities for taxes of any kind.
"Interest Rate Agreement" means, with respect to any person, any
interest rate swap agreement, interest rate cap agreement, interest rate
collar agreement or other similar agreement the principal purpose of which is
to protect the party indicated therein against fluctuations in interest rates.
"Senior Debt" with respect to us means Indebtedness (including any
monetary obligation in respect of the Credit Agreement, and interest, whether
or not allowable, accruing on Indebtedness incurred pursuant to the Credit
Agreement after the filing of a petition initiating any proceeding under any
bankruptcy, insolvency or similar law) of ours arising under the Credit
Agreement or any other Indebtedness of ours, whether outstanding on the date
of the indenture or thereafter created, incurred, assumed or guaranteed by us.
Notwithstanding anything to the contrary in the foregoing, Senior
Debt shall not include: (a) Indebtedness of or amounts owed by us for
compensation to employees, or for goods or materials purchased or for services
obtained in the ordinary course of business or (b) our Indebtedness that
expressly provides that it shall not be senior in right of payment to the
notes or expressly provides that it is on the same basis as or junior to the
notes.
Optional Redemption
The notes may not be redeemed at our option prior to December 21,
2005. Thereafter the notes may be redeemed at our option in whole, or in part,
upon not less than 20 nor more than 60 days' notice by mail to holders of the
notes, at 100% of the principal amount of the notes together with accrued
interest up to, but not including, the redemption date; provided that (1) in
connection with any redemption of the notes occurring on or after December 21,
2005 and until December 15, 2007, the closing price of our Class A Subordinate
Voting Stock has exceeded 125% of the conversion price for at least 20 trading
days in the 30 consecutive trading day period ending on the trading day prior
to the mailing of the notice of redemption and (2) if the redemption date
falls after an interest payment record date and on or before an interest
payment date, then the interest payment shall be payable to holders of record
on the relevant record date.
If fewer than all the notes are to be redeemed, the trustee will
select the notes to be redeemed by lot, or in its discretion, on a pro rata
basis. If any note is to be redeemed in part only, a new note in principal
amount equal to the unredeemed principal portion will be issued. If a portion
of your notes is selected for partial redemption and you convert a portion of
your notes, the converted portion will be deemed to be the portion selected
for redemption.
No sinking fund is provided for the notes.
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Purchase of Notes at Your Option upon a Change in Control
If a change in control occurs, you will have the right to require us
to purchase all or any part of your notes 30 business days after the
occurrence of such change in control at a purchase price equal to 100% of the
principal amount of the notes together with accrued and unpaid interest to,
but excluding, the purchase date. Notes submitted for purchase must be in
integral multiples of $1,000 principal amount. We will mail to the trustee and
to each holder a written notice of the change in control within 10 business
days after the occurrence of such change in control. This notice shall state
certain specified information, including:
o information about and the terms and conditions of the change in
control;
o information about the holders' right to convert the notes;
o the holders' right to require us to purchase the notes;
o the procedures required for exercise of the purchase option
upon the change in control; and
o the name and address of the paying and conversion agents.
You must deliver written notice of your exercise of this purchase
right to the paying agent at any time prior to the close of business on the
business day prior to the change in control purchase date. The written notice
must specify the notes for which the purchase right is being exercised. If you
wish to withdraw this election, you must provide a written notice of
withdrawal to the paying agent at any time prior to the close of business on
the business day prior to the change in control purchase date. A change in
control will be deemed to have occurred if any of the following occurs:
o any "person" or "group" is or becomes the "beneficial owner,"
directly or indirectly, of shares of our voting stock
representing 50% or more of the total voting power of all
outstanding classes of our voting stock or has the power,
directly or indirectly, to elect a majority of the members of
our board of directors;
o we consolidate with, or merge with or into, another person or
we sell, assign, convey, transfer, lease or otherwise dispose
of all or substantially all our assets, or any person
consolidates with, or merges with or into, us, in any such
event other than pursuant to a transaction in which the persons
that "beneficially owned," directly or indirectly, the shares
of our voting stock immediately prior to such transaction
"beneficially own," directly or indirectly, shares of our
voting stock representing at least a majority of the total
voting power of all outstanding classes of voting stock of the
surviving or transferee person; or
o the holders of our capital stock approve any plan or proposal
for the liquidation or dissolution of MEC (whether or not
otherwise in compliance with the indenture).
However, a change in control will be deemed not to have occurred if:
o any of the Stronach Trust, Frank Stronach or any member of his
immediate family or any of their heirs or personal
representatives, continue to be the "beneficial owner",
directly or indirectly, of shares of our voting stock
representing 50% or more of the total voting power of all
outstanding classes of our voting stock or has the power,
directly or indirectly, to elect a majority of the members of
our board of directors; or
o the last sale price of our Class A Subordinate Voting Stock for
any five trading days during the ten trading days immediately
preceding the change in control is at least equal to 105% of
the conversion price in effect on such day; or
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o in the case of a merger or consolidation, all the consideration
(excluding cash payments for fractional shares and cash
payments pursuant to dissenters' appraisal rights) in the
merger or consolidation constituting the change in control
consists of Class A Subordinate Voting Stock traded on a United
States national securities exchange or quoted on the Nasdaq
National Market (or which will be so traded or quoted when
issued or exchanged in connection with such change in control)
and as a result of such transaction or transactions the notes
become convertible solely into such Class A Subordinate Voting
Stock.
For purposes of this change in control definition:
o "person" and "group" have the meanings given to them for
purposes of Sections 13(d) and 14(d) of the Exchange Act or any
successor provisions, and the term "group" includes any group
acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act, or any successor provision;
o a "beneficial owner" will be determined in accordance with Rule
13d-3 under the Exchange Act, as in effect on the date of the
indenture, except that the number of shares of our voting stock
will be deemed to include, in addition to all outstanding
shares of our voting stock and unissued shares deemed to be
held by the "person" or "group" or other person with respect to
which the change in control determination is being made, all
unissued shares deemed to be held by all other persons;
o "beneficially own" and "beneficially owned" have meanings
correlative to that of beneficial owner;
o "unissued shares" means shares of voting stock not outstanding
that are subject to options, warrants, rights to purchase or
conversion privileges exercisable within 60 days of the date of
determination of a change in control, including the shares of
Class A Subordinate Voting Stock issuable upon conversion of
the notes; and
o "voting stock" means any class or classes of capital stock or
other interests then outstanding and normally entitled (without
regard to the occurrence of any contingency) to vote in the
election of the board of directors, managers or trustees.
The term "all or substantially all" as used in the definition of
change in control will likely be interpreted under applicable state law and
will be dependent upon particular facts and circumstances. There may be a
degree of uncertainty in interpreting this phrase. As a result, we cannot
assure you how a court would interpret this phrase under applicable law if you
elect to exercise your rights following the occurrence of a transaction that
you believe constitutes a transfer of "all or substantially all" our assets.
We will under the indenture:
o comply with the provisions of Rule 13e-4 and Rule 14e-1, if
applicable, under the Exchange Act;
o file a Schedule TO or any successor or similar schedule, if
required, under the Exchange Act; and
o otherwise comply with all federal and state securities laws in
connection with any offer by us to purchase the notes upon a
change in control.
This change in control purchase feature may make more difficult or
discourage a takeover of us and the removal of incumbent management. We are
not, however, aware of any specific effort to accumulate shares of our Class A
Subordinate Voting Stock or to obtain control of us by means of a merger,
tender offer, solicitation or otherwise. In addition, the change in control
purchase feature is not part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the change in control purchase feature is a
result of negotiations between us
29
and the Initial Purchasers of the notes.
We could, in the future, enter into certain transactions, including
recapitalizations, that would not constitute a change in control but would
increase the amount of debt, including Senior Debt, outstanding or otherwise
adversely affect a holder. Neither we nor our subsidiaries are prohibited from
incurring debt, including Senior Debt, under the indenture. The incurrence of
significant amounts of additional debt could adversely affect our ability to
service our debt, including the notes.
Certain of our debt agreements that we may enter into in the future
may prohibit our redemption or repurchase of the notes and provide that a
change in control constitutes an event of default.
