As filed with the Securities and Exchange Commission on September 30, 2003.
Registration No. 333-107368
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
to
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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MAGNA ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
Delaware 7948 98-0208374
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
337 Magna Drive
Aurora, Ontario L4G 7K1
Canada
(905) 726-2462
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
---------
Gary M. Cohn
Vice-President, Special Projects
and Secretary
Magna Entertainment Corp.
337 Magna Drive
Aurora, Ontario L4G 7K1
Canada
(905) 726-2462
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Scott M. Freeman
Sidley Austin Brown & Wood LLP
787 Seventh Avenue
New York, New York 10019
(212) 839-5300
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a Post-Effective Amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
================================ ======================= ======================= ======================= =======================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price per Aggregate Offering Amount of
Securities to be Registered Registered Note Price Registration Fee
- -------------------------------- ----------------------- ----------------------- ----------------------- -----------------------
8.55% Convertible Subordinated $150,000,000 (1) 100% (2) $150,000,000 (2) $12,135(3)
Notes due June 15, 2010
- -------------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Class A Subordinate Voting 21,276,595 (4) -- -- (5)
Stock, par value $0.01 per
share
================================ ======================= ======================= ======================= =======================
(1) Represents the aggregate principal amount at maturity of the notes that
were originally issued by the Registrant in June 2003.
(2) This estimate is made pursuant to Rule 457(c) of the Securities Act of
1933, as amended, solely for purposes of determining the registration fee.
(3) Previously paid by the registrant.
(4) Represents the number of shares of Class A Subordinate Voting Stock that
are currently issuable upon conversion of the notes registered hereby at the
initial conversion rate of 141.844 shares for each $1,000 principal amount of
notes. In addition to the shares set forth in the table, pursuant to Rule 416
under the Securities Act of 1933, as amended, the amount to be registered
includes an indeterminate number of shares of Class A Subordinate Voting Stock
issuable upon the conversion of the notes, as this amount may be adjusted as a
result of stock splits, stock dividends and anti-dilution provisions.
(5) No separate consideration will be received for the shares of Class A
Subordinate Voting Stock issuable upon conversion of the notes and, therefore,
no registration fee is required pursuant to Rule 457(i) under the Securities
Act.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
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THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. THE
SELLING SECURITY HOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 2003.
PROSPECTUS
MAGNA ENTERTAINMENT CORP.
$150,000,000
8.55% Convertible Subordinated Notes due June 15, 2010
Shares of Class A Subordinate Voting Stock
Issuable upon the Conversion of the Notes
---------
This prospectus relates to the offer and sale from time to time by the
selling securityholders named in this prospectus of up to $150,000,000
aggregate principal amount of our 8.55% Convertible Subordinated Notes due
June 15, 2010 and the shares of our Class A Subordinate Voting Stock issuable
upon conversion of the notes. Interest on the notes is payable on June 15 and
December 15 of each year, beginning December 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 June 2, 2006, 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 141.844 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 $7.05 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. The notes rank
pari passu in right of payment with our $75,000,000 aggregate principal amount
of 7 1/4% Convertible Subordinated Notes due December 15, 2009.
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".
Investing in the notes or shares of Class A Subordinate Voting Stock
involves risks. See "Risk Factors" beginning on page 2.
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 __________, 2003.
OUR COMPANY
We are North America's number one owner and operator of horse racetracks,
based on revenue, 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 twelve thoroughbred
racetracks, two standardbred racetracks, one racetrack that runs both
thoroughbred and standardbred meets and one greyhound track, 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 up to 70 racetracks in North America. We also
own and operate HorseRacing TV(TM), a television network focused on horse
racing that we initially launched on the Racetrack Television Network ("RTN")
in 2002. HorseRacing TV(TM) is currently carried on cable systems in nine
states, with over one million subscribers to date. We are in ongoing
discussions with cable and satellite operators with the goal of achieving
broader distribution for HorseRacing TV(TM) . RTN, in which we have a
one-third interest, was formed to telecast races from our racetracks and other
racetracks, via private direct-to-home satellite, to paying subscribers.
All references to "we", "us", "our", or "MEC" 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: $150,000,000 in principal amount of 8.55% Convertible Subordinated Notes
due June 15, 2010 (which we refer to as the notes).
Maturity: June 15, 2010.
