As filed with the Securities and Exchange Commission on October 23, 2003
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 98-0208374
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
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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, NY 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 as
determined by the registrant in light of market conditions.
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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 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
- ----------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount to be Proposed Maximum Amount of
Securities to be Registered Registered(1) Aggregate Offering Registration Fee(2)
Price(1)(2)
- ----------------------------------------------------------------------------------------------------------------
Debt Securities(3).........................
- ----------------------------------------------------------------------------------------------------------------
Warrants to Purchase Debt Securities.......
- ----------------------------------------------------------------------------------------------------------------
Warrants to Purchase Class A Subordinate
Voting Stock.............................
- ----------------------------------------------------------------------------------------------------------------
Class A Subordinate Voting Stock, par
value $0.01 per share (4)................
- ----------------------------------------------------------------------------------------------------------------
TOTAL...................................... $300,000,000 $300,000,000 $24,270
- ----------------------------------------------------------------------------------------------------------------
(1) In United States dollars or the equivalent thereof in foreign currency or
currency units. Subject to Rule 462(b) under the Securities Act of 1933,
the amount registered represents the maximum aggregate public offering
price to be received
from the sale of the Debt Securities, Warrants to Purchase Debt
Securities, Warrants to Purchase Class A Subordinate Voting Stock and
Class A Subordinate Voting Stock registered hereby, including any
securities sold at a discount, and pursuant to Rule 457(i) under the
Securities Act of 1933 also includes the aggregate exercise price of such
Warrants issued hereunder. For Debt Securities issued with an original
issue discount, the amount to be registered is calculated as the initial
accreted value of such Debt Securities.
(2) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
(3) In addition to any Debt Securities that may be issued directly under this
Registration Statement, includes such indeterminate amount of Debt
Securities as may from time to time be issued at indeterminate prices or
issuable upon exchange of Debt Securities registered hereunder, to the
extent any of such Debt Securities are, by their terms, exchangeable for
Debt Securities registered hereunder, or upon the exercise of Warrants to
Purchase Debt Securities registered hereunder, as the case may be. No
separate consideration will be received for Debt Securities that are
issued upon exchange of Debt Securities registered hereunder.
(4) In addition to any shares of Class A Subordinate Voting Stock that may be
issued directly under this Registration Statement, includes such
indeterminate number of shares of Class A Subordinate Voting Stock as may
from time to time be issued at indeterminate prices or issuable upon
conversion or exchange of Debt Securities registered hereunder, to the
extent any of such Debt Securities are, by their terms, convertible into
or exchangeable for shares of Class A Subordinate Voting Stock registered
hereunder, or upon the exercise of Warrants to Purchase Class A
Subordinate Voting Stock registered hereunder, as the case may be. No
separate consideration will be received for shares of Class A Subordinate
Voting Stock that are issued upon conversion of Debt Securities registered
hereunder.
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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.
The information in this prospectus is not complete and may be changed. We 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 it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated October 23, 2003
PROSPECTUS
[Insert MEC Logo]
MAGNA ENTERTAINMENT CORP.
337 Magna Drive
Aurora, Ontario L4G 7K1
Canada
(905) 726-2462
$300,000,000
Debt Securities, Class A Subordinate Voting Stock
and Securities Warrants
-----------
We may sell from time to time, in one or more offerings:
o Debt Securities
o Class A Subordinate Voting Stock
o Warrants to Purchase Debt Securities or Class A Subordinate Voting
Stock
Debt Securities may be exchangeable for, or convertible into, other Debt
Securities or Class A Subordinate Voting Stock.
The total offering price of these securities, in the aggregate, will not
exceed $300,000,000. We will provide specific terms of these securities in
supplements to this prospectus. You should read this prospectus and any
supplement to this prospectus carefully before you invest. In particular, you
should carefully consider the discussion in "Risk Factors" beginning on page 3
of this prospectus before you invest.
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". We have not yet determined whether any of the other securities
offered hereby will be listed on any exchange or over-the-counter market. If
we decide to seek listing of any such securities, a prospectus supplement
relating thereto will disclose such exchange or market.
We may offer the securities directly or through underwriters, agents or
dealers. The supplements to this prospectus will designate the terms of our
plan of distribution. The discussion under the heading "Plan of Distribution"
provides more information on this topic.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE OR OTHER
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.
This prospectus is dated ________
TABLE OF CONTENTS
Page
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RISK FACTORS................................................................3
FORWARD-LOOKING STATEMENTS.................................................19
OUR COMPANY................................................................20
EARNINGS RATIOS............................................................20
USE OF PROCEEDS............................................................20
CORPORATE CONSTITUTION.....................................................21
DESCRIPTION OF DEBT SECURITIES.............................................22
DESCRIPTION OF CAPITAL STOCK...............................................41
DESCRIPTION OF SECURITIES WARRANTS.........................................44
PLAN OF DISTRIBUTION.......................................................46
LEGAL MATTERS..............................................................48
EXPERTS....................................................................48
ABOUT THIS PROSPECTUS......................................................48
ADDITIONAL INFORMATION.....................................................49
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..........................49
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In this prospectus, when we use the terms "we", "us", "our" and the
"Company", we are referring to Magna Entertainment Corp. and its subsidiaries,
unless the context otherwise requires. In this prospectus, unless stated
otherwise, all references to "U.S. $" or "$" are to U.S. dollars and all
references to "Cdn. $" are to Canadian dollars.
When we use the term "securities" we are referring to any of the debt
securities, shares of Class A Subordinate Voting Stock or warrants to purchase
debt securities or shares of Class A Subordinate Voting Stock, each as may be
offered by this prospectus and the accompanying prospectus supplement.
RISK FACTORS
You should carefully consider the following factors in addition to the
other information contained in this prospectus before purchasing any of our
securities.
If any of the following risks, or any of the risks described in the other
documents we file with the Securities and Exchange Commission ("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, our ability to make payments of principal
and interest on our debt securities may be limited and the trading price of
the shares of our Class A Subordinate Voting Stock or other securities could
decline substantially and investors may lose all or part of the value of the
shares of our Class A Subordinate Voting Stock or other securities 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 "Additional
Information" and "Incorporation of Certain Information by Reference".
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 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 ("Pimlico") 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.
3
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. On October 10, 2003, we amended and extended
our revolving credit facility with a Canadian chartered bank as a $50 million
senior credit facility maturing on October 8, 2004. As of October 21, 2003, we
had no borrowings under this facility but had issued letters of credit
totaling $21.2 million under such facility. 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 in October
2004. 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 senior revolving credit facility with a Canadian chartered bank
imposes important restrictions on us.
Our senior revolving credit facility with a Canadian chartered bank,
which matures on October 8, 2004, requires us to maintain a debt to earnings
before interest, taxes, depreciation and amortization ratio not greater than
3.5 to 1, an interest coverage ratio not lower than 1.5 to 1 and a senior
interest coverage ratio not lower than 2.5 to 1, each as calculated under the
facility. This revolving credit facility is secured by mortgages on our Santa
Anita and Golden Gate racetracks. The credit agreement also contains customary
covenants relating to our ability to incur additional indebtedness, make
future acquisitions, enter into certain related party transactions, consummate
asset dispositions, incur capital expenditures and make restricted payments.
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 senior revolving credit facility. Upon the occurrence of an event of
default, the lender may terminate the senior revolving credit facility and
demand immediate payment of all amounts borrowed by us under that facility,
which could adversely affect our ability to repay our debt securities and
would adversely affect the trading price of our Class A Subordinate Voting
Stock.
We have recruited most of our senior executive officers from outside the
racetrack industry.
Although our management personnel at our racetracks generally have
extensive experience in the racetrack industry, we have recruited most of our
senior executive officers from outside the industry. Our chief executive
officer, chief operating officer and 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
4
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, Lone Star Park at Grand Prairie or
Flamboro Downs, 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".
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 statements 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.
5
Our management may have broad discretion over the use of proceeds from
any offering of securities described in this prospectus, and may spend the
proceeds in ways with which you do not agree.
Our management may retain broad discretion as to the use of proceeds from
any offering of securities described in this prospectus. Accordingly, you may
not have an opportunity to evaluate the specific uses of those proceeds and
you may not agree with those uses. Our failure to use the proceeds effectively
could have an adverse effect on our business, financial condition, operating
results and prospects.
We are exposed to currency exchange rate fluctuations.