We may not purchase any note at any time when the subordination
provisions of the indenture otherwise would prohibit us from making such
repurchase. If we fail to repurchase the notes when required, this failure
will constitute an event of default under the indenture whether or not
repurchase is permitted by the subordination provisions of the indenture.
If a change in control were to occur, we may not have sufficient
funds to pay the change in control purchase price for the notes tendered by
holders. In addition, we may in the future incur debt that has similar change
of control provisions that permit holders of this future debt to accelerate or
require us to repurchase this future debt upon the occurrence of events
similar to a change in control. Our failure to repurchase the notes upon a
change in control will result in an event of default under the indenture,
whether or not the purchase is permitted by the subordination provisions of
the indenture.
Events of Default
Each of the following constitutes an event of default under the
indenture:
(1) we fail to pay principal on any note when due, whether or not
prohibited by the subordination provisions of the indenture;
(2) we fail to pay any interest, including any additional interest,
on any note when due if such failure continues for 30 days, whether or not
prohibited by the subordination provisions of the indenture;
(3) we fail to perform any other agreement required of us in the
indenture if such failure continues for 60 days after notice is given in
accordance with the indenture;
(4) we fail to pay the purchase price of any note when due, whether
or not prohibited by the subordination provisions of the indenture;
(5) we fail to provide timely notice of a change in control if such
failure continues for 30 days after notice is given;
(6) any indebtedness for money borrowed by us or one of our
significant subsidiaries (all or substantially all of the outstanding voting
securities of which are owned, directly, or indirectly, by us) in an aggregate
outstanding principal amount in excess of $10.0 million is not paid at final
maturity or upon acceleration and such indebtedness is not discharged, or such
acceleration is not cured or rescinded, within 30 days after written notice as
provided in the indenture; and
(7) certain events in bankruptcy, insolvency or reorganization of us
or any of our significant subsidiaries.
If an event of default, other than an event of default described in
clause (7) above with respect to us, occurs and is continuing, either the
trustee or the holders of at least 25% in aggregate principal amount of the
outstanding notes may declare the principal amount of the notes to be due and
payable immediately. If an event of
30
default described in clause (7) above occurs with respect to us, the principal
amount of the notes will automatically become immediately due and payable. Any
payment by us on the notes following any acceleration will be subject to the
subordination provisions described above.
After any such acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of the
notes may, under certain circumstances, rescind and annul such acceleration if
all events of default, other than the non-payment of accelerated principal,
have been cured or waived.
Subject to the trustee's duties in the case of an event of default,
the trustee will not be obligated to exercise any of its rights or powers at
the request of the holders, unless the holders have offered to the trustee
reasonable indemnity. Subject to the indenture, applicable law and the
trustee's indemnification, the holders of a majority in aggregate principal
amount of the outstanding notes will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercising any trust or power conferred on the trustee with respect to the
notes.
No holder will have any right to institute any proceeding under the
indenture, or for the appointment of a receiver or a trustee, or for any other
remedy under the indenture unless:
o the holder has previously given the trustee written notice of a
continuing event of default;
o the holders of at least 25% in aggregate principal amount of the
notes then outstanding have made a written request and have
offered reasonable indemnity to the trustee to institute such
proceeding as trustee; and
o the trustee has failed to institute such proceeding within 60
days after such notice, request and offer, and has not received
from the holders of a majority in aggregate principal amount of
the notes then outstanding a direction inconsistent with such
request within 60 days after such notice, request and offer.
However, the above limitations do not apply to a suit instituted by a
holder for the enforcement of payment of the principal of or interest on any
note on or after the applicable due date or the right to convert the note in
accordance with the indenture.
Generally, the holders of not less than a majority of the aggregate
principal amount of outstanding notes may waive any default or event of
default unless:
o we fail to pay principal or interest on any note when due;
o we fail to convert any note into Class A Subordinate Voting
Stock in accordance with the provisions of the note and the
indenture; or
o we fail to comply with any of the provisions of the indenture
that would require the consent of the holder of each outstanding
note affected to waive such failure.
We are required to furnish to the trustee, on an annual basis, a
statement by our officers as to whether or not MEC, to the officer's
knowledge, is in default in the performance or observance of any of the terms,
provisions and conditions of the indenture, specifying any known defaults.
Modification and Waiver
We and the trustee may amend or supplement the indenture or the notes
with the consent of the holders of a majority in
31
aggregate principal amount of the outstanding notes. In addition, the holders
of a majority in aggregate principal amount of the outstanding notes may waive
our compliance in any instance with any provision of the indenture without
notice to the note holders. However, no amendment, supplement or waiver may be
made without the consent of the holder of each outstanding note if such
amendment, supplement or waiver would:
o change the stated maturity of the principal of, or interest on,
any note;
o reduce the principal amount of or any interest on any note;
o reduce the amount of principal payable upon acceleration of the
maturity of any note;
o change the place or currency of payment of principal of, or any
interest on, any note;
o impair the right to institute suit for the enforcement of any
payment on, or with respect to, any note;
o modify the provisions with respect to the purchase right of the
holders upon a change in control in a manner adverse to holders;
o modify the subordination provisions in a manner materially
adverse to the holders of notes;
o adversely affect the right of holders to convert notes other
than as provided in the indenture;
o reduce the percentage in principal amount of outstanding notes
required for modification or amendment of the indenture;
o reduce the percentage in principal amount of outstanding notes
necessary for waiver of compliance with certain provisions of
the indenture or for waiver of certain defaults; or
o modify provisions with respect to modification and waiver
(including waiver of events of default), except to increase the
percentage required for modification or waiver or to provide for
consent of each affected note holder.
We and the trustee may amend or supplement the indenture or the notes
without notice to, or the consent of, the note holders to, among other things,
cure any ambiguity, defect or inconsistency or make any other change that does
not, in the good faith opinion of our board of directors and the trustee,
adversely affect the rights of any note holder in any material respect.
Consolidation, Merger and Sale of Assets
We may not consolidate with or merge into any person in a transaction
in which we are not the surviving person or convey, transfer or lease our
properties and assets substantially as an entirety to any successor person,
unless:
o the successor person, if any, is a corporation organized and
existing under the laws of the United States, Canada, any state
of the United States, any province of Canada or the District of
Columbia and assumes our obligations on the notes and under the
indenture;
o immediately after giving effect to the transaction, no default
or event of default shall have occurred and be continuing; and
o other conditions specified in the indenture are met.
Satisfaction and Discharge
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We may discharge our obligations under the indenture while notes
remain outstanding if (1) all outstanding notes have or will become due and
payable at their scheduled maturity within one year or (2) all outstanding
notes are scheduled for redemption within one year, and, in either case, we
have deposited with the trustee or a paying agent an amount sufficient to pay
and discharge all outstanding notes on the date of their scheduled maturity or
the scheduled date of redemption; provided, however, that the foregoing shall
not discharge our obligation to effect conversion, registration of transfer or
exchange of securities in accordance with the terms of
the indenture.
Transfer and Exchange
We have initially appointed the trustee as the security registrar,
paying agent and conversion agent, acting through its corporate trust office.
We reserve the right to:
o vary or terminate the appointment of the security registrar,
paying agent or conversion agent;
o act as the paying agent;
o appoint additional paying agents or conversion agents; or
o approve any change in the office through which any security
registrar or any paying agent or conversion agent acts.
Purchase and Cancellation
All notes surrendered for payment, redemption, registration of
transfer or exchange or conversion shall, if surrendered to any person other
than the trustee, be delivered to the trustee. All notes delivered to the
trustee shall be cancelled promptly by the trustee. No notes shall be
authenticated in exchange for any notes cancelled as provided in the
indenture.
We may, to the extent permitted by law, purchase notes in the open
market or by tender offer at any price or by private agreement. Any notes
purchased by us may, to the extent permitted by law, be reissued or resold or
may, at our option, be surrendered to the trustee for cancellation. Any notes
surrendered for cancellation may not be reissued or resold and will be
promptly cancelled. Any notes held by us or one of our subsidiaries shall be
disregarded for voting purposes in connection with any notice, waiver, consent
or direction requiring the vote or concurrence of note holders.