Interest Payment Dates: June 15 and December 15 of each year, beginning December 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 141.844 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 $7.05 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 June 2, 2006, 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 June 2, 2006 and until June 2, 2008, 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. See "Description of the Notes-- Optional Redemption".
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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.
The notes will rank pari passu in right of payment with our $75.0
million aggregate principal amount of 7 1/4% Convertible Subordinated
Notes due December 15, 2009. 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 If there is a change in control with respect to us, you will have
a Change in Control: 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 and registered in the name of
the common depository for Euroclear Bank S.A./N.V. ("Euroclear") and
Clearstream Banking, societe anonyme, Luxembourg ("Clearstream").
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 below on this page.
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 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".
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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. The notes rank
pari passu in right of payment with our $75.0 million aggregate principal
amount of 7 1/4% Convertible Subordinated Notes due December 15, 2009. 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. Bank Austria
Creditanstalt AG, the initial purchaser, may make a market in the notes and
assist in their resale, but is 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 purchaser ceases to act as a market maker 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, 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 upon a change in
control, we may remain prohibited from repurchasing the notes. Any failure to
repurchase the
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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 approximately less than five 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 the racing operations of
Colonial Downs in November 2002. Maronas, the national racetrack of Uruguay,
located in Montevideo, re-opened with our assistance in June 2003. Prior to
their respective acquisitions or management agreements with us, 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 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 June 30, 2003, we had no borrowings
under this facility but had issued letters of credit totaling $20.6 million
under such facility. We are negotiating the renewal of this revolving credit
facility for an additional year and currently expect to be able to renew it on
substantially the same terms and conditions, except that we may have to grant
the bank a security interest over some of our assets. However, there can be no
assurance that the amounts, terms and conditions involved in a renewal of the
facility will be favorable, or that we will be able to renew the facility at
all. If we are unable to obtain substantial additional 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 unsecured revolving credit facility with a Canadian chartered bank,
which matures on October 10, 2003, 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
covenants relating to our ability to incur additional indebtedness,
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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. We expect that the renewed facility
will contain substantially similar restrictions and we may have to grant the
bank a security interest over some of our assets. 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, including the notes, 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 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 cease, 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 two years 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, or at Pimlico or any of our other recently acquired
racetracks which contribute significantly to our revenue and earnings, 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 MI Developments Inc. ("MI Developments") and
therefore MI Developments is able to prevent any takeover of us by a third
party.
MI Developments 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, MI Developments is able to
cause or prevent a change in our control. See "Description of Capital Stock -
Takeover Protection".
5
Our relationship with MI Developments is not at "arm's length", and
therefore MI Developments may influence us to make decisions that are not in
the best interests of our other stockholders.
Our relationship with MI Developments is not at "arm's length". In
addition to the ownership of our stock as described in the preceding risk
factor (and in the risks described below in "--Risks Relating to Our Securities
- -- Sales of our Class A Subordinate Voting Stock by MI Developments or by
certain other of our significant stockholders under our shelf registration
could depress our stock price"), two members of our board of directors are
also members of MI Developments' board of directors, including our chairman,
who is also the chairman of MI Developments. In some cases, the interests of
MI Developments 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. MI Developments 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 MI Developments, 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
6
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 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 over the last year 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 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
7
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 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, on June 13, 2003, the
United States House of Representatives approved a bill in the form of the
Unlawful Internet Gambling Funding Prohibition Act that, if enacted, would
prohibit the use of credit cards, checks, electronic funds transfers and
certain other funding methods for most forms of Internet gambling. The United
States Senate Banking, Housing and Urban Affairs Committee adopted a different
bill with a similar effect on August 31, 2003; however, this bill still needs
to be considered by the full Senate. While each of these recent bills contain
exemptions which we believe are intended at the very least to permit such
funding for account wagering under certain conditions in states that authorize
account wagering, it is unclear whether and to what extent such exemptions
will remain in any Internet gambling funding bill that ultimately may be
enacted, or the extent to which we will be able to utilize those exemptions
with respect to our account wagering operations as currently conducted.
Moreover, 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.
8
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 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-
9
sponsored lotteries as well as some of our other non-racetrack competitors,
which may adversely affect our ability to compete effectively with them.
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.
10
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 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,
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 preliminary report of the
task force was released in August 2003.