Our business outside the United States is generally transacted in
currencies other than U.S. dollars. Fluctuations in currencies relative to the
U.S. dollar may make it more difficult to perform period-to-period comparisons
of our operating results. Moreover, fluctuations in the U.S. dollar relative
to currencies in which earnings are generated outside the United States could
result in a reduction in our profitability as reported in U.S. dollars.
Risks Relating to Our Gaming Operations
A decline in the popularity of horse racing could adversely impact our
business.
The continued popularity of horse racing is important to our growth plans
and our operating results. Our business plan anticipates our attracting new
customers to our racetracks, off-track betting facilities and account wagering
operations. Even if we are successful in making acquisitions and expanding and
improving our current operations, we may not be able to attract a sufficient
number of new customers to achieve our business plan. Public tastes are
unpredictable and subject to change. Any decline in interest in horse racing
or any change in public tastes may adversely affect our revenues and,
therefore, our operating results.
Declining on-track attendance and increasing competition in simulcasting
may materially adversely affect our operating results.
There has been a general decline in the number of people attending and
wagering at live horse races at North American racetracks due to a number of
factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance at
live horse racing events has prompted racetracks to rely increasingly on
revenues from inter-track, off-track and account wagering markets. The
industry-wide focus on inter-track, off-track and account wagering markets has
increased competition among racetracks for outlets to simulcast their live
races. A continued decrease in attendance at live events and in on-track
wagering, as well as increased competition in the inter-track, off-track and
account wagering markets, could lead to a decrease in the 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
6
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
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
7
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.
9
Competition from non-racetrack gaming operators may reduce the amount
wagered at our facilities and materially adversely affect our operating
results.
We compete for customers with casinos, sports wagering services and other
non-racetrack gaming operators, including government-sponsored lotteries,
which benefit from numerous distribution channels, including supermarkets and
convenience stores, as well as from frequent and extensive advertising
campaigns. We do not enjoy the same access to the gaming public or possess the
advertising resources that are available to government-sponsored lotteries as
well as some of our other non-racetrack competitors, which may adversely
affect our ability to compete effectively with them.
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.
10
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.
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 off-track betting ("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
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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.
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 lease of our Bay Meadows property is scheduled to expire on December
31, 2003, and discussions are currently underway with the landlord to extend
the term of the lease. We are also 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. We are uncertain as to the likelihood of the
renewal of this lease or the terms upon which such renewal may be achieved.
There can also 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 the
lease is not renewed on favorable terms or if the lease is not renewed at all
and we conduct the Bay Meadows racing dates at another of our racetracks, we
may suffer
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a reduction in revenues and earnings at Bay Meadows, 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.
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. has announced
its intentions not to assume the obligations of the Maryland Revenue Sharing
Agreement as part of that sale, which failure to assume may result in
litigation. In the event of the non-assumption by Centaur or the expiry on
March 31, 2004 of the Maryland Revenue Sharing Agreement, the Company will be
required to renegotiate an agreement with Centaur. 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
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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.
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
14
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, including Amtote International, Inc.
("Amtote"), in which we own a 30% equity interest. 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
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
15
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 racetracks and the thoroughbred
training facility in Bowie, Maryland, together with their related facilities
and operations, between January 1, 2003 and June 30, 2004. We will endeavor to
schedule the work for these expenditures to minimize 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
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.
16
We face strict environmental regulation and may be subject to liability
for environmental damage, which could materially adversely affect our
financial results.
We are subject to a wide range of requirements under environmental laws
and regulations relating to waste water discharge, waste management and
storage of hazardous substances. Compliance with environmental laws and
regulations can, in some circumstances, require significant capital
expenditures. Moreover, violations can result in significant penalties and, in
some cases, interruption or cessation of operations. We were involved in a
dispute with the United States Environmental Protection Agency involving the
Portland Meadows racetrack, which we currently lease and operate, which
dispute caused us to postpone the planned opening of the 2001-2002 meet at
that facility on September 1, 2001 and also to conclude the 2001-2002 meet
early, on February 10, 2002.
Furthermore, we may not have all required environmental permits and we
may not otherwise be in compliance with all applicable environmental
requirements. Where we do not have an environmental permit but one may be
required, we will determine if one is in fact required and, if so, will seek
to obtain one and address any related compliance issues, which may require
significant capital expenditures.
Various environmental laws and regulations in the United States, Canada
and Europe impose liability on us as a current or previous owner and manager
of real property, for the cost of maintenance, removal and remediation of
hazardous substances released or deposited on or in properties now or
previously owned or managed by us or disposed of in other locations. Our
ability to sell properties with hazardous substance contamination or to borrow
money using that property as collateral may also be uncertain.
Changes to environmental laws and regulations, resulting in more
stringent terms of compliance, or the enactment of new environmental
legislation, could expose us to additional liabilities and ongoing expenses.
Any of these environmental issues could have a material adverse effect on
our business.
Risks Relating to Our Securities
Our stock price may be volatile, and future issuances or sales of our
stock may decrease our stock price.
The trading price of our Class A Subordinate Voting Stock has
experienced, and may continue to experience, substantial volatility. The
following factors have had, and may continue to have, a significant effect on
the market price of our Class A Subordinate Voting Stock:
o our historical and anticipated operating results;
o the announcement of new wagering and gaming opportunities by us or our
competitors;
o the passage or anticipated passage of legislation affecting horse racing or
gaming;
o developments affecting the horse racing or gaming industries generally;
o sales or other issuances or the perception of potential sales or issuances,
including in connection with our past and future acquisitions, of
substantial amounts of our shares;
17
o sales or the expectation of sales by 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
statements 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 effective shelf registration statements 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 and up to 21,276,595 shares of our
Class A Subordinate Voting Stock issuable upon the conversion of $150.0
million aggregate principal amount of our 8.55% Convertible Subordinated Notes
due June 15, 2010. 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
18
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:
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.
19
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. On August 22, 2003, we acquired a 30% equity interest in
Amtote, a leading provider of totalistor services to the North American
pari-mutuel industry. 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 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 1.2 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. To support certain of our
thoroughbred racetracks, we also own and operate thoroughbred training centers
situtated near San Diego California, in Palm Beach County, Florida, and in the
Baltimore, Maryland area.
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.
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement, we
intend to use the net proceeds from the sale of the securities offered by this
prospectus and the accompanying prospectus supplement for general corporate
purposes, including repayment of borrowings, working capital, capital
expenditures, and the potential acquisition or construction and development of
additional racetracks and related entertainment operations, training centers,
OTB facilities and account wagering operations. The net proceeds may be
invested temporarily or applied to repay short-term debt until they are used
for their
20
stated purpose. Additional information on the use of net proceeds from the
sale of offered securities will be described in the applicable prospectus
supplement relating to those securities. See "Risk Factors--Risks Regarding
Our Company--Our management may have broad discretion over the use of proceeds
from any offering of securities described in this prospectus, and may spend
the proceeds in ways with which you do not agree."
CORPORATE CONSTITUTION
We have adopted certain organizational and operating policies and
principles used by Magna International, our former parent company, 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 Magna
International, by any of its affiliates (which include MI Developments) or 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) 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 voting separately as a
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
21
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".
Social Objectives
Pursuant to our corporate constitution, a maximum of 2% of our annual
pre-tax profits beginning with 2004 shall be allocated to the promotion of
social objectives during each fiscal year or the immediately following fiscal
year. Social objectives are objectives that are in our executive management's
opinion of a political, patriotic, philanthropic, charitable, educational,
scientific, artistic, social or other useful nature to the communities in
which we or our affiliates operate.
Incentive Bonuses
Our corporate constitution provides that the incentive bonuses paid or
payable to our corporate management in respect of each fiscal year, beginning
with 2004, shall not, in the aggregate, exceed 6% of our pre-tax profits
before profit sharing for such fiscal year. Our executive management, with the
approval of our board of directors or a duly appointed committee of our board,
has the right to allocate the amount to be paid to individuals within our
corporate management as well as to determine the timing and manner of payment
(whether in cash or in our shares or otherwise).
Authorized Capital Stock
Our corporate constitution provides that no resolution of our board of
directors purporting to:
o increase the maximum number of authorized shares of any class of our stock;
or
o create a new class or series of stock having voting rights of any kind
(other than on default of payment of dividends) or having rights to
participate in our profits in whatever manner (other than a class or
series convertible into existing classes of stock or a class or series of
stock having a fixed dividend or a dividend determined without regard to
profits);
shall be effective unless such resolution is approved by ordinary resolution
of the holders of each of our Class A Subordinate Voting Stock and our Class B
Stock voting separately as a class.