Replacement of Notes
We will replace mutilated, destroyed, stolen or lost notes at your
expense upon delivery to the trustee of the mutilated notes, or evidence of
the loss, theft or destruction of the notes satisfactory to us and the
trustee. In the case of a lost, stolen or destroyed note, indemnity
satisfactory to the trustee and us may be required at the expense of the
holder of such note before a replacement note will be issued.
Governing Law
The indenture and the notes are governed by, and construed in
accordance with, the laws of the State of New York.
Concerning the Trustee
The Bank of New York has agreed to serve as the trustee under the
indenture. The trustee will be permitted to deal with us and any of our
affiliates with the same rights as if it were not trustee. However, under the
Trust Indenture Act, if the trustee acquires any conflicting interest and
there exists a default with respect to the
33
notes, the trustee must eliminate such conflict or resign.
The holders of a majority in principal amount of all outstanding
notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy or power available to the trustee.
However, any such direction may not conflict with any law or the indenture,
may not be unduly prejudicial to the rights of another holder or the trustee
and may not involve the trustee in personal liability.
Book-Entry, Delivery and Form
The notes were originally sold in the United States in reliance on
Rule 144A or in offshore transactions in reliance on Regulation S and were
initially issued in the form of two permanent global securities. The global
securities were deposited with the trustee as custodian for DTC and registered
in the name of a nominee of DTC. Except as set forth below, the global
security may be transferred, in whole and not in part, only to DTC or another
nominee of DTC. The notes sold under this prospectus will be represented by
new unrestricted global securities.
DTC has advised us that it is:
o a limited purpose trust company organized under the laws of the
State of New York;
o a member of the Federal Reserve System;
o a "clearing corporation" within the meaning of the New York
Uniform Commercial Code; and
o a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act.
DTC was created to hold securities of institutions that have accounts
with DTC (the "participants") and to facilitate the clearance and settlement
of securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, which may include the
initial purchasers, banks, trust companies, clearing corporations and certain
other organizations. Access to DTC's book-entry system is also available to
others such as banks, brokers, dealers and trust companies (the "indirect
participants") that clear through or maintain a custodial relationship with a
participant, whether directly or indirectly.
We expect that pursuant to procedures established by DTC upon the
deposit of the new global securities with DTC, DTC will credit, on its
book-entry registration and transfer system, the principal amount of notes
represented by such global securities to the accounts of participants. The
accounts to be credited shall be designated by the initial purchasers.
Ownership of beneficial interests in the global securities will be limited to
participants or persons that may hold interests through participants.
Ownership of beneficial interests in the global securities will be shown on,
and the transfer of those beneficial interests will be effected only through,
records maintained by DTC (with respect to participants' interests), the
participants and the indirect participants. The laws of some jurisdictions may
require that certain purchasers of securities take physical delivery of such
securities in definitive form. These limits and laws may impair the ability to
transfer or pledge beneficial interests in the global securities. Investors
may also hold their interests in the global note directly through Euroclear
Bank S.A./N.V., as operator of the Euroclear System ("Euroclear") and
Clearstream Banking, societe anonyme ("Clearstream"), if they are participants
in such systems, or indirectly through organizations that are participants in
such systems. Euroclear and Clearstream will hold interests in the global note
on behalf of their participants through their respective depositaries, which
in turn will hold such interests in the global note in customers' securities
accounts in the depositaries' names on the books of DTC.
Owners of beneficial interests in global securities who desire to
convert their interests into Class A Subordinate Voting Stock should contact
their brokers or other participants or indirect participants through whom they
hold such beneficial interests to obtain information on procedures, including
proper forms and cut-off times,
34
for submitting requests for conversion.
So long as DTC, or its nominee, is the registered owner or holder of
a global security, DTC or its nominee, as the case may be, will be considered
the sole owner or holder of the notes represented by the global security for
all purposes under the indenture and the notes. In addition, no owner of a
beneficial interest in a global security will be able to transfer that
interest except in accordance with the applicable procedures of DTC, in
addition to those provided for under the indenture and, if applicable, those
of Euroclear Bank S.A./N.V., as operator of the Euroclear and Clearstream.
Except as set forth below, as an owner of a beneficial interest in the global
security, you will not be entitled to have the notes represented by the global
security registered in your name, will not receive or be entitled to receive
physical delivery of certificated securities and will not be considered to be
the owner or holder of any notes under the global security. We understand that
under existing industry practice, if an owner of a beneficial interest in the
global security desires to take any action that DTC, as the holder of the
global security, is entitled to take, DTC would authorize the participants to
take such action. Additionally, in such case, the participants would authorize
beneficial owners owning through such participants to take such action or
would otherwise act upon the instructions of beneficial owners owning through
them.
We will make payments of principal and interest (including any
additional interest) on the notes represented by the global security
registered in the name of and held by DTC or its nominee to DTC or its
nominee, as the case may be, as the registered owner and holder of the global
security. Neither we, the trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial interests in the global security or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
We expect that DTC or its nominee, upon receipt of any payment of
principal or interest (including additional interest) on the global security,
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of the global
security as shown on the records of DTC or its nominee. We also expect that
payments by participants or indirect participants to owners of beneficial
interests in the global security held through such participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of such participants or indirect participants.
We will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial interests in the
global security for any note or for maintaining, supervising or reviewing any
records relating to such beneficial interests or for any other aspect of the
relationship between DTC and its participants or indirect participants or the
relationship between such participants or indirect participants and the owners
of beneficial interests in the global security owning through such
participants.
Transfers between participants in DTC will be effected in the
ordinary way in accordance with DTC rules and will be settled in same-day
funds. Transfers between participants in Euroclear and Clearstream will be
effected in the ordinary way in accordance with their respective rules and
operating procedures. If a holder requires physical delivery of a definitive
note for any reason, including to sell notes to persons in jurisdictions that
require such delivery of such notes or to pledge such notes, such holder must
transfer its interest in the relevant global note in accordance with the
normal procedures of DTC and the procedures set forth in the indenture.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream participants, on the other, will
be effected in DTC in accordance with DTC rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear
or Clearstream, as the case may be, by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(Brussels time). Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by delivering or receiving interests in the global note in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a
Euroclear or Clearstream participant
35
purchasing an interest in the global note for a DTC participant will be
credited during the securities settlement processing day (which must be a
business day for Euroclear or Clearstream, as the case may be) immediately
following the DTC settlement date, and such credit of any transactions
interests in the global note settled during such processing day will be
reported to the relevant Euroclear or Clearstream participant on such date.
Cash received in Euroclear or Clearstream as a result of sales of interests in
a global note by or through a Euroclear or Clearstream participant to a DTC
participant will be received with value on the DTC settlement date, but will
be available in the relevant Euroclear or Clearstream cash account only as of
the business day following settlement in DTC.
DTC has advised us that it will take any action permitted to be taken
by a holder of notes only at the direction of one or more participants to
whose account the DTC interests in the global security is credited and only in
respect of such portion of the aggregate principal amount of notes as to which
such participant or participants has or have given such direction. However, if
DTC notifies us that it is unwilling to be a depositary for the global
security or ceases to be a clearing agency or there is an event of default
under the notes, DTC will exchange the global security for certificated
securities which it will distribute to its participants and which will be
legended, if required. Although we expect that DTC, Euroclear and Clearstream
will agree to the foregoing procedures in order to facilitate transfers of
interests in each global note among participants of DTC, Euroclear and
Clearstream, DTC, Euroclear and Clearstream are under no obligation to perform
or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither we, the initial purchasers, nor the trustee
will have any responsibility for the performance or nonperformance by DTC,
Euroclear or Clearstream or their participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
The information in this section concerning DTC, Clearstream,
Euroclear and DTC's book-entry system has been obtained from sources that we
believe to be reliable, but we do not take responsibility for the accuracy
thereof.
DESCRIPTION OF CAPITAL STOCK
Capital Stock
This section describes the general terms of our capital stock. The
capital stock and the rights of common stockholders are subject to the
applicable provisions of the General Corporation Law of the State of Delaware
and our restated certificate of incorporation.