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.
11
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 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.
12
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. There have been recent
reports that Centaur and Sportsystems may have terminated their agreement and
that Centaur may be seeking other partners or means of financing. 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 provide management services to Colonial Downs and Maronas pursuant to
management contracts which are 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 revenues that we receive by providing management services to Maronas,
a thoroughbred racetrack in Montevideo, Uruguay, are somewhat dependent on the
business strategy of Maronas, over which we have limited control. These
revenues are also highly dependent on Maronas' ability to maintain licenses
and permits pursuant to which it operates under the law of Uruguay and over
which we have limited control.
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.
13
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 six
months 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
14
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 Inc. ("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 Race Course racetracks and the
thoroughbred training facility in Bowie, Maryland, together with their related
facilities and operations, between
15
January 1, 2003 and June 30, 2004. We will endeavor to schedule the work for
these expenditures to minimize interference with the respective racing
seasons, but given the short timeline, that cannot be assured. If there is
interference with the racing seasons of either of Pimlico Race Course 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;
16
o sales or the expectation of sales by MI Developments of a portion of our
shares held by it, 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 MI Developments 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, MI Developments 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). 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. We
also have an effective shelf registration statement covering up to 8,823,529
shares of our Class A Subordinate Voting Stock issuable upon the conversion of
$75.0 million aggregate outstanding principal amount of our 7 1/4% Convertible
Subordinated Notes due December 15, 2009. Sales of a substantial number of
shares of our Class A Subordinate Voting Stock, either by MI Developments or
under our shelf registration statements, 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.
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:
17
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, including documents incorporated by reference, contains
forward-looking statements as defined by the U.S. Securities Act of 1933, as
amended (the "Securities Act") and the U.S. Securities Exchange Act of 1934,
as amended (the "Exchange Act"). 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 risks or 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 on the front of this
prospectus. 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.
18
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 Six Months Ended
Ended December Year Ended December 31, June 30,
July 31, 31, ---------------------------------------- --------------------
1998 1998 1999 2000 2001 2002 2002 2003
------- -------- -------- -------- -------- -------- --------- ---------
Ratio of earnings to fixed
charges.................... __(1) __(2) 2.18 1.45 3.90 __(3) 12.51 4.13
- -----------
(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.
19
SELLING SECURITYHOLDERS
The notes were originally issued by us and sold by Bank Austria
Creditanstalt AG (the "Initial Purchaser") in transactions exempt from the
registration requirements of the Securities Act in offshore transactions under
Regulation S of the Securities Act or to persons reasonably believed by the
Initial Purchaser to be "qualified institutional buyers" as defined by Rule
144A under 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 $150,000,000 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 141.844 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 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 shares of
Aggregate Principal Class A Subordinate
Amount of Notes That Percentage of Voting Stock That May Percentage of
May Be Sold Under Notes Be Sold Under this Shares
Name this Prospectus Outstanding Prospectus (1) Outstanding (2)
- ------------------------------------ ---------------------- ---------------- ----------------------- -------------------
Wachovia Bank National Association $5,000,000 3.333% 709,219 1.436%
All holders of the notes or future $145,000,000 96.667% 20,567,375 29.701%
transferees, pledgees, donees,
assignees or successors of any
such holders (3)
Total $150,000,000 100.000% 21,276,595(4) 30.414%
20
(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 Exchange Act, including shares of
Class A Subordinate Voting Stock into which the notes are convertible,
and assumes a conversion price of $7.05 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 Exchange Act, using
48,679,796 shares of Class A Subordinate Voting Stock outstanding as of
June 30, 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 selling securityholders, including current holders
of the notes for which we have not received information regarding their
holdings, will be included in post-effective amendments to the
registration statement of which this prospectus forms a part. For purposes
of this table, we have assumed that any holders of the notes, or any
future pledgees, donees, assignees, transferees or successors of or from
any 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 Stock into which
the $150,000,000 of notes would be convertible at the initial conversion
price described in footnote (1) above.
DESCRIPTION OF THE NOTES
We issued the notes under an indenture dated as of June 2, 2003 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 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 to any of its subsidiaries.