DESCRIPTION OF DEBT SECURITIES
This section describes the general terms of the debt securities to which
any prospectus supplement may relate. A prospectus supplement will describe in
greater detail the terms relating to any debt securities to be offered and may
provide information that is different from this prospectus. If the information
in the prospectus supplement with respect to the particular debt securities
being offered differs from the information contained in this prospectus, you
should rely on the information in the prospectus supplement.
In this section of the prospectus entitled "Description of Debt
Securities," when we refer to "MEC," "we," "our," or "us," we are referring to
Magna Entertainment Corp. and not any of its subsidiaries.
22
The debt securities will be issued in series under one or more
indentures. The debt securities that will be our senior debt will be issued
under an indenture to be entered into between us and a trustee to be
determined. Any debt securities that will be our subordinated debt will be
issued under a separate indenture to be entered into between us and a separate
trustee to be determined. The senior debt indenture and the subordinated debt
indenture are together called the "indentures".
Copies of the indentures are filed as exhibits to the registration
statement of which this prospectus is a part. Summaries of some of the
provisions that will be contained in the indentures follow. The particular
provisions of the indentures and terms defined in the indentures referred to
below are incorporated by reference in this prospectus. Section references
below are to the section in the applicable indenture. We encourage you to read
our indentures.
General
The debt securities may be either senior securities or subordinated
securities, and will be unsecured unless otherwise specified in the applicable
prospectus supplement. The indentures will permit an unlimited amount of debt
securities, and debt securities may be issued up to the aggregate principal
amount that may be authorized from time to time by the board of directors.
Debt securities may be issued from time to time and offered on terms
determined by market conditions at the time of sale.
Senior securities will be our direct unsecured obligations, except as
noted above, and will rank on a parity with all our other unsecured and
unsubordinated indebtedness. Subordinated securities will be our direct
unsecured obligations, except as noted above, and will be subordinated and
junior to all "senior indebtedness", which for this purpose includes any
senior securities, to the extent provided in the applicable supplemental
indenture and described in the prospectus supplement relating to that series.
The debt securities may be issued in one or more series with the same or
various maturities at par, at a premium or at a discount. Any debt securities
bearing no interest or interest at a rate which at the time of issuance is
below market rates will be sold at a discount, which may be substantial, from
their stated principal amount. Income tax consequences and other special
considerations applicable to any such substantially discounted debt securities
will be described in the related prospectus supplement.
You should refer to the prospectus supplement relating to the debt
securities to be offered for the following terms of the debt securities:
o the designation, aggregate principal amount and authorized
denominations of such debt securities;
o the total principal amount of the debt securities;
o the percentage of their principal amount at which such debt securities
will be issued;
o the date or dates on which the debt securities will mature;
o the rate or rates, which may be fixed or floating, per annum at which
the debt securities will bear interest, if any, or the method of
determining such rate or rates;
o the date or dates on which any such interest will be payable, the date
or dates on which payment of any such interest will commence and the
regular record dates for such interest payments;
23
o whether such debt securities are senior securities or subordinated
securities and, if subordinated, the material terms of such
subordination;
o the terms of any mandatory or optional redemption or repayment option,
including any provisions for any sinking, purchase or other analogous
fund;
o the currency, currencies or currency units for which the debt
securities may be purchased and the currency, currencies or currency
units in which the principal thereof, any premium thereon and any
interest thereon may be payable;
o the extent to which any of the debt securities will be issuable in
temporary or permanent global form, or the manner in which any
interest payable on a temporary or permanent global security will be
paid;
o the terms and conditions upon which conversion or exchange of the debt
securities into or for capital stock or other debt securities will be
effected, including the conversion price or exchange ratio, the
conversion or exchange period and any other conversion or exchange
provisions;
o information with respect to book-entry procedures, if any;
o if the currency, currencies or currency units for which the debt
securities may be purchased or in which the principal thereof, any
premium thereon and any interest thereon may be payable is at our
election or the purchaser's, the manner in which such election may be
made;
o if the amount of payments on the debt securities is determined with
reference to any index based on one or more currencies or currency
units, changes in the price of one or more securities or changes in
the price of one or more commodities, the manner in which such amount
may be determined;
o any changes to or additional events of default or covenants;
o a discussion of certain income tax, accounting and other special
considerations, procedures and limitations with respect to the debt
securities; and
o any other material terms of the debt securities.
If any of the debt securities are sold for one or more currencies or
currency units other than U.S. dollars or if the principal of, premium, if
any, or any interest on any series of debt securities is payable in one or
more currencies or currency units other than U.S. dollars, the restrictions,
elections, income tax consequences, specific terms and other information with
respect to such issue of debt securities and such currencies or currency units
will be described in the related prospectus supplement.
Unless otherwise specified in the prospectus supplement, the principal
of, any premium on, and any interest on the debt securities will be payable,
and the debt securities will be transferable, at the corporate trust office of
the trustee in New York, New York, provided that payment of interest, if any,
may be made at our option by check mailed on or before the payment date, first
class mail, to the address of the person entitled thereto as it appears on our
or our agent's registry books.
Debt securities may bear legends required by United States Federal tax
laws and regulations. (Section 2.01 of the indentures)
24
Unless otherwise specified in the prospectus supplement, the debt
securities will be issued only in fully registered form and in denominations
of $1,000 and any integral multiple thereof. No service charge will be made
for any transfer or exchange of any debt securities, but we may, except in
certain specified cases not involving any transfer, require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. (Sections 3.01 and 3.02 of the indentures)
Some of the debt securities may be issued as original issue discount debt
securities. Original issue discount securities bear no interest or bear
interest at below-market rates. These are sold at a discount below their
stated principal amount. If we issue these securities, the prospectus
supplement will describe any special tax, accounting or other considerations
relevant to these securities.
Exchange, Registration And Transfer
Debt securities may be transferred or exchanged at the corporate trust
office of the security registrar or at any other office or agency which is
maintained for these purposes. No service charge will be payable upon the
transfer or exchange, except for any applicable tax or governmental charge.
The security registrar for the debt securities will be designated in a
prospectus supplement.
In the event of any redemption in part of any series of debt securities,
we will not be required to issue, register the transfer of, or exchange debt
securities of any series between the opening of business 15 days before the
day of the mailing of a notice of redemption of securities of such series
selected for redemption and the close of business on the day of mailing of the
relevant notice of redemption.
(Section 3.05 of the indentures)
Global Securities
The debt securities of a series may be issued, in whole or in part, in
the form of one or more global securities that will be deposited with, or on
behalf of, a depositary identified in the prospectus supplement relating to
such series. (Section 2.04 of the indentures)
Global securities may be issued only in fully registered form and in
either temporary or permanent form. Unless and until it is exchanged in whole
or in part for the individual debt securities represented thereby, a global
security may not be transferred except as a whole by the depositary for such
global security to a nominee of such depositary or by a nominee of such
depositary to such depositary or another nominee of such depositary or by the
depositary or any nominee of such depositary to a successor depositary or any
nominee of such successor.
The specific terms of the depositary arrangement with respect to a series
of debt securities will be described in the related prospectus supplement. We
anticipate that the following provisions will generally apply to depositary
arrangements:
U.S. Book-Entry Securities. Upon the issuance of a global security, the
depositary for such global security or its nominee will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the individual debt securities represented by such global security to the
accounts of persons that have accounts with such depositary. Such accounts
shall be designated by the dealers, underwriters or agents with respect to
such debt securities, or by us if such debt securities are offered and sold
directly by us. Ownership of beneficial interests in a global security will be
limited to persons that have accounts with the applicable depositary
("participants") or persons that may hold interests through participants.
Ownership of beneficial interests in such global security will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by the applicable depositary or its
25
nominee, with respect to
interests of participants, and the records of participants, with respect to
interests of persons other than participants. The laws of some states and
other jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a global
security.
So long as the depositary for a global security, or its nominee, is the
registered owner of such global security, such depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the debt
securities represented by such global security for all purposes under the
applicable indenture. Except as provided below, owners of beneficial interests
in a global security will not be entitled to have any of the individual debt
securities of the series represented by such global security registered in
their names, will not receive or be entitled to receive physical delivery of
any such debt securities of such series in definitive form and will not be
considered the owners or holders thereof under the applicable indenture
governing such debt securities.