Our authorized capital stock consists of 310,000,000 shares of Class
A Subordinate Voting Stock, par value $0.01 per share, and 90,000,000 shares
of Class B Stock, par value $0.01 per share. As of January 31,2003, there were
48,674,796 shares of Class A Subordinate Voting Stock outstanding and
58,466,056 shares of Class B Stock outstanding (all of which shares of Class B
Stock are owned, directly or indirectly, by Magna International and are
convertible into shares of Class A Subordinate Voting Stock).
Our Class A Subordinate Voting Stock trades on the Nasdaq National
Market under the symbol "MECA" and on the Toronto Stock Exchange under the
symbol "MEC.A". Until February 26, 2003, our Class A Subordinate Voting Stock
traded on the Nasdaq National Market under the symbol "MIEC" and on the
Toronto Stock Exchange under the symbol "MIE.A". There is no market for our
Class B Stock.
Class A Subordinate Voting Stock
The holders of shares of our Class A Subordinate Voting Stock are
entitled:
o to one vote for each share of Class A Subordinate Voting Stock held
(together with the holders of our Class B Stock who are entitled to vote
at such meetings on the basis of 20 votes per share of Class B Stock
held) at all meetings of our stockholders other than meetings of the
holders of another class or series of shares;
36
o on a pro rata basis with the holders of our Class B Stock, to receive any
dividends (except for certain stock dividends as described below) that
may be declared by our board of directors; and
o after the payment of all our liabilities, to receive, on a pro rata basis
with the holders of our Class B Stock, all our property and net assets
available for distribution in the event of our liquidation, dissolution
or winding-up, whether voluntary or involuntary, or any other distribution
of our assets among our stockholders for the purpose of winding-up our
affairs.
Under our restated certificate of incorporation, our board of
directors may declare a simultaneous dividend payable on our Class A
Subordinate Voting Stock in shares of our Class A Subordinate Voting Stock,
and payable on our Class B Stock in shares of our Class A Subordinate Voting
Stock or in shares of our Class B Stock. However, no dividend payable in
shares of our Class B Stock may be declared on shares of our Class A
Subordinate Voting Stock.
The holders of shares of our Class A Subordinate Voting Stock have
additional voting rights under our corporate constitution. See "Corporate
Constitution".
Our restated certificate of incorporation provides that if the
approval of the holders of our Class A Subordinate Voting Stock voting as a
separate class is required, such approval shall be given by a majority of the
votes cast at a meeting of such holders, other than the votes attaching to our
Class A Subordinate Voting Stock beneficially owned, directly or indirectly,
by Magna International or by any person who, by agreement, is acting jointly
with Magna International or over which Magna International or any such person
exercises direct or indirect control or direction. These limitations do not
apply to any other holder of our Class A Subordinate Voting Stock.
Class B Stock
The holders of our Class B Stock are entitled:
o to 20 votes for each share of Class B Stock held (together with the
holders of our Class A Subordinate Voting Stock who are entitled to vote
at such meetings on the basis of one vote per share held) at all meetings
of our stockholders other than meetings of the holders of another class
or series of shares;
o on a pro rata basis with the holders of our Class A Subordinate Voting
Stock, to receive any dividends (except for certain stock dividends as
described below) that may be declared by our board of directors;
o after the payment of all our liabilities, to receive, on a pro rata basis
with the holders of our Class A Subordinate Voting Stock, all our
property and net assets available for distribution in the event of our
liquidation, dissolution or winding-up, whether voluntary or involuntary,
or any other distribution of our assets among our stockholders for the
purpose of winding-up our affairs; and
o from time to time, to convert shares of our Class B Stock into shares of
our Class A Subordinate Voting Stock on a one-for-one basis.
Under our restated certificate of incorporation, our board of
directors may declare a simultaneous dividend payable on our Class A
Subordinate Voting Stock in shares of our Class A Subordinate Voting Stock,
and payable on our Class B Stock in shares of our Class A Subordinate Voting
Stock or in shares of our Class B Stock. However, no dividend payable in
shares of our Class B Stock may be declared on shares of our Class A
Subordinate Voting Stock.
None of our Class B Stock may be issued (other than in connection
with a stock dividend) without the approval by ordinary resolution of the
holders of our Class B Stock, voting as a separate class.
37
Holders of our Class B Stock have additional voting rights under our
corporate constitution. See "Corporate Constitution".
Amendments to Stock Provisions and Other Matters
Any amendment to our restated certificate of incorporation to add,
delete or vary any right, privilege, restriction or condition attaching to the
Class A Subordinate Voting Stock that adversely affects the rights of the
holders of Class A Subordinate Voting Stock requires the prior written
approval of the holders of all our outstanding Class A Subordinate Voting
Stock or a resolution authorized by at least two-thirds of the votes cast at a
separate meeting of the holders of the Class A Subordinate Voting Stock called
and held for that purpose (provided, however, that an amendment to create
stock ranking in priority to or on a parity with the Class A Subordinate
Voting Stock shall be deemed not to adversely affect the rights of the holders
of Class A Subordinate Voting Stock). It is further required that a majority
of the votes cast at such a meeting, or in any other vote by Class A
Subordinate Voting Stock holders voting as a class, not be votes attaching to
the Class A Subordinate Voting Stock beneficially owned, directly or
indirectly, by Magna International, or by any person who, by agreement, acts
jointly with Magna International or over which Magna International or any such
person exercises direct or indirect control or direction.
Any amendment to our restated certificate of incorporation to add,
delete or vary any right, privilege, restriction or condition attaching to the
Class B Stock or to create stock ranking in priority to or on a parity with
the Class B Stock requires the prior written approval of the holders of all
our outstanding Class B Stock or a resolution authorized by at least
two-thirds of the votes cast at a separate meeting of the holders of Class B
Stock called and held for that purpose.
Our Class A Subordinate Voting Stock is not redeemable, has no
preemptive or conversion rights and is not liable for further assessments or
calls. Our Class B Stock is not redeemable, has no preemptive rights and is
not liable for further assessments or calls. Each share of Class B Stock may
be converted at any time into one fully-paid share of Class A Subordinate
Voting Stock. All shares of Class A Subordinate Voting Stock offered hereby
will be fully paid and non-assessable.
Takeover Protection
Under applicable law, an offer to purchase shares of our Class B
Stock would not necessarily result in an offer to purchase shares of our Class
A Subordinate Voting Stock. Magna International, as the holder of all our
issued and outstanding Class B Stock, has entered into a trust agreement with
Computershare Trust Company of Canada (as successor to Montreal Trust Company
of Canada) and us. This trust agreement provides that the holders of our Class
A Subordinate Voting Stock will not be deprived of any rights under applicable
takeover bid laws to which they would have been entitled in the event of a
takeover bid (which may include a private offer to purchase) if our Class B
Stock and the Class A Subordinate Voting Stock were a single class of stock.
For these purposes, a takeover bid is generally defined as an offer to acquire
any of our outstanding equity or voting stock where the party making the offer
would, if the offer were accepted, own more than 20% of the shares of any
class of our stock.
Under the trust agreement, Magna International agrees not to sell any
of our Class B Stock that it owns, directly or indirectly, to any person under
circumstances in which (1) the offer is a takeover bid for purposes of Ontario
securities laws and (2) those securities laws would have required the same
offer to be made to all holders of our Class A Subordinate Voting Stock if the
offer had been made for Class A Subordinate Voting Stock rather than Class B
Stock. One circumstance where Ontario securities laws would not require the
same offer to be made to all holders of Class A Subordinate Voting Stock is
where Magna International, as the only holder of our Class B Stock, sells
shares of Class B Stock for a price not exceeding 115% of the average of the
closing prices of the Class A Subordinate Voting Stock over the 20 trading
days immediately preceding the sale.
This restriction will not apply if: (1) the sale is made pursuant to
an offer to purchase only part of the Class B Stock made to all holders of our
Class B Stock and an identical offer in all material respects is made
38
concurrently to purchase our Class A Subordinate Voting Stock, which identical
offer has no condition attached other than the right not to take up and pay
for shares tendered if no shares are purchased pursuant to the offer for Class
B Stock; or (2) there is a concurrent unconditional offer to purchase all our
Class A Subordinate Voting Stock at a price per share at least as high as the
highest price per share paid pursuant to the takeover bid for the Class B
Stock.