General
The notes are direct, general unsecured obligations of MEC and are
subordinate in right of payment as described under "Subordination of Notes"
below. The notes rank pari passu in right of payment with our 7 1/4%
Convertible Subordinated Notes due December 15, 2009. 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
$150.0 million. The notes were issued in denominations of $1,000 or in
multiples of $1,000. The notes will mature on June 15, 2010, 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.
21
The notes bear interest at the annual rate of 8.55%. Interest is payable
on June 15 and December 15 of each year, beginning December 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 and London 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 $7.05 per share, subject to the
adjustments described below. This is equivalent to a conversion rate of
approximately 141.844 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 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:
22
(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 not triggering a conversion price
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
23
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, assuming the original issuance of the notes had been
completed, the notes would have been 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. The notes rank pari passu in right of payment with our $75.0
million aggregate principal amount of 7 1/4% Convertible Subordinated Notes
due December 15, 2009. After giving effect to the original issuance of the
notes, we would have had approximately $287.0 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 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.
24
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 June 2, 2003, among 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 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
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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 June 2, 2006.
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 June 2, 2006 and until
June 2, 2008, 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.
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
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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 our
liquidation or dissolution (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
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;
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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 and the initial purchaser 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.
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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 of 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 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;
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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 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;
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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
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 paying agent;
o appoint additional paying agents or conversion agents; or
o approve any change in the office through which any security registrar,
paying agent or conversion agent acts.
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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 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 will be held through the book-entry systems operated by
Euroclear and Clearstream Banking. The notes will be represented by three
notes, in global registered form, which will represent the total principal
amount of the notes. Upon issuance, the global notes were deposited with, and
registered in the name of a nominee of the common depository for Euroclear and
Clearstream.
Each investor holds its interest in the notes through the global notes.
Transfers of beneficial interests in the global notes will be subject to the
Euroclear and Clearstream rules and procedures, which may change from time to
time. All transfers of interests in the global notes will be recorded in
accordance with the book-entry system maintained by Euroclear and Clearstream,
pursuant to customary procedures established by Euroclear and Clearstream and
their participants.
Except in the limited circumstances described below, owners of interests
in the global notes will not have notes registered in their names, will not
receive physical delivery of notes in certificated form and will not be
considered the registered owners or holders of the notes.
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Noteholders may register the transfer and exchange of their notes at the
offices of the registrar or at the offices of the paying and transfer agent in
New York City and London.
We provide the following description of the operations and procedures of
Euroclear and Clearstream solely as a matter of convenience. Euroclear and
Clearstream control these operations and procedures and may change them from
time to time. We take no responsibility for these operations and procedures,
and we urge you to contact the clearing systems to discuss these matters.
Euroclear and Clearstream each hold securities for their account holders.
By using electronic book entry transfer between their respective account
holders, Euroclear and Clearstream facilitate the clearance and settlement of
securities transactions, and also eliminate the need for physical movements of
certificates and any risk from lack of simultaneous transfers of securities.
Euroclear and Clearstream each provide various services, including
safekeeping, administration, clearance and settlement of internationally
traded securities, and securities lending and borrowing. Each of Euroclear and
Clearstream can settle securities transactions in any of more than 30
currencies, including the Euro. Euroclear and Clearstream each also deal with
domestic securities markets in several countries through established
depositary and custodial relationships. The respective systems of Euroclear
and Clearstream have established an electronic bridge between their two
systems across which their respective account holders may settle trades with
each other. Account holders in both Euroclear and Clearstream are world-wide
financial institutions including underwriters, securities brokers and dealers,
banks, trust companies and clearing corporations. Indirect access to both
Euroclear and Clearstream is available to other institutions that clear
through or maintain a custodial relationship with an account holder in either
system. An account holder's overall contractual relations with either
Euroclear or Clearstream are governed by the respective rules and operating
procedures of Euroclear or Clearstream and any applicable laws. Both Euroclear
and Clearstream act under those rules and operating procedures only on behalf
of their respective account holders and have no record of or relationship with
any person who is not a direct account holder.
Investors who hold accounts with Euroclear or Clearstream may acquire,
hold and transfer security entitlements with respect to the global notes
against Euroclear or Clearstream and their respective property by book entry
to accounts with Euroclear or Clearstream, each of which has an account with
the common depositary. Investors who do not have accounts with Euroclear or
Clearstream may acquire, hold and transfer security entitlements with respect
to the global notes against the securities intermediary and its property with
which those investors hold accounts by book entry to accounts with the
securities intermediary and its property, which in turn may hold a security
entitlement with respect to the global notes through Euroclear or Clearstream.