Payments of principal of, any premium on, and any interest on, individual
debt securities represented by a global security registered in the name of a
depositary or its nominee will be made to the depositary or its nominee, as
the case may be, as the registered owner of the global security representing
such debt securities. Neither we, the trustee for such debt securities, any
paying agent, nor the security registrar for such debt securities will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the global
security for such debt securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
We expect that the depositary for a series of debt securities or its
nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent global security representing any of such debt
securities, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such global security for such debt securities as shown on the records of
such depositary or its nominee. We also expect that payments by participants
to owners of beneficial interests in such global security held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name". Such payments will be
the responsibility of such participants.
Special Situation When a Global Security Will be Terminated. In a few
special situations described below, the global security will terminate and
interests in it will be exchanged for physical certificates representing those
interests. After that exchange, the choice of whether to hold securities
directly or in street name will be up to the investor. Investors must consult
their own bank or brokers to find out how to have their interests in
securities transferred to their own name, so that they will be direct holders.
If the depositary for a series of debt securities is at any time
unwilling, unable or ineligible to continue as depositary and a successor
depositary is not appointed by us within 90 days, we will issue individual
debt securities of such series in exchange for the global security
representing such series of debt securities. In addition, we may at any time
and in our sole discretion, subject to any limitations described in the
prospectus supplement relating to such debt securities, determine not to have
any debt securities of a series represented by one or more global securities
and, in such event, will issue individual debt securities of such series in
exchange for the global security or securities representing such series of
debt securities. Further, if we so specify with respect to the debt securities
of a series, an owner of a beneficial interest in a global security
representing debt securities of such series may, on terms acceptable to us,
the trustee and the depositary for such global security, receive individual
debt securities of such series in exchange for such beneficial interests,
subject to any limitations described in the prospectus
26
supplement relating to such debt securities. In any such instance, an owner of
a beneficial interest in a global security will be entitled to physical
delivery of individual debt securities of the series represented by such
global security equal in principal amount to such beneficial interest and to
have such debt securities registered in its name. Individual debt securities
of such series so issued will be issued in denominations, unless otherwise
specified by us, of $1,000 and integral multiples thereof.
Consolidation, Merger, Conveyance or Transfer
The indentures will provide that we may not consolidate with or merge
into any other corporation, or convey or transfer our properties and assets
substantially as an entirety to any other person, unless:
o We are the surviving corporation or the successor or transferee is a
corporation organized and existing under the laws of the United States
or any state thereof or the District of Columbia, or under the laws of
Canada or any province thereof, and such successor or transferee
expressly assumes by a supplemental indenture the due and punctual
payment of the principal of, any premium on, and any interest on, all
the outstanding debt securities and the performance of every covenant
in the applicable indenture on our part to be performed or observed;
o Immediately after giving effect to such transaction, no Event of
Default (as will be defined in the indentures and described below),
and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have occurred and be continuing; and
o We deliver to the trustee an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, conveyance or
transfer and such supplemental indenture comply with the foregoing
provisions relating to such transaction and that all conditions
precedent contained in the applicable indenture relating to such
transaction have been satisfied. (Section 8.01 of the indentures)
In case of any such consolidation, merger, conveyance or transfer, such
successor or transferee corporation will succeed to and be substituted for us
as obligor on the debt securities, with the same effect as if it had been
named in the applicable indenture as us, and we will be released from all
obligations under the indentures. (Section 8.02 of the indentures)
The indentures and the debt securities will not contain any covenants or
other provisions designed to protect holders of debt securities in the event
of a highly leveraged transaction involving us or our subsidiaries.
Purchase of Debt Securities at Your Option upon a Change in Control
Unless the applicable prospectus supplement specifies otherwise, if a
change in control occurs, you will have the right to require us to purchase
all or any part of your debt securities 30 business days after the occurrence
of such change in control at a purchase price equal to 100% of the principal
amount of the debt securities together with accrued and unpaid interest to,
but excluding, the purchase date. Debt securities submitted for purchase must
be in integral multiples of $1,000 principal amount. (Section 10.07 of the
indentures)
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:
27
o information about and the terms and conditions of the change in
control;
o information about the holders' right to convert the debt securities,
if applicable;
o the holders' right to require us to purchase the debt securities;
o the procedures required for exercise of the purchase option upon the
change in control; and
o the name and address of the paying agent and, if applicable, the
conversion agent.
(Section 10.07(a) of the indentures)
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 debt securities 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. (Section
10.07(b) of the indentures)
Unless otherwise specified in the applicable prospectus supplement, a
change in control will be deemed to have occurred if any of the following
occurs:
o any "person" or "group" is or becomes the "beneficial owner," directly
or indirectly, of shares of our voting stock representing 50% or more
of the total voting power of all outstanding classes of our voting
stock or has the power, directly or indirectly, to elect a majority of
the members of our board of directors;
o we consolidate with, or merge with or into, another person or we sell,
assign, convey, transfer, lease or otherwise dispose of all or
substantially all our assets, or any person consolidates with, or
merges with or into, us, in any such event other than pursuant to a
transaction in which the persons that "beneficially owned," directly
or indirectly, the shares of our voting stock immediately prior to
such transaction "beneficially own," directly or indirectly, shares of
our voting stock representing at least a majority of the total voting
power of all outstanding classes of voting stock of the surviving or
transferee person; or
o the holders of our capital stock approve any plan or proposal for the
liquidation or dissolution of the Company (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,
continues 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 in the case of any debt securities that are convertible into shares of
our Class A Subordinate Voting Stock, the last sale price of our Class
A Subordinate Voting Stock for any five trading
28
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 any debt securities that are convertible into shares of
our Class A Subordinate Voting Stock, upon 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 debt securities become convertible solely into such
Class A Subordinate Voting Stock. (Section 10.07(a) of the indentures)
For purposes of this change in control definition:
o "person" and "group" have the meanings given to them for purposes of
Sections 13(d) and 14(d) of the Exchange Act or any successor provisions,
and the term "group" includes any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, or any successor provision;
o a "beneficial owner" will be determined in accordance with Rule 13d-3
under the Exchange Act, as in effect on the date of the indenture, except
that the number of shares of our voting stock will be deemed to include,
in addition to all outstanding shares of our voting stock and unissued
shares deemed to be held by the "person" or "group" or other person with
respect to which the change in control determination is being made, all
unissued shares deemed to be held by all other persons;
o "beneficially own" and "beneficially owned" have meanings correlative to
that of beneficial owner;
o "unissued shares" means shares of voting stock not outstanding that are
subject to options, warrants, rights to purchase or conversion privileges
exercisable within 60 days of the date of determination of a change in
control, including the shares of Class A Subordinate Voting Stock
issuable upon conversion of the debt securities; 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 indentures:
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
29
o otherwise comply with all federal and state securities laws in
connection with any offer by us to purchase the debt securities 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. As of the
date of this prospectus, 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, this change
in control purchase feature is included in some of our outstanding
indebtedness.
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 outstanding or otherwise adversely affect a
holder. Neither we nor our subsidiaries are prohibited from incurring debt
under the indentures. The incurrence of significant amounts of additional debt
could adversely affect our ability to service our debt, including the debt
securities.
Certain of our debt agreements that we may enter into in the future may
prohibit our redemption or repurchase of the debt securities and provide that
a change in control constitutes an event of default.
We may not purchase any subordinated debt securities at any time when the
subordination provisions of the subordinated debt indenture otherwise would
prohibit us from making such repurchase. If we fail to repurchase any
subordinated debt securities when required, this failure would constitute an
event of default under the applicable 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 debt securities tendered by
holders. In addition, we may in the future incur debt that has similar change
of control provisions that permit holders of the future debt to accelerate or
require us to repurchase the future debt upon the occurrence of events similar
to a change in control. Our failure to repurchase the debt securities upon a
change in control would result in an event of default under the applicable
indenture, whether or not the purchase is permitted by the subordination
provisions of the applicable indenture.
Events of Default; Waiver and Notice Thereof
As to any series of debt securities, unless otherwise specified in the
applicable prospectus supplement, an Event of Default will be defined in the
indentures as:
1. default for 30 days in payment of any interest on the debt
securities of such series;
2. default in payment of principal of or any premium on the debt
securities of such series at maturity or on the date fixed for
redemption or purchase, if any;
3. default in payment of any sinking or purchase fund or analogous
obligation, if any, on the debt securities of such series;
4. default by us in the performance, or breach, of any other covenant
or warranty contained in the applicable indenture for the benefit of
such series which shall not have been remedied for a period of 60
days (30 days in the case of any failure by us to provide
30
timely notice of a change in control) after notice is given as
specified in the applicable indenture;
5. 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
6. certain events of our bankruptcy, insolvency and reorganization.