The trust agreement contains provisions for the authorization of
action by the trustee to enforce the rights of the holders of our Class A
Subordinate Voting Stock. The trustee only has to enforce these rights if
either we or the holders of our Class A Subordinate Voting Stock agree to pay
the trustee's costs and to indemnify the trustee. A holder of our Class A
Subordinate Voting Stock is not entitled to take action unless the trustee
refused to act after a request to do so by holders of at least 10% of our
outstanding Class A Subordinate Voting Stock.
The trust agreement prohibits Magna International from disposing of
any shares of our Class B Stock unless the disposition is conditional upon the
person acquiring those shares becoming a party to the trust agreement.
Conversion of Class B Stock into Class A Subordinate Voting Stock and the
subsequent sale of that Class A Subordinate Voting Stock is excluded from this
prohibition.
The trust agreement provides that it may not be amended and material
provisions cannot be waived, without the approval of the Toronto Stock
Exchange and at least two-thirds of the votes cast by the holders of the Class
A Subordinate Voting Stock. The two-thirds majority must include a simple
majority of the votes cast by holders of the Class A Subordinate Voting Stock,
excluding any of our principal stockholders and their affiliates and any
persons who have an agreement to purchase Class B Stock on terms that would
constitute a sale for the purposes of the trust agreement.
The trust agreement does not prevent the holder of our Class B Stock
from:
o granting a security interest in shares of our Class B Stock in connection
with a bona fide borrowing, provided that the secured party concurrently
agrees in writing to become a party to the trust agreement; or
o selling, transferring or otherwise disposing of all or any of the shares
of our Class B Stock to a company controlled by or under common control
with the holder, provided that the transferee concurrently agrees in
writing to become a party to the trust agreement.
No provision of the trust agreement limits the rights of any holder
of our Class A Subordinate Voting Stock under any applicable securities
legislation.
39
CORPORATE CONSTITUTION
We have adopted certain organizational and operating policies and
principles used by Magna International to define the rights of employees and
investors to participate in profits and growth and to impose discipline on
management, some of which have been embodied in our corporate constitution.
The following description summarizes the material terms and provisions of our
corporate constitution, which cannot be amended or varied without the prior
approval of the holders of a majority of our Class A Subordinate Voting Stock
(not including shares held by Magna International or any person who, by
agreement, is acting jointly with Magna International or over which Magna
International or any such person exercises direct or indirect control or
direction) and our Class B Stock, each voting as a separate class.
Board of Directors
Our corporate constitution provides that, unless otherwise approved
by the holders of our Class A Subordinate Voting Stock and our Class B Stock,
each voting as a separate class, (1) a majority of the members of our board of
directors shall be individuals who are not our officers or our employees or
individuals related to these persons, and (2) at least two of our directors
shall be individuals who are not our officers or employees, or directors,
officers or employees of any of our affiliates, including Magna International,
nor persons related to any such officers, employees or directors.
Employee Profit Sharing Plan
We are currently examining the establishment of an employee profit
sharing plan pursuant to which a percentage of our pre-tax profits before
profit sharing for each fiscal year would be allocated to our employee profit
sharing plan and/or otherwise be distributed to our employees or the employees
of our subsidiaries who do not participate in a similar plan, and who do not
receive management incentive bonuses, during that year or the immediately
following fiscal year.
Required Allocations
Dividends
The holders of our common stock are entitled to receive dividends, as
and when declared by our board of directors, out of any legally available
funds as follows. In respect of our fiscal years commencing January 1, 2004
and 2005, unless otherwise approved by ordinary resolution of the holders of
each of our Class A Subordinate Voting Stock and our Class B Stock, each
voting as a separate class, the holders of our Class A Subordinate Voting
Stock and our Class B Stock will be entitled to receive and we will pay, as
and when declared by our board of directors out of funds properly applicable
to the payment of dividends, non-cumulative dividends in respect of each
fiscal year so that the aggregate of the dividends paid or payable in respect
of that year is at least equal to 10% of our after-tax profits for that fiscal
year; in respect of each fiscal year thereafter, holders of our Class A
Subordinate Voting Stock and our Class B Stock will be entitled to receive, as
and when declared by our board of directors out of funds properly applicable
to the payment of dividends, non-cumulative dividends in respect of such
fiscal year so that the aggregate of the dividends paid or payable in respect
of that year shall be equal to the greater of (1) 10% of our after-tax profits
for that fiscal year and (2) an amount such that the aggregate of the
dividends paid or payable in respect of that fiscal year and the two
immediately preceding fiscal years is at least 20% of our after-tax profits
for such three-year period.
For further information regarding dividends payable with respect to
our capital stock, see "Description of Capital Stock--Capital Stock" and
"Dividend Policy".
40
Social Objectives
Pursuant to our corporate constitution, a maximum of 2% of our annual
pre-tax profits beginning with 2004 shall be allocated to the promotion of
social objectives during each fiscal year or the immediately following fiscal
year. Social objectives are objectives that are in our executive management's
opinion of a political, patriotic, philanthropic, charitable, educational,
scientific, artistic, social or other useful nature to the communities in
which we or our affiliates operate.
Incentive Bonuses
Our corporate constitution provides that the incentive bonuses paid
or payable to our corporate management in respect of each fiscal year,
beginning with 2004, shall not, in the aggregate, exceed 6% of our pre-tax
profits before profit sharing for such fiscal year. Our executive management,
with the approval of our board of directors or a duly appointed committee of
our board, has the right to allocate the amount to be paid to individuals
within our corporate management as well as to determine the timing and manner
of payment (whether in cash or in our shares or otherwise).
Authorized Capital Stock
Our corporate constitution provides that no resolution of our board
of directors purporting to:
o increase the maximum number of authorized shares of any class of our
stock; or
o create a new class or series of stock having voting rights of any kind
(other than on default of payment of dividends) or having rights to
participate in our profits in whatever manner (other than a class or
series convertible into existing classes of stock or a class or series of
stock having a fixed dividend or a dividend determined without regard to
profits);
shall be effective unless such resolution is approved by ordinary resolution
of the holders of each of our Class A Subordinate Voting Stock and our Class B
Stock voting separately as a class.
41
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the material United States federal income tax
consequences of the purchase, ownership and disposition of the notes and the
shares of Class A Subordinate Voting Stock issuable upon conversion of the
notes (each, a "Security" and collectively the "Securities"). This summary is
based on the U.S. Internal Revenue Code of 1986, as amended (the "Code"),
administrative pronouncements, judicial decisions and existing and proposed
Treasury Regulations, all of which are subject to change which change may be
on a retroactive basis. This summary discusses only the principal U.S. federal
income tax consequences to those beneficial owners ("Holders") who purchase
the notes in the initial offering at their "issue price", as defined in
Section 1273 of the Code and who hold the Securities as capital assets within
the meaning of Section 1221 of the Code. This summary does not address the tax
treatment of Holders that may be subject to special tax rules, including
certain financial institutions, insurance companies, dealers in securities or
foreign currencies, and U.S. persons whose functional currency (as defined in
Section 985 of the Code) is not the U.S. dollar. Persons considering the
purchase of a Security should consult their tax advisors with regard to the
application of the United States and other income tax laws to their particular
situations.
For purposes of this discussion, "U.S. Holder" means a Holder of a
Security that is (i) a citizen or resident of the United States, (ii) a
corporation created or organized under the laws of the U.S., (iii) an estate,
the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust if (A) the administration of the
trust is subject to the primary supervision of a court within the United
States and one or more United States persons have the authority to control all
of its substantial decisions or (B) it was in existence on August 20, 1996 and
has elected to continue to be treated as a United States trust. If a
partnership (including for this purpose any entity treated as a partnership
for U.S. federal income tax purposes) is a beneficial owner of any notes or
shares of Class A Subordinate Voting Stock, the treatment of a partner in that
partnership will generally depend on the status of such partner and the
activities of such partnership. For purposes of this discussion, a "Non-U.S.
Holder" means any Holder of a Security that is not a U.S. Holder.
U.S. Holders
The following is a summary of the material U.S. federal income tax
consequences with respect to the purchase, ownership and disposition of the
Securities by U.S. Holders.