Investors electing to acquire security entitlements with respect to the global
notes through an account with Euroclear or Clearstream or some other
securities intermediary must follow the settlement procedures of their
securities intermediary with respect to the settlement of new issues of
securities. "Security entitlement" means the rights and property interests of
an account holder against its securities intermediary under applicable law in
or with respect to a security, including any ownership, co-ownership,
contractual or other rights.
Security entitlements with respect to the global notes to be acquired
through an account with Euroclear or Clearstream will be credited to that
account against payment in Euro for value as of the settlement date. Investors
electing to acquire, hold or transfer security entitlements with respect to
the global notes through an account with Euroclear, Clearstream or some other
securities intermediary other than in connection with the initial distribution
of the notes must follow the settlement procedures of their securities
intermediary with respect to the settlement of secondary market transactions
in securities.
So long as the common depositary is the registered owner or holder of the
global notes, the common depositary will be considered the sole owner or
holder of the notes represented by the global notes for all purposes under the
indenture and the notes. Accordingly, each person who owns a beneficial
interest in the global notes and who wishes to exercise any rights and
remedies of a noteholder under the indenture must rely on the procedures of
Euroclear or Clearstream, as the case may be, and their account holders.
Payments of principal and interest on the global notes will be made to the
common depositary on behalf of Euroclear or Clearstream, as the case may be,
as the registered owners of the global notes.
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The laws of some countries and of some states in the United States
require that certain persons take physical delivery in definitive form of
securities which they own. Accordingly, the ability to transfer beneficial
interests in the global notes to those persons may be limited. Because
Euroclear and Clearstream can act only on behalf of their respective account
holders, the ability of a person having beneficial interests in the global
notes to pledge those interests to persons or entities that do not participate
in the relevant clearing system, or otherwise take actions in respect of those
interests, may be affected by the lack of a physical certificate evidencing
those interests.
We understand that under existing industry practices, if either we or the
trustee requests any action of noteholders, or if an owner of a beneficial
interest in the global notes desires to give instructions or take an action
that a noteholder is entitled to give or take under the indenture, Euroclear
or Clearstream, as the case may be, would authorize their respective account
holders owning the relevant beneficial interest to give instructions to take
that action, and those account holders would authorize intermediaries to give
instructions or to take that action, or would otherwise act on the
instructions of the intermediaries.
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 June 30, 2003, there were
48,679,796 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 MI Developments 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;
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.
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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 by our Corporate Constitution, 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, by any of its affiliates
(which include MI Developments) or by any person who, by agreement, is acting
jointly with Magna International or any such affiliate or over which Magna
International or any such affiliate or other 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.
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
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(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
any of its affiliates (which include MI Developments), or by any person who,
by agreement, acts jointly with Magna International, any such affiliate or any
person or over which Magna International, any such affiliate 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. MI Developments, as the holder of all our issued and
outstanding Class B Stock, has assumed the obligations of Magna International
under 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, MI Developments 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 MI Developments, 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
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
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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 MI Developments 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.
37
CORPORATE CONSTITUTION
We have adopted certain organizational and operating policies and
principles used by Magna International and certain of its subsidiaries 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 beneficially
owned, directly or indirectly, by MI Developments or any person who, by
agreement, is acting jointly with MI Developments or over which MI
Developments 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
(and MI Developments), 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".
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
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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.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the material U.S. 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, U.S. persons whose functional currency (as defined in
Section 985 of the Code) is not the U.S. dollar, U.S. persons holding the
Securities as part of a hedging, conversion, constructive sale or other
integrated transaction, and subsequent purchasers of a Security. 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. or any political
subdivision thereof, (iii) an estate, the income of which is subject to U.S.
federal income taxation regardless of its source, (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 or (v) any Holder that otherwise is subject to U.S.
federal income taxation on a net income basis in respect to a Security. 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 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 the Company's current or
accumulated earnings and profits. Under applicable Treasury Regulations, an
adjustment of the conversion price may, under certain circumstances,
40
be treated as a 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 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.