(Section 5.01 of the indentures)
Unless otherwise specified in the applicable prospectus supplement, and
except as provided in (5) above, a default under our other indebtedness will
not be a default under the indentures and a default under one series of debt
securities will not necessarily be a default under another series. Any
additions, deletions or other changes to the Events of Default which will be
applicable to a series of debt securities will be described in the prospectus
supplement relating to such series of debt securities. (Section 6.02 of the
indentures)
The indentures will provide that if an Event of Default described in
clause (1), (2), (3), (4) or (5) above (if the Event of Default under clause
(4) is with respect to less than all series of debt securities then
outstanding) shall have occurred and be continuing with respect to any series,
either the trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of such series then outstanding (each such
series acting as a separate class) may declare the principal (or, in the case
of original issue discount securities, the portion thereof specified in the
terms thereof) of all outstanding debt securities of such series and the
interest accrued thereon, if any, to be due and payable immediately. The
indentures will provide that if an Event of Default described in clause (4)
(if the Event of Default under clause (4) is with respect to all series of
debt securities then outstanding) above shall have occurred and be continuing,
either the trustee or the holders of at least 25% in aggregate principal
amount of all debt securities then outstanding, treated as one class, may
declare the principal (or, in the case of original issue discount securities,
the portion thereof specified in the terms thereof) of all debt securities
then outstanding and the interest accrued thereon, if any, to be due and
payable immediately. The indentures will provide that if an Event of Default
described in clause (6) above has occurred, all debt securities then
outstanding and the interest accrued thereon, if any, shall automatically be
due and payable immediately. Upon certain conditions, such declarations may be
annulled and defaults (except for certain payments and other specified
defaults) may be waived by the holders of at least a majority in aggregate
principal amount of the debt securities of such series then outstanding on
behalf of the holders of all debt securities. (Section 5.02 of the indentures)
Under the indentures, the trustee will be required to give to the holders
of each series of debt securities notice of all uncured defaults known to it
with respect to such series within 90 days after such a default occurs (the
term default to include the events specified above without notice or grace
periods). However, except in the case of default in the payment of principal
of, any premium on, or any interest on, any of the debt securities, or default
in the payment of any sinking or purchase fund installment or analogous
obligations, the trustee shall be protected in withholding such notice if it
in good faith determines that the withholding of such notice is in the
interests of the holders of the debt securities of such series.
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No holder of any debt securities of any series will be able to institute
any action under the applicable indenture unless:
o Such holder shall have given the trustee written notice of a
continuing Event of Default with respect to such series;
o The holders of not less than 25% in aggregate principal amount of the
debt securities of such series then outstanding shall have requested
the trustee to institute proceedings in respect of such Event of
Default;
o Such holder or holders shall have offered the trustee such reasonable
indemnity as the trustee may require;
o The trustee shall have failed to institute an action for 60 days
thereafter; and
o No inconsistent direction shall have been given to the trustee during
such 60-day period by the holders of a majority in aggregate principal
amount of debt securities of such series. (Section 5.07 of the
indentures)
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
debt security on or after the applicable due date or the right to convert the
debt securities in accordance with the indentures. (Section 5.08 of the
indentures)
The holders of a majority in aggregate principal amount of the debt
securities of any series affected and then outstanding will have the right,
subject to certain limitations, 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 such
series of debt securities. (Section 5.12 of the indentures)
The indentures will provide that, in case an Event of Default shall occur
and be continuing, the trustee, in exercising its rights and powers under the
applicable indenture, will be required to use the degree of care and skill as
a prudent man in the conduct of his own affairs. The indentures will further
provide that the trustee shall not be required to expend or risk its own funds
or otherwise incur any financial liability in the performance of any of its
duties under the applicable indenture unless it has obtained satisfactory
assurances as to repayment of such funds or adequate indemnity against such
risk or liability. (Section 6.01 of the indentures)
We will be required to furnish to the trustee within 90 days after the
end of each fiscal year a statement signed by certain of our officers stating
that a review of our activities during such year and of our performance under
the applicable indenture and the terms of the debt securities has been made,
and, to the best of the knowledge of the signatory based on such review, we
have complied with all conditions and covenants of the applicable indenture
or, if we are in default, specifying such default. (Section 10.04 of the
indentures)
If any debt securities are denominated in a currency other than U.S.
dollars, then for the purposes of determining whether the holders of the
requisite principal amount of debt securities have taken any action as herein
described, the principal amount of such debt securities shall be deemed to be
that amount of U.S. dollars that could be obtained for such principal amount
on the basis of the spot rate of exchange into U.S. dollars for the currency
in which such debt securities are denominated (as evidenced to the trustee by
an Officers' Certificate of ours) as of the date the taking of such action by
the holders of such
32
requisite principal amount is evidenced to the trustee as provided in the
indentures. (Section 1.04(a) of the indentures)
Payment and Paying Agent
We will pay principal, interest and any premium on fully registered
securities in the designated currency or currency unit at the office of the
paying agent. Payments of interest on fully registered securities may be made
by check mailed to the persons in whose names the debt securities are
registered on days specified in the indenture or any prospectus supplement.
(Section 3.07 of the indentures)
If any amount payable on any debt security or coupon remains unclaimed at
the end of two years after the amount becomes due and payable, the paying
agent will release any unclaimed amounts to us. (Section 10.03 of the
indentures)
We will designate the paying agent for the debt securities in the
applicable prospectus supplement.
Modification of the Indentures
We and the trustee may, without notice to or the consent of the holders
of the debt securities (provided that in the case of the third item below, the
interests of the holders of debt securities would not, in the good faith
opinion of our board of directors and the trustee, be adversely affected in
any material respect), enter into one or more supplemental indentures, for,
among others, one or more of the purposes listed below:
o to evidence the succession of another corporation to us, and the
assumption by such successor of our obligations under the applicable
indenture and the debt securities of any series;
o to add covenants of ours, or surrender any of our rights or power
conferred by the applicable indenture, for the benefit of the holders
of debt securities of any or all series;
o to cure any ambiguity, omission, defect or inconsistency in, or make
any other provision with respect to questions arising under, the
applicable indenture;
o to establish the form or terms of any series of debt securities,
including any convertible securities;
o to evidence and provide for the acceptance of any successor trustee
with respect to one or more series of debt securities or to facilitate
the administration of the trusts thereunder by one or more trustees in
accordance with the applicable indenture;
o to provide any additional Events of Default;
o to comply with the Trust Indenture Act, the Securities Act and any
requirements of the SEC; and
o to conform the indenture to the description of the securities
contained in this prospectus and the applicable prospectus supplement.
(Section 9.01 of the indentures)
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The indentures or the rights of the holders of the debt securities may be
modified or amended in any respect by us and the trustee with the consent of
the holders of a majority in aggregate principal amount of the debt securities
of each series affected by such modification or amendment then outstanding,
but no such modification or amendment may be made without the consent of the
holder of each outstanding debt security affected thereby which would:
o change the maturity of any payment of principal of, or any premium on,
or any installment of interest on, any debt security, or reduce the
principal amount thereof or the interest or any premium thereon, or
change the method of computing the amount of principal thereof or
premium or interest thereon on any date or change any place of payment
where, or the currency in which, any debt security or any premium or
interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment on or after the maturity thereof,
or, in the case of redemption or repayment, on or after the redemption
date or the repayment date, as the case may be;
o in the case of subordinated or convertible debt securities, modify the
subordination or conversion provisions in a manner materially adverse
to the holders of those debt securities;
o reduce the percentage in principal amount of the outstanding debt
securities of any series, the consent of whose holders is required for
any such modification or amendment, or the consent of whose holders is
required for any waiver of compliance with certain provisions of the
applicable indenture or certain defaults thereunder and their
consequences provided for in the applicable indenture; or
o modify or amend any of the provisions of certain sections of the
applicable indenture, including the provisions summarized in this
paragraph, except to increase any such percentage or to provide that
certain other provisions of the applicable indenture cannot be
modified or waived without the consent of the holder of each
outstanding debt security affected thereby.
(Section 9.02 of the indentures)
Conversion of the Debt Securities
If specified in the applicable prospectus supplement, the holders of a
series of debt securities, will have the right, at their option, to convert
such debt securities 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 a conversion price per
share, subject to the adjustments described below, to be determined by
dividing the principal amount of such debt security by the conversion price in
effect on the conversion date as set forth in the applicable debt security.