Interest
Interest paid on a note will generally be taxable to a U.S. Holder as
ordinary income at the time the interest is received or accrued in accordance
with such U.S. Holder's method of tax accounting.
Sale, Exchange, Redemption, Retirement or Other Disposition of the
Notes
Upon the sale, exchange, redemption, retirement or other disposition
of a note other than conversion into shares of Class A Subordinate Voting
Stock, a U.S. Holder generally will recognize taxable gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption,
retirement or other disposition (not including any amount attributable to
accrued but unpaid interest) and such U.S. Holder's adjusted tax basis in the
note. Any such gain or loss will generally be capital gain or loss and will be
long-term capital gain or loss if, at the time of disposition, the note was
held for more than one year.
Constructive Dividends Upon Adjustment of Conversion Price
The conversion price of the notes may be adjusted under certain
circumstances. Section 305 of the Code treats certain actual or constructive
distributions of stock with respect to stock or convertible securities as a
distribution taxable as a dividend, to the extent of current or accumulated
earnings and profits. Under applicable Treasury Regulations, an adjustment of
the conversion price may, under certain circumstances, be treated as a
42
constructive dividend to the extent that it increases the proportional
interest of a U.S. Holder of a note in fully diluted shares of Class A
Subordinate Voting Stock, whether or not the Holder ever converts the note
into such stock. Generally, a U.S. Holder's tax basis in a note will be
increased by the amount of any constructive dividend. Similarly, a failure to
adjust the conversion price of the notes to reflect a stock dividend or
similar event could give rise to constructive dividend income to U.S. Holders
of shares of Class A Subordinate Voting Stock in certain circumstances.
Conversion into Shares of Class A Subordinate Voting Stock
No gain or loss will generally be recognized for U.S. federal income
tax purposes on conversion of the notes solely into shares of Class A
Subordinate Voting Stock, except with respect to any cash received in lieu of
a fraction share of a Class A Subordinate Voting Stock or any accrued interest
not previously included in the U.S. Holder's income. The tax basis for the
shares of Class A Subordinate Voting Stock received upon conversion will be
equal to the adjusted tax basis of the converted notes (exclusive of any tax
basis allocable to a fractional share), and the holding period of such shares
of Class A Subordinate Voting Stock will generally include the holding period
of such notes.
Upon conversion by the Company of the notes into Class A Subordinate
Voting Stock, cash received in lieu of a fractional share of Class A
Subordinate Voting Stock will generally be treated as a payment in exchange
for such fractional share. The receipt of such cash will generally result in
gain or loss measured by the difference between the cash the U.S. Holder
received for the fractional share and the U.S. Holder's adjusted tax basis
allocable to the fractional share.
Dividends on Shares of Class A Subordinate Voting Stock
Distributions made to a U.S. Holder with respect to shares of Class A
Subordinate Voting Stock up to the amount of the Company's current or
accumulated earnings and profits, as determined for U.S. federal income tax
purposes, will generally be taxable as ordinary dividend income. Provided
certain conditions are met, U.S. Holders that are corporations should be
entitled to the dividends-received deduction with respect to amounts treated
as ordinary dividend income. To the extent in excess of the Company's current
or accumulated earnings and profits, such distributions will first be treated
as a tax-free return of capital to the extent of the U.S. Holder's tax basis
in the shares of Class A Subordinate Voting Stock with respect to which the
distribution was made, and thereafter as a gain from the sale or exchange of
such shares of Class A Subordinate Voting Stock.
Disposition of Shares of Class A Subordinate Voting Stock
Upon a sale or exchange of shares of Class A Subordinate Voting
Stock, a U.S. Holder will recognize gain or loss equal to the difference
between the amount realized on such sale or exchange and the U.S. Holder's
adjusted tax basis in such shares of Class A Subordinate Voting Stock. Any
such gain or loss will generally be capital gain or loss and will be long-term
capital gain or loss if, at the time of the disposition, the shares were held
for more than one year.
Information Reporting and Backup Withholding
A U.S. Holder may be subject to U.S. information reporting with
respect to interest paid on the notes, to dividends paid on the shares of
Class A Subordinate Voting Stock and to cash proceeds from the sale, exchange,
redemption, or retirement or other disposition of the notes or sale or
exchange of the shares of Class A Subordinate Voting Stock, unless such U.S.
Holder is corporation or comes within certain other exempt categories and,
when required, demonstrates this fact. A U.S. Holder that is subject to U.S.
information reporting generally will also be subject to U.S. backup
withholding tax unless such U.S. Holder provides certain information to the
Company or its agent, including a correct taxpayer identification number and a
certification that it is not subject to backup withholding. A U.S. Holder that
does not comply with these requirements may be subject to certain penalties.
Any amounts withheld from a payment to a U.S. Holder under the backup
withholding provision is generally creditable against the U.S. Holder's
federal income tax liability.
43
Non-U.S. Holders
The following discussion is a summary of the principal U.S. federal
income consequences resulting from the purchase, ownership and disposition of
the Securities by Non-U.S. Holders.
Payment of Interest
Generally, interest income of a Non-U.S. Holder that is not
effectively connected with a U.S. trade or business will be subject to a
withholding tax at a 30% rate, or lower rate specified by an applicable income
tax treaty. Under the Canada/U.S. Income Tax Treaty, for Non-U.S. Holders
resident in Canada that do not qualify for the exemption discussed below, the
withholding tax rate on interest will generally be 10%. However, interest
income earned on the notes by a Non-U.S. Holder may qualify for an exemption,
referred to as the portfolio interest exemption, and as a result should not be
subject to U.S. federal withholding tax. Interest paid on the notes to a
Non-U.S. Holder generally will qualify for the portfolio interest exemption
if:
1. the interest is not effectively connected with the conduct of a trade or
business within the U.S. by the Non-U.S. Holder;
2. the Non-U.S. Holder does not actually or constructively own 10% or more
of the total voting power of all classes of the Company's stock entitled
to vote;
3. the Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company through stock ownership (for this purpose, the
Holder of notes would be deemed to own constructively the Class A
Subordinate Voting Stock into which it could be converted);
4. the Non-U.S. Holder, under penalty of perjury, certifies to the Company
or its agent that it is not a U.S. person and provides its name, address
and taxpayer identification number, if applicable, or otherwise satisfies
the applicable identification requirements; and
5. the Non-U.S. Holder is not a bank receiving interest pursuant to a loan
agreement entered into in the ordinary course of its trade or business.
If a Non-U.S. Holder satisfies certain requirements, the
certification described above may be provided by a securities clearing
organization, a bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business.
The Treasury Regulations require that foreign partnerships and
certain foreign trusts must provide additional documentation which (i)
certifies the U.S. or foreign status of the individual partners, beneficiaries
or owners of the partnership or trust and (ii) provides certain information
regarding the individual partners, beneficiaries, or owners including their
names and addresses.
A Non-U.S. Holder that is not exempt from tax under these rules will
be subject to U.S. federal income tax withholding at a rate of 30% on payments
of interest, unless the interest is effectively connected with the conduct of
a U.S. trade or business of the holder or a lower treaty rate applies and, in
either case, the Non-U.S. Holder provides proper certification as to the
holder's exemption from withholding. If the interest is effectively connected
with the conduct of a U.S. trade or business, it will be subject to the U.S.
federal income tax on net income that applies to U.S. persons generally, and
if a foreign corporation, it may also be subject to a U.S. branch profits tax
on its effectively connected earnings and profits at a 30% rate, or a lower
rate as may be specified by an applicable income tax treaty. Non-U.S. Holders
should consult applicable income tax treaties, which may provide different
rules. Even though effectively connected interest is subject to income tax,
and may be subject to the branch profits tax, it is not subject to withholding
tax if the Non-U.S. Holder delivers a property executed IRS Form W-8ECI to the
Company or its agent.
Constructive Dividends Upon Adjustment of Conversion Price
44
The conversion price of the notes may be adjusted in certain
circumstances. An adjustment may give rise to a deemed distribution to
Non-U.S. Holders of the notes. See "U.S. Holders - Constructive Dividends on
Notes Upon Adjustment of Conversion Price" above. In that case, the deemed
distribution would be subject to the rules below regarding withholding of U.S.
federal income tax on dividends in respect of shares of Class A Subordinate
Voting Stock. See "Dividends on Shares of Class A Subordinate Voting Stock"
below.