Under recently enacted tax legislation, certain dividends received by
U.S. Holders of Class A Subordinate Voting Stock who are individuals, and
long-term capital gain recognized by U.S. Holders of Class A Subordinate
Voting Stock who are individuals, generally are subject to a reduced maximum
tax rate of 15% through December 31, 2008. For these purposes, long-term
capital gain is gain realized in respect of a capital asset in which the
taxpayer has a holding period of more than one year. The rate reduction does
not apply to dividends received in respect of certain short-term or hedged
positions in the Class A Subordinate Voting Stock or to dividends to the
extent that an individual U.S. Holder elects to treat the dividends as
"investment income," which may be offset against interest expense.
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 disposition, the shares were held for more than one
year.
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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 a 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.
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 rate of 30%, or lower rate specified by an applicable income tax treaty.
Interest income earned on the notes by a Non-U.S. Holder will generally
qualify for an exemption from U.S. income and withholding tax, referred to as
the portfolio interest exemption; provided that:
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
42
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 U.S. federal income tax on net income that
applies to U.S. persons generally, and if the Non-U.S. Holder is a foreign
corporation, the interest may also be subject to a U.S. branch profits tax on
the foreign corporation's 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, the interest 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
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.
If the dividends are effectively connected with the conduct of a U.S.
trade or business, they will be subject to U.S. federal income tax on net
income that applies to U.S. persons generally, and if the Non-U.S. Holder is a
foreign corporation, the dividends may also be subject to a U.S. branch
profits tax on the foreign corporation's effectively connected earnings and
profits at a 30% rate, or a lower rate as may be specified by an applicable
income tax treaty.
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 United States 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
43
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 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.
Information Reporting and Backup Withholding
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.
44
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 Regulation
S 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 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
45
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.
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
46
additional information with respect to the distribution of the securities.
The notes were issued and sold in June 2003 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 purchaser 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 MEC 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
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 Exchange Act
until the selling securityholders 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 28, 2003.
o Our Proxy Statement filed pursuant to Section 14(a) of the Exchange Act
on March 28, 2003.
o Our Quarterly Report on Form 10-Q for the quarterly periods ended March
31, 2003 and June 30, 2003.
o Our Current Reports on Form 8-K dated July 15, 2003 and July 31, 2003
respectively.
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.
47
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.
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.
48
============================================================= =============================================================
No dealer, salesman or other person has been authorized
to give any information or to make any representations
other than those contained in this prospectus in connection
with the offer made hereby, and, if given or made, such
information or representations must not be relied upon as MAGNA ENTERTAINMENT
having been authorized by Magna Entertainment Corp. This CORP.
prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, the securities offered
hereby to any person in any state or other jurisdiction $150,000,000 8.55%
in which such offer or solicitation is unlawful. Neither CONVERTIBLE
the delivery of this prospectus nor any sale made hereunder SUBORDINATED NOTES
shall, under any circumstances, imply that information DUE JUNE 15, 2010 AND
contained herein is correct as of any time subsequent to SHARES OF CLASS A
its date or that there has not been any change in the facts SUBORDINATE VOTING
set forth in this prospectus or in our affairs since the STOCK ISSUABLE UPON
date hereof. THE CONVERSION OF THE
NOTES
- ------------------
TABLE OF CONTENTS Page
OUR COMPANY.........................................1
THE OFFERING........................................1 PROSPECTUS
RISK FACTORS........................................2 ------------
FORWARD-LOOKING STATEMENTS.........................18
DIVIDEND POLICY....................................18
EARNINGS RATIOS....................................19
SELLING SECURITYHOLDERS............................20 ___________________, 2003
DESCRIPTION OF THE NOTES...........................21
DESCRIPTION OF CAPITAL STOCK.......................34
CORPORATE CONSTITUTION.............................38
CERTAIN UNITED STATES FEDERAL
INCOME TAX
CONSIDERATIONS................................40
USE OF PROCEEDS....................................44
PLAN OF DISTRIBUTION...............................45
INCORPORATION BY REFERENCE.........................47
LEGAL MATTERS......................................48
EXPERTS 48
ADDITIONAL INFORMATION.............................48
============================================================= =============================================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
The following table sets forth the costs and expenses payable by us in
connection with the registration for resale of the 8.55% Convertible
Subordinated Notes due June 15, 2010 and the shares of our Class A Subordinate
Voting Stock issuable upon the conversion of the notes.