(Sections 12.01 and 12.02 of the senior debt indenture and sections 13.01 and
13.02 of the subordinated debt indenture).
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 debt securities with conversion rights. If
you submit your debt securities for conversion between a record date and the
opening of business on the next interest payment date (except for debt
securities or portions of debt securities 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.
34
As a result of the foregoing provisions, if the exception described in the
preceding sentence does not apply and you surrender your debt securities with
conversion rights 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.
(Section 12.02 of the senior debt indenture and section 13.02 of the
subordinated debt indenture).
We will not issue fractional shares of Class A Subordinate Voting Stock
upon conversion of debt securities with conversion rights. 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 debt securities with conversion rights are called for redemption
or are subject to purchase following a change in control, your conversion
rights would 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 debt securities 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 rights will terminate at the close of business on the
date the default is cured and the debt securities are redeemed or purchased.
If you have submitted your debt securities with conversion rights for purchase
upon a change in control, you may convert your debt securities only if you
withdraw your election in accordance with the indenture. (Section 12.03 of the
senior debt indenture and section 13.03 of the subordinated debt indenture).
The conversion price will be adjusted upon the occurrence of:
1. the issuance of shares of our Class A Subordinate Voting Stock as a
dividend or distribution on our Class A Subordinate Voting Stock;
2. the subdivision or combination of our outstanding Class A Subordinate
Voting Stock;
3. the issuance to all or substantially all holders of our Class A
Subordinate Voting Stock of rights or warrants entitling them for a
period of not more than 60 days to subscribe for or purchase our Class
A Subordinate Voting Stock, or securities convertible into our Class A
Subordinate Voting Stock, at a price per share or a conversion price
per share less than the then current market price per share; provided
that the conversion price will be readjusted to the extent that such
rights or warrants are not exercised prior to the expiration;
4. the distribution to all or substantially all holders of our Class A
Subordinate Voting Stock of shares of our capital stock, evidences of
indebtedness or other non-cash assets, or rights or warrants,
excluding:
o dividends, distributions and rights or warrants referred to in
clause 1 or 3 above; and
o distribution of rights to all holders of Class A Subordinate Voting
Stock pursuant to an adoption of a shareholder rights plan;
5. the dividend or distribution to all or substantially all holders of
our Class A Subordinate Voting Stock of all-cash distributions in an
aggregate amount that together with (A) any cash and the fair market
value of any other consideration payable in respect of any tender
offer by us or any of our subsidiaries for our Class A Subordinate
Voting Stock consummated within the preceding 12 months not triggering
a conversion price adjustment and (B) all other all-cash distributions
to all or substantially all holders of our Class A Subordinate Voting
Stock made within the preceding 12 months not triggering a conversion
price adjustment, exceeds
35
an amount equal to 10%, or such other percentage as may be specified
in the applicable prospectus supplement, 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%, or such other percentage as may be specified in the applicable
prospectus supplement, of our market capitalization on the expiration
date of such tender offer. (Section 12.07 of the senior debt indenture
and section 13.07 of the subordinated debt indenture)
If we implement a shareholders rights plan, we will be required under the
indenture to provide that the holders of our convertible debt securities will
receive the rights upon conversion of the debt securities, 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 debt securities with
conversion rights will generally be entitled to convert their debt securities
with conversion rights into the same type of consideration received by Class A
Subordinate Voting Stock holders immediately prior to one of these types of
events. (Section 12.13 of the senior debt indenture and section 13.13 of the
subordinated debt indenture)
We will be permitted to reduce the conversion price of the debt
securities with conversion rights 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 will be required to give at least 15 days prior notice of
any reduction in the conversion price. (Section 12.15 of the senior debt
indenture and section 13.15 of the subordinated debt indenture)
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. (Section 12.10 of the
senior debt indenture and section 13.10 of the subordinated debt indenture)
No adjustment in the conversion price will be 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 in this prospectus or the applicable prospectus supplement
with respect to a series of debt securities with conversion rights, we will
not adjust the conversion price for the
36
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. (Section 12.08 of the senior debt indenture and
section 13.08 of the subordinated debt indenture)
Optional Redemption
Unless otherwise specified in the applicable prospectus supplement, the
debt securities 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 debt
securities, at 100% of the principal amount of the debt securities together
with accrued interest up to, but not including, the redemption date, subject
to any restrictions or limitations on the Company's right to redeem such debt
securities that may be specified in the applicable prospectus supplement. If
the redemption date fixed for any series of debt securities falls after a
regular record date and on or before the next succeeding interest payment
date, then the applicable interest payment shall be payable to holders of
record on the relevant regular record date. (Section 11.08 of the indentures)
If fewer than all the debt securities are to be redeemed, the trustee
will select the debt securities to be redeemed by lot, or in its discretion,
on a pro rata basis. If any debt security is to be redeemed in part only, a
new debt security in principal amount equal to the unredeemed principal
portion will be issued. If a portion of your debt security with conversion
rights is selected for partial redemption and you convert a portion of your
debt securities with conversion rights, the converted portion will be deemed
to be the portion selected for redemption.
Unless otherwise specified in the applicable prospectus supplement, the
Company shall not be required to make mandatory redemption payments with
respect to any series of debt securities or set aside any funds for the
redemption of securities. (Section 11.09 of the indentures)
Subordinated Debt Securities
Unless otherwise specified in the applicable prospectus supplement, the
subordinated debt securities will be subordinate in right of payment to all
our existing and future Senior Indebtedness. The senior debt securities
constitute Senior Indebtedness under the subordinated debt indenture. The
subordinated debt securities will rank equally with our other subordinated
indebtedness. The subordinated debt indenture does not restrict the amount of
Senior Indebtedness or other Indebtedness that we or any of our subsidiaries
may incur. (Section 12.01 of the subordinated debt indenture)
The subordinated debt 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 Indebtedness will receive payment in full before the holders
of any series of subordinated debt securities 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 subordinated debt securities. (Section 12.02(a) of the subordinated
debt indenture)
The subordinated debt indenture also provides no payment or prepayment on
account of principal, or interest on, and no repurchase, redemption or other
retirement (including without limitation any defeasance) of any series of
subordinated debt securities shall be made if at the time of such payment or
prepayment or immediately after giving effect thereto, there shall exist under
any Senior Indebtedness or any agreement or instrument pursuant to which any
Senior Indebtedness is outstanding, any default or any conditions, event or
act which with notice, lapse of time, or both, would constitute an event of
default,
37
unless such Senior Indebtedness 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. (Section 12.03 of the subordinated debt indenture)
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 any series of subordinated debt securities because of
any event of default, all Senior Indebtedness must be paid in full in cash
before the holders of the subordinated debt securities are entitled to any
payments whatsoever. (Section 12.02 of the subordinated debt indenture)
As a result of these subordination provisions, in the event of our
insolvency, holders of any series of subordinated debt securities may recover
ratably less than the holders of our Senior Indebtedness and our general
creditors. Such subordination will not prevent the occurrence of any Event of
Default under the subordinated debt indenture.
If the trustee or any holder of any series of subordinated debt
securities receives any payment or distribution of our assets of any kind in
contravention of any of the terms of the subordinated debt indenture, whether
in cash, property or securities, including, without limitation, by way of
set-off or otherwise, in respect of the subordinated debt securities before
all Senior Indebtedness 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 Indebtedness, and will be immediately paid over or delivered to the
holders of Senior Indebtedness or their representative or representatives to
the extent necessary to make payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness. (Section 12.05 of the subordinated debt indenture)
The subordinated debt securities 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 any
series of subordinated debt securities, 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
debt securities 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 subordinated debt indenture does not limit the amount of additional
Indebtedness, including Senior Indebtedness, that we can create, incur, assume
or guarantee, nor will the subordinated debt 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 October 10, 2003, between MEC, the Guarantors named therein, Bank of
Montreal, acting through its Chicago lending office and BMO Nesbitt Burns, a
division of Bank of Montreal, as arranger, as such facility may be further
amended, extended, renewed, restated, supplemented or otherwise modified (in
whole or in part, and without limitation as to amount, terms, conditions,
covenants and other provisions) from time to time,
38
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, or similar instruments or letters of credit, bank
guarantees or bankers' acceptances, or reimbursement agreements in respect
thereof, or representing the balance deferred and unpaid of the purchase price
of any property, including pursuant to capital leases and sale-and-leaseback
transactions, or representing our obligations and liabilities, contingent or
otherwise, in respect of leases required, in conformity with GAAP, to be
accounted for as capitalized lease obligations on our balance sheet, or
representing any hedging obligations under an Exchange Rate Contract or an
Interest Rate Agreement, except any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing
indebtedness, other than obligations under an Exchange Rate Contract or an
Interest Rate Agreement, would appear as a liability upon a balance sheet of
such person prepared in accordance with GAAP, and also includes, to the extent
not otherwise included, the guarantee of items that would be included within
this definition. The amount of any Indebtedness outstanding as of any date
shall be the accreted value thereof, in the case of any Indebtedness issued
with original issue discount. Indebtedness shall not include liabilities for
taxes of any kind.