Conversion of the Notes
A Non-U.S. Holder generally will not be subject to U.S. federal
income tax on the conversion of a note into shares of Class A Subordinate
Voting Stock. To the extent a Non-U.S. Holder receives cash in lieu of a
fractional share of Class A Subordinate Voting Stock on conversion, that cash
may give rise to gain that would be subject to the rules described below with
respect to the sale or exchange of a note or shares of Class A Subordinate
Voting Stock.
Dividends on Shares of Class A Subordinate Voting Stock
Subject to the discussion below of backup withholding, dividends, if
any, paid on shares of Class A Subordinate Voting Stock to a Non-U.S. Holder
generally will be subject to a 30% U.S. federal withholding tax, subject to
reduction for Non-U.S. Holders eligible for the benefits of certain income tax
treaties. Dividends for this purpose may include stock distributions treated
as deemed dividends as discussed in "U.S. Holders - Constructive Dividends on
Notes Upon Adjustment of Conversion Price" above. Under the Treasury
Regulations, Non-U.S. Holders will be required to satisfy certain
certification requirements to claim treaty benefits.
Except to the extent otherwise provided under an applicable tax
treaty, a Non-U.S. Holder generally will be taxed in the same manner as a U.S.
Holder on dividends paid, or deemed paid, that are effectively connected with
the conduct of a trade or business in the U.S. by the Non-U.S. Holder, and if
required by a tax treaty, is attributable to a permanent establishment
maintained in the United States. If that Non-U.S. Holder is a foreign
corporation, it may also be subject to a U.S. branch profits tax on its
effectively connected earnings and profits at a 30% rate, or a lower rate as
may be specified by an applicable income tax treaty. Under the Canada/U.S.
Income Tax Treaty, for Non-U.S. Holders resident in Canada the withholding tax
rate on dividends will generally be 15%.
Gain on Disposition of the Notes and Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal
income tax or withholding tax on gain realized on the sale, exchange,
redemption or retirement of a note, or the sale or exchange of shares of Class
A Subordinate Voting Stock, unless:
1. in the case of an individual Non-U.S. Holder, that holder is
present in the U.S. for 183 days or more in the taxable year of
the sale, exchange, redemption or retirement and certain other
requirements are met;
2. the gain is effectively connected with the conduct of a U.S.
trade or business of the Non-U.S. Holder; or
3. the Non-U.S. Holder holds (or has held, during the shorter of
the five-year period prior to the sale and the period the
Non-U.S. Holder has held the Class A Subordinate Voting Stock)
more than 5% of our Class A Subordinate Voting Stock and the
Company is (or has been during such period) a "United States
real property holding corporation" for U.S. federal income tax
purposes. The Company currently may be a United States real
property holding corporation.
Federal Estate Tax
The U.S. federal estate tax will not apply to notes owned by an
individual Non-U.S. Holder at the time of
45
his or her death, provided that (1) such Holder does not own 10% or more of
the total combined voting power of all classes of the Company's voting stock
(within the meaning of the Code and the Treasury Regulations) and (2) interest
on the notes would not have been, if received at the time of such Holder's
death, effectively connected with the Holder's conduct of a trade or business
in the United States. An individual Non-U.S. holder who owns shares of Class A
Subordinate Voting Stock at the time of his or her death, or who had made
certain lifetime transfers of an interest in shares of Class A Subordinate
Voting Stock while retaining certain powers, rights or interests in the stock,
will be required to include the value of that shares of Class A Subordinate
Voting Stock in his or her gross estate for U.S. federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
Backup Withholding and Information Reporting
The Company must report annually to the IRS and to each Non-U.S.
Holder the amount of any interest or dividends paid to that Non-U.S. Holder,
and tax withheld, if any, with respect to those payments. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which
the Non-U.S. Holder resides or is incorporated. However, U.S. backup
withholding and information reporting will not apply to payments of interest
or principal on the notes by the Company or its agent to a Non-U.S. Holder if
the Non-U.S. Holder satisfies the certification or identification requirements
described in "Non-U.S. Holders - Payment of Interest" above, unless the payor
knows or has reason to know that the Non-U.S. Holder is not entitled to an
exemption from information reporting or backup withholding tax. The payment of
the proceeds on the disposition of notes or shares of Class A Subordinate
Voting Stock to or through the U.S. office of a U.S. or foreign broker will be
subject to information reporting and backup withholding unless the owner
provides the certification described above or otherwise establishes an
exemption. The proceeds of the disposition by a Non-U.S. Holder of notes or
shares of Class A Subordinate Voting Stock effected outside the United States
to or through a foreign office of a broker generally will not be subject to
backup withholding or information reporting. However, if the broker is a U.S.
person or has certain connections to the United States, information reporting
requirements, but not backup withholding, will apply unless the broker has
documentary evidence in its files of the Holder's non-U.S. status and has not
actual knowledge, or reason to know, to the contrary or unless the holder
otherwise establishes an exemption.
THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF CERTAIN U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF NOTES
OR SHARES OF CLASS A SUBORDINATE VOTING STOCK. HOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF
OWNERSHIP AND DISPOSITION OF NOTES OR SHARES OF CLASS A SUBORDINATE VOTING
STOCK, INCLUDING THE EFFECT OF ANY FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER
TAX LAWS, AND ANY APPLICABLE INCOME OR ESTATE TAX TREATY.
USE OF PROCEEDS
We will not receive any proceeds from the sale by any selling
securityholder of the notes or the shares of Class A Subordinate Voting Stock.
PLAN OF DISTRIBUTION
The selling securityholders will be offering and selling all the
securities offered and sold under this prospectus. We will not receive any of
the proceeds from the offering of the notes or the shares of Class A
Subordinate Voting Stock by the selling securityholders.
However, selling securityholders may resell all or a portion of the
securities in open market transactions in reliance upon Rule 144 or, in the
case of the notes, Rule 144A under the Securities Act, provided they meet the
criteria and conform to the requirements of one of these rules. We are
registering the notes and shares of Class A Subordinate Voting Stock covered
by this prospectus to permit holders to conduct public secondary trading of
these
46
securities from time to time after the date of this prospectus. We have
agreed, among other things, to bear all expenses, other than underwriting
discounts, selling commissions and legal fees, in connection with the
registration and sale of the notes and the shares of Class A Subordinate
Voting Stock covered by this prospectus.
We have been advised by the selling securityholders that the selling
securityholders may sell all or a portion of the notes and shares of Class A
Subordinate Voting Stock beneficially owned by them and offered hereby from
time to time:
o directly; or
o through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, commissions or concessions from
the selling securityholders and/or from the purchasers of the notes and
shares of Class A Subordinate Voting Stock for whom they may act as
agent.
The notes and the shares of Class A Subordinate Voting Stock may be
sold from time to time in one or more transactions at:
o fixed prices, which may be changed;
o prevailing market prices at the time of sale;
o varying prices determined at the time of sale; or
o negotiated prices.
These prices will be determined by the holders of the securities or
by agreement between these holders and underwriters or dealers who may receive
fees or commissions in connection with the sale. The aggregate proceeds to the
selling securityholders from the sale of the notes or shares of Class A
Subordinate Voting Stock offered by them hereby will be the purchase price of
the notes or shares of Class A Subordinate Voting Stock less discounts and
commissions, if any.
The sales described in the preceding paragraph may be effected in
transactions:
o on any national securities exchange or quotation service on which the
notes or shares of Class A Subordinate Voting Stock may be listed or
quoted at the time of sale, including the Nasdaq National Market and the
Toronto Stock Exchange in the case of our shares of Class A Subordinate
Voting Stock;
o in the over-the counter market;
o in transactions otherwise than on such exchanges or services or in the
over-the-counter market; or
o through the writing of options.
These transactions may include block transactions or crosses. Crosses
are transactions in which the same broker acts as an agent on both sides of
the trade.