Registration fees.................................... $12,135
Accounting fees and expenses......................... $7,500
Legal fees and expenses.............................. $25,000
Miscellaneous........................................ $2,000
TOTAL...............................................$46,635
* All amounts are estimated except for the registration fees.
Item 15. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, our
by-laws require us to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that such person is or was or has
agreed to become one of our directors, officers, employees or agents, or has
agreed to serve at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Our indemnification obligation extends to costs, charges, expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by any such person or on his or her behalf in connection
with such an action, suit or proceeding and any appeal therefrom, if any such
person acted in good faith in a manner he or she reasonably believed to be in
or not opposed to our best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. Our restated certificate of incorporation also provides that, to the
extent permitted by law, our directors will have no liability to us or our
stockholders for monetary damages for breach of fiduciary duty as a director.
Our officers and directors and the officers and directors of our subsidiaries
are covered by liability insurance, subject to a deductible for executive
indemnification. The policy does not provide coverage for losses arising from
the violation of, or the enforcement of, environmental laws and regulations.
Item 16. Exhibits
Exhibit No. Description of Document
- ----------- -----------------------
4.1* Indenture dated as of June 2, 2003, between Magna Entertainment
Corp. and The Bank of New York, as trustee, including the form
of 8.55% Convertible Subordinated Notes due June 15, 2010
5.1* Opinion of Sidley Austin Brown & Wood LLP
12.1* Statement re: Computation of Ratio of Earnings to Fixed Charges
23.1* Consent of Ernst & Young LLP in respect of the Audited
Consolidated Financial Statements of Magna Entertainment Corp.
23.2* Consent of Sidley Austin Brown & Wood LLP (included in
Exhibit 5.1)
24.1* Power of Attorney
24.2* Power of Attorney
- -------------------
* Previously filed.
II-1
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended;
(b) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement; and
(c) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (1)(a) and (1)(b) shall not apply
if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the SEC by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such Post-Effective Amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a Post-Effective Amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a
II-2
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Magna Entertainment Corp. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Aurora, Ontario, Canada, on the
30th day of September, 2003.
MAGNA ENTERTAINMENT CORP.
By: /s/ Jim McAlpine
-------------------------------------
Jim McAlpine
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on the 30th day of September, 2003.
Signature Title
- --------- -----
President and Chief Executive Officer and
* Director (Principal Executive Officer)
- -------------------------------------------
Jim McAlpine
Executive Vice-President and Chief
* Financial Officer (Principal Financial Officer)
- --------------------------------------------
Blake Tohana
Vice-President and Controller (Principal
* Accounting Officer)
- -------------------------------------------
Douglas R. Tatters
Director
*
- -------------------------------------------
Jerry D. Campbell
III-1
* Director
- -------------------------------------------
William G. Davis
* Director
- --------------------------------------------
Louis E. Lataif
* Director
- -------------------------------------------
F. Jack Liebau
* Director
- -------------------------------------------
Edward C. Lumley
* Director
- -------------------------------------------
William J. Menear
* Director
- -------------------------------------------
Gino Roncelli
* Chairman and Director
- -------------------------------------------
Frank Stronach
* The undersigned, by signing his name hereto, does hereby sign this
Amendment No. 2 on behalf of each of the persons indicated above pursuant
to the powers of attorney filed as Exhibits 24.1 and 24.2 of the
registration statement on Form S-3 (File No. 333-107368) filed on July
25, 2003 and September 26, 2003.
September 30, 2003
By: /s/ Gary M. Cohn
- ---------------------------------
Name: Gary M. Cohn
Title: Attorney-in-fact
III-2
EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- -----------------------
4.1* Indenture dated as of June 2, 2003, between Magna
Entertainment Corp. and The Bank of New York, as trustee,
including the form of 8.55% Convertible Subordinated Notes
due June 15, 2010
5.1* Opinion of Sidley Austin Brown & Wood LLP
12.1* Statement re: Computation of Ratio of Earnings to Fixed
Charges
23.1* Consent of Ernst & Young LLP in respect of the Audited
Consolidated Financial Statements of Magna Entertainment Corp.
23.2* Consent of Sidley Austin Brown & Wood LLP (included in
Exhibit 5.1)
24.1* Power of Attorney
24.2* Power of Attorney
- ---------------------
* Previously filed.
III-3