"Interest Rate Agreement" means, with respect to any person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar
agreement or other similar agreement the principal purpose of which is to
protect the party indicated therein against fluctuations in interest rates.
"Senior Indebtedness" 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, any series of senior debt securities 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
Indebtedness 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 debt
securities or expressly provides that it is on the same basis as or junior to
any series of subordinated debt securities.
Satisfaction and Discharge; Defeasance
We may be discharged from our obligations on the debt securities of any
series that have matured or will mature or be redeemed within one year if we
deposit with the trustee enough cash to pay all the principal, interest and
any premium due to the stated maturity date or redemption date of the debt
securities. (Section 4.01 of the indentures)
Each indenture contains a provision that permits us to elect:
39
1. to be discharged from all of our obligations (subject to limited
exceptions) with respect to any series of debt securities then outstanding;
and/or
2. to be released from our obligations under the following covenants and
from the consequences of an event of default or cross-default resulting from a
breach of these covenants:
a. the limitations on mergers, consolidations and certain sales of
assets,
b. the filing of certain reports pursuant to Sections 7.04 and
10.04 of the indenture,
c. the payment of principal, premium, if any, and interest on the
debt securities,
d. the maintenance of the Company's corporate existence, and
e. the obligation to repurchase the debt securities upon a change
in control pursuant to Section 10.07 of the indenture.
To make either of the above elections, we must deposit in trust with the
trustee enough money to pay in full the principal, interest and premium on the
debt securities. This amount may be made in cash and/or U.S. government
obligations, if the debt securities are denominated in U.S. dollars. This
amount may be made in cash and/or foreign government securities if the debt
securities are denominated in a foreign currency. As a condition to either of
the above elections, we must deliver to the trustee an opinion of counsel that
the holders of the debt securities will not recognize income, gain or loss for
Federal income tax purposes as a result of the action. (Section 4.03 of the
indentures)
If either of the above events occur, the holders of the debt securities
of the series will not be entitled to the benefits of the indentures, except
for registration of transfer and exchange of debt securities and replacement
of lost, stolen or mutilated debt securities. (Sections 4.01 and 4.03 of the
indentures)
Notices To Holders
Notice shall be given to holders of securities by mail to the addresses
of the holders as they appear in the Security Register.
We, the trustee, and any agent of ours or the trustee may treat the
registered owner of any registered security as the absolute owner of that
security for all purposes.
Replacement Of Securities
We will replace debt securities that have been mutilated, but you will
have to pay for the replacement and will have to surrender the mutilated debt
security to the trustee first. Debt securities that become destroyed, stolen,
or lost will only be replaced by us upon your providing evidence of
destruction, loss, or theft that the trustee and we find satisfactory. In the
case of a destroyed, lost, or stolen debt security, we may also require you,
as the holder of the debt security, to indemnify the trustee and us before we
will issue any replacement debt security. (Section 3.06 of the indentures)
Governing Law
The indentures and the debt securities will be governed by, and construed
under, the internal laws of the State of New York, without giving effect to
applicable principles of conflicts of laws.
40
Our Relationship With The Trustee
We may from time to time maintain lines of credit, and have other
customary banking relationships, with the trustee under the senior indenture
or the trustee under the subordinated debt indenture.
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 September 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. However, no dividend payable in shares of our Class B
Stock may be declared on shares of our Class A Subordinate Voting Stock.
41
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 require 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
42
called and held for that purpose (provided, however, that an amendment to
create stock ranking in priority to or on a parity with the Class A
Subordinate Voting Stock shall be deemed not to adversely affect the rights of
the holders of Class A Subordinate Voting Stock). It is further required that
a majority of the votes cast at such a meeting, or in any other vote by Class
A Subordinate Voting Stock holders voting as a class, not be votes attaching
to the Class A Subordinate Voting Stock beneficially owned, directly or
indirectly, by Magna International or 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.
Neither our Class A Subordinate Voting Stock nor our Class B Stock is
redeemable, has any preemptive rights or is 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, or issued upon the conversion of Debt
Securities or the exercise of warrants offered hereby, will be fully paid and
non-assessable when issued.
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
43
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 has to enforce these rights only if either we or the
holders of our Class A Subordinate Voting Stock agree to pay the trustee's
costs and to indemnify the trustee. A holder of our Class A Subordinate Voting
Stock is not entitled to take action unless the trustee refused to act after a
request to do so by holders of at least 10% of our outstanding Class A
Subordinate Voting Stock.
The trust agreement prohibits 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.
DESCRIPTION OF SECURITIES WARRANTS
We may issue securities warrants for the purchase of debt securities or
Class A Subordinate Voting Stock. Securities warrants may be issued
independently or together with any debt securities or shares of Class A
Subordinate Voting Stock offered by any prospectus supplement and may be
attached to or separate from such debt securities or shares of Class A
Subordinate Voting Stock. The securities warrants are to be issued under
warrant agreements to be entered into between us and such bank or trust
company as will be named as warrant agent in the prospectus supplement
relating to the particular issue of securities warrants. The warrant agent
will act solely as an agent of ours in connection with the securities warrants
and will not assume any obligation or relationship of agency or trust for or
with any holders of securities warrants or beneficial owners of securities
warrants. The following summaries of certain provisions of the form of warrant
agreement and securities warrants do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the applicable warrant agreement and the securities warrants.
44
General
If securities warrants are offered, the prospectus supplement will
describe the terms of the securities warrants, including the following if
applicable to the particular offering:
o the title of the warrants;
o the offering price;
o the currency, currencies or currency units for which securities
warrants may be purchased;
o the designation, aggregate principal amount, currency, currencies or
currency units and terms of any debt securities purchasable upon
exercise of the securities warrants and the price at which such debt
securities may be purchased upon such exercise;
o the number of shares of Class A Subordinate Voting Stock purchasable
upon exercise of the securities warrants and the price at which such
shares of Class A Subordinate Voting Stock may be purchased upon such
exercise, as well as antidilution provisions;
o the designation and terms of any debt securities or Class A
Subordinate Voting Stock with which the securities warrants are issued
and the number of securities warrants issued with any such debt
security or share of Class A Subordinate Voting Stock;
o the date on and after which the securities warrants and any related
debt securities or Class A Subordinate Voting Stock will be separately
transferable;
o the date on which the right to exercise the securities warrants shall
commence and the date on which such right shall expire;
o whether the securities warrants will be issued in registered or bearer
form;
o information relating to book-entry procedures, if any;
o a discussion of certain income tax and any special considerations,
procedures and limitations relating to the securities warrants;
o redemption or call provisions, if any, applicable to the warrants; and
o any other material terms of the securities warrants.
Securities warrants may be exchanged for new securities warrants of
different denominations, may (if in registered form) be presented for
registration of transfer, and may be exercised at the corporate trust office
of the warrant agent or any other office indicated in the prospectus
supplement. Before the exercise of their securities warrants, holders of
securities warrants will not have any of the rights of holders of the debt
securities or Class A Subordinate Voting Stock purchasable upon such exercise,
including the right to receive payments of principal of, any premium on, or
any interest on, any debt securities purchasable upon such exercise or to
enforce the covenants in the indentures or to receive payments of dividends,
if any, on the Class A Subordinate Voting Stock purchasable upon such exercise
or to exercise any applicable right to vote.
45
Exercise of Securities Warrants
Each securities warrant will entitle the holder to purchase such
principal amount of debt securities or such number of shares of Class A
Subordinate Voting Stock at such exercise price as shall in each case be set
forth in, or calculable from, the prospectus supplement relating to the
securities warrant. Securities warrants may be exercised at such times as are
set forth in the prospectus supplement relating to such securities warrants.
After the close of business on the expiration date of unexercised securities
warrants (or such later date to which such expiration date may be extended by
us), such warrants will become void. Subject to any restrictions and
additional requirements that may be set forth in the prospectus supplement
relating thereto, securities warrants may be exercised by delivery to the
warrant agent of the certificate evidencing such securities warrants properly
completed and duly executed and of payment as provided in the prospectus
supplement of the amount required to purchase the debt securities or shares of
Class A Subordinate Voting Stock purchasable upon such exercise. The exercise
price will be the price applicable on the date of payment in full, as set
forth in the prospectus supplement relating to the securities warrants. Upon
receipt of such payment and the certificate representing the securities
warrants to be exercised properly completed and duly executed at the corporate
trust office of the warrant agent or any other office indicated in the
prospectus supplement, we will, as soon as practicable, issue and deliver the
debt securities or shares of Class A Subordinate Voting Stock purchased upon
such exercise. If fewer than all of the securities warrants represented by
such certificate are exercised, a new certificate will be issued for the
remaining amount of securities warrants.
PLAN OF DISTRIBUTION
We may sell the securities offered by this prospectus through
underwriters or dealers, through agents, directly to purchasers, or through a
combination of any such methods of sale.
The prospectus supplement relating to the offered securities will set
forth their offering terms, including the following:
o the name or names of any underwriters, dealers or agents;
o the purchase price of the securities offered and the proceeds to us from
such sale;
o any underwriting discounts, commissions and other items constituting
compensation to underwriters, dealers or agents;
o any initial public offering price;
o any discounts or concessions allowed or reallowed or paid by underwriters or
dealers to other dealers;
o any securities exchanges on which the offered securities may be listed; and
o any other material terms of the offered securities.
If we use underwriters in the sale, such underwriters will acquire the
securities for their own account. The underwriters may resell the securities
in one or more transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the time of sale. The
securities may be offered to the public either through underwriting syndicates
represented by managing underwriters or by underwriters without a syndicate.
The obligations of the underwriters to purchase the securities will be subject
to certain conditions. The underwriters will be obligated to purchase all the
securities of the series offered if any of the securities are purchased. The
underwriters may change from
46
time to time any initial public offering price and any discounts or
concessions allowed or re-allowed or paid to dealers.
After the initial offering of the securities offered to the public by
this prospectus and the prospectus supplement, the representatives of the
underwriters may change the public offering price in the United States and
such discounts or concessions. In the case of a public offering in Canada, the
public offering price in Canada may be decreased, and further changed from
time to time, by the representatives of the underwriters to an amount not
greater than the public offering price specified in the prospectus supplement,
provided that the underwriters have made a reasonable effort to sell all the
securities offered for sale in Canada by such prospectus and prospectus
supplement at such specified price.
We may sell offered securities through agents designated by us. Any agent
involved in the offer or sale of the securities for which this prospectus is
delivered will be named, and any commissions payable by us to that agent will
be set forth in the prospectus supplement. Unless otherwise indicated in the
prospectus supplement, the agents have agreed to use their reasonable best
efforts to solicit purchases for the period of their appointment.
If so indicated in the prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by certain specified
institutions to purchase offered securities from us at the public offering
price set forth in the prospectus supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject to any conditions set forth in the
prospectus supplement and the prospectus supplement will set forth the
commission payable for solicitation of such contracts. The underwriters and
other persons soliciting such contracts will have no responsibility for the
validity or performance of any such contracts.
We may also sell the offered securities directly. In that case, no
underwriters or agents would be involved.
Underwriters, dealers and agents may be entitled under agreements entered
into with us to indemnification by us against certain civil liabilities,
including liabilities under the Securities Act and applicable provincial
securities laws in Canada, or to contribution by us to payments they may be
required to make in respect thereof. The terms and conditions of such
indemnification will be described in an applicable prospectus supplement.
Underwriters, dealers and agents may be customers of, engage in transactions
with, or perform services for, us or our affiliates in the ordinary course of
business.
Underwriters, dealers or agents that participate in the distribution of
the offered securities may be deemed to be an underwriter within the meaning
of the Securities Act and applicable provincial securities laws in Canada and
any discounts or commissions received by them from us and any profit on the
resale of the offered securities by them may be treated as underwriting
discounts and commissions under the Securities Act. We will identify any
underwriters or agents, and describe their compensation, in a prospectus
supplement.
Certain of any such underwriters and agents, including their associates,
may engage in transactions with and perform services for us or our
subsidiaries in the ordinary course of business. One or more of our affiliates
may from time to time act as an agent or underwriter in connection with the
sale of the offered securities to the extent permitted by applicable law. The
participation of any such affiliate in the offer and sale of the securities
will comply with Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. regarding the offer and sale of securities of an
affiliate.
Each series of offered securities other than Class A Subordinate Voting
Stock will be a new issue of securities with no established trading market.
Any underwriters to whom any such securities are sold
47
by us for public offering and sale may make a market in such offered
securities, but such underwriters will not be obligated to do so and may
discontinue any market making activities at any time without notice. No
assurance can be given as to the liquidity of the trading market for any such
offered securities.
Any underwriter may engage in stabilizing and syndicate covering
transactions in accordance with Rule 104 under the Exchange Act. Rule 104
permits stabilizing bids to purchase the underlying security so long as the
stabilizing bids to do not exceed a specified maximum amount. The underwriters
may over-allot offered securities, thereby creating a short position in the
underwriters' accounts. Syndicate covering transactions involve purchases of
offered securities in the open market after the distribution has been
completed to cover syndicate short positions. Stabilizing and syndicate
covering transactions may cause the price of the offered securities to be
higher than it would otherwise be in the absence of such transactions. These
transactions, if commenced, may be discontinued at any time.
Pursuant to policy statements of the Ontario and Quebec Securities
Commissions, an underwriter may not, throughout any period of distribution
under this prospectus, bid for or purchase our offered securities. This
restriction is subject to certain exceptions on the condition that the bid or
purchase not be engaged in for the purpose of creating actual or apparent
active trading in, or raising the price of, our offered securities. These
exceptions include a bid or purchase permitted under the by-laws and rules of
applicable stock exchanges relating to market stabilization and passive
market-making activities and a bid or purchase made for or on behalf of a
customer where the order was not solicited during the period of
distribution. All these transactions shall also be effected in accordance with
Rule 104 under the Exchange Act.
LEGAL MATTERS
The validity of the securities described in this prospectus will be
passed upon for us by Sidley Austin Brown & Wood LLP, New York, New York, and
for the underwriters, dealers or agents, if any, by such counsel as may be
named in the applicable prospectus supplement.
EXPERTS
The financial statements incorporated by reference to our Annual Report
on Form 10-K for the year ended December 31, 2002 in this prospectus have been
so incorporated in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of that firm as experts in auditing and
accounting.
ABOUT THIS PROSPECTUS
This prospectus is part of a shelf registration statement that we filed
with the SEC and also constitutes a base shelf prospectus filed with the
securities regulatory authorities of each province of Canada. Under this shelf
registration statement and base shelf prospectus, we may sell any combination
of the securities described in this prospectus in one or more offerings up to
an aggregate offering price of $300,000,000. For further information about our
business and the securities, you should refer to this registration statement
and its exhibits or to the documents incorporated by reference in the Canadian
base shelf prospectus. The exhibits to the registration statement contain the
full text of certain contracts and other important documents summarized in
this prospectus, which have also been filed in Canada. Because these summaries
may not contain all the information that you may find important in deciding
whether to purchase the securities we may offer, you should review the full
text of these documents. You can obtain the registration statement from the
SEC and the documents filed with Canadian securities regulatory authorities as
indicated under the heading "Additional Information".
48
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities, we will provide a prospectus
supplement that contains specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read both this prospectus and the
prospectus supplement together with additional information described under the
heading "Additional Information".
You should rely only on the information contained or incorporated by
reference in this prospectus and the prospectus supplement. We have not
authorized anyone to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely
on it. This prospectus and the prospectus supplement may be used only where it
is legal to offer the securities. The information in this prospectus, as well
as information we have previously filed with the SEC and the Canadian
securities regulatory authorities and incorporated by reference in this
prospectus, is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations, risks
and prospects may have changed since that date.
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.
INCORPORATION OF CERTAIN INFORMATION 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 we sell all the securities described in this prospectus:
o Our Annual Report on Form 10-K for the year ended December 31, 2002, dated
March 27, 2003.
o Our Proxy Statement filed pursuant to Section 14(a) of the Exchange Act on
March 28, 2003.
o Our Quarterly Reports 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.
49
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.
50
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
U.S. and Canadian registration fees....................... $100,000
Blue sky fees............................................. $15,000
Accounting fees........