In connection with sales of the notes and shares of Class A
Subordinate Voting Stock or otherwise, the selling securityholders may enter
into hedging transactions with broker-dealers. These broker-dealers may in
turn engage in short sales of the notes and shares of Class A Subordinate
Voting Stock in the course of hedging their positions. The selling
securityholders may also sell the notes and shares of Class A Subordinate
Voting Stock short and deliver the notes and shares of Class A Subordinate
Voting Stock to close out short positions, or loan or pledge the notes and
shares of Class A Subordinate Voting Stock to broker-dealers that in turn may
sell the notes and shares of Class A Subordinate Voting Stock.
47
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the notes and the shares of Class
A Subordinate Voting Stock by the selling securityholders. Selling
securityholders may not sell any, or may not sell all, of the notes and the
shares of Class A Subordinate Voting Stock offered by them pursuant to this
prospectus. In addition, we cannot assure you that a selling securityholder
will not transfer, devise or gift the notes and the shares of Class A
Subordinate Voting Stock by other means not described in this prospectus. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144, Rule 144A or Regulation S of the Securities Act may be
sold under Rule 144, Rule 144A or Regulation S rather than pursuant to this
prospectus.
The outstanding shares of Class A Subordinate Voting Stock are listed
for trading on the Nasdaq National Market and the Toronto Stock Exchange.
The selling securityholders and any broker and any broker-dealers,
agents or underwriters that participate with the selling securityholders in
the distribution of the notes or the shares of Class A Subordinate Voting
Stock may be deemed to be "underwriters" within the meaning of the Securities
Act. In this case, any commissions received by these broker-dealers, agents or
underwriters and any profit on the resale of the notes or the shares of Class
A Subordinate Voting Stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. In addition, any profits
realized by the selling securityholders may be deemed to be underwriting
commissions under the Securities Act. To the extent the selling
securityholders may be deemed to be underwriters, the selling securityholders
may be subject to statutory liabilities, including, but not limited to,
liability under Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
Because the selling securityholders may be deemed to be underwriters
within the meaning of Section 2(11) of the Securities Act, they will be
subject to the prospectus delivery requirements of the Securities Act. At any
time a particular offer of the securities is made, a revised prospectus or
prospectus supplement, if required, will be distributed which discloses:
o the name of the selling securityholders and any participating
underwriters, broker-dealers or agents;
o the aggregate amount and type of securities being offered;
o the price at which the securities were sold and other material terms of
the offering;
o any discounts, commissions, concessions or other times constituting
compensation from the selling securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers; and
o that the participating broker-dealers did not conduct any investigation
to verify the information in this prospectus or incorporated in this
prospectus by reference.
A prospectus supplement or a post-effective amendment will be filed with the
SEC to reflect the disclosure of additional information with respect to the
distribution of the securities.
The notes were issued and sold in December 2002 in transactions
exempt from the registration requirements of the Securities Act to persons
reasonably believed by the initial purchasers to be "qualified institutional
buyers," as defined in Rule 144A under the Securities Act or in offshore
transactions pursuant to Regulation S under the Securities Act. We have agreed
to indemnify the initial purchasers and each selling securityholder, and each
selling securityholder has agreed to indemnify us, our directors, our officers
who sign the registration statement to which this prospectus relates and each
person, if any, who controls Magna Entertainment Corp. within the meaning of
the Securities Act, against specified liabilities arising under the Securities
Act.
The selling securityholders and any other person participating in
such distribution will be subject to the Exchange Act. The Exchange Act rules
include, without limitation, Regulation M, which may limit the timing of
48
purchases and sales of any of the notes and the underlying shares of Class A
Subordinate Voting Stock by the selling securityholders and any such other
person. In addition, Regulation M of the Exchange Act may restrict the ability
of any person engaged in the distribution of the notes and the underlying
shares of Class A Subordinate Voting Stock to engage in market-making
activities with respect to the particular notes and the underlying shares of
Class A Subordinate Voting Stock being distributed for a period of up to five
business days prior to the commencement of distribution. This may affect the
marketability of the notes and the underlying shares of Class A Subordinate
Voting Stock and the ability of any person or entity to engage in
market-making activities with respect to the notes and the underlying shares
of Class A Subordinate Voting Stock.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to these documents. The information incorporated by reference
is an important part of this prospectus, and the information that we file
later with the SEC will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future filings
made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the U.S.
Securities Exchange Act of 1934, as amended, until we sell all the securities
described in this prospectus:
o Our Annual Report on Form 10-K for the year ended December 31, 2002, dated
March 27, 2003.
o Our Proxy Statement filed pursuant to Section 14(a) of the U.S.
Securities Exchange Act of 1934, dated March 21, 2003, with respect to
the annual meeting of stockholders held on April 30, 2003.
You may request a copy of these filings (other than an exhibit to a
filing unless that exhibit is specifically incorporated by reference into that
filing) at no cost, by writing or telephoning us at the following address:
Magna Entertainment Corp.
337 Magna Drive
Aurora, Ontario L4G 7K1
Canada
Attention: Corporate Secretary
(905) 726-2462
You should rely only on the information incorporated by reference or
provided by us in this prospectus. We have not authorized anyone else to
provide you with different information. We are only offering these securities
in states and provinces where the offer is permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of this document.
LEGAL MATTERS
Certain legal matters in connection with the notes and the shares of
Class A Subordinate Voting Stock will be passed upon by Sidley Austin Brown &
Wood LLP, our special United States counsel.
EXPERTS
The financial statements incorporated into this prospectus by
reference to our Annual Report on Form 10-K for the year ended December 31,
2002 have been so incorporated in reliance on the reports of Ernst & Young
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
49
ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC and with the Canadian securities regulatory
authorities. Our SEC filings are available at the SEC's website on the World
Wide Web at http://www.sec.gov. You may also read and copy any document we
file with the SEC at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 for more information about the public reference rooms and their
copy charges. This prospectus is part of a registration statement on Form S-3
that we have filed with the SEC and does not contain all the information set
forth in the registration statement. This registration statement, including
all exhibits, has been filed with the SEC through EDGAR. The documents that we
have filed with the Canadian securities regulatory authorities are available
on the World Wide Web at http:/ /www.sedar.com. Our Class A Subordinate Voting
Stock is quoted and traded on the Nasdaq National Market and is listed on the
Toronto Stock Exchange. Reports, proxy and information statements and other
information concerning us can be inspected at the offices of the Nasdaq
National Market, 1735 K Street, N.W., Washington, D.C. 20006-1506.
50
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No dealer, salesman or other person has been
authorized to give any information or to make any
representations other than those contained in this MAGNA ENTERTAINMENT CORP.
prospectus in connection with the offer made hereby,
and, if given or made, such information or
representations must not be relied upon as having $75,000,000 7 1/4%
been authorized by Magna Entertainment Corp. CONVERTIBLE
This prospectus does not constitute an offer to sell, SUBORDINATED NOTES
or a solicitation of an offer to buy, the securities DUE DECEMBER 15, 2009
offered hereby to any person in any state or other AND SHARES OF CLASS A
jurisdiction in which such offer or solicitation is SUBORDINATE VOTING
unlawful. Neither the delivery of this prospectus nor STOCK ISSUABLE UPON
any sale made hereunder shall, under any circumstances, THE CONVERSION OF THE
imply that information contained herein is correct as NOTES
of any time subsequent to its date or that there has
not been any change in the facts set forth in this
prospectus or in our affairs since the date hereof.
__________________
TABLE OF CONTENTS Page
OUR COMPANY.........................................2
THE OFFERING........................................2
RISK FACTORS........................................3 PROSPECTUS
FORWARD-LOOKING STATEMENTS.........................19
DIVIDEND POLICY....................................19 ________
EARNINGS RATIOS....................................20
SELLING SECURITYHOLDERS............................20
DESCRIPTION OF THE NOTES...........................22
DESCRIPTION OF CAPITAL STOCK.......................36 May 16, 2003
CORPORATE CONSTITUTION.............................40
CERTAIN UNITED STATES FEDERAL
INCOME TAX
CONSIDERATIONS..........................42
USE OF PROCEEDS....................................46
PLAN OF DISTRIBUTION...............................46
INCORPORATION BY REFERENCE.........................49
LEGAL MATTERS......................................49
EXPERTS............................................49
ADDITIONAL INFORMATION.............................50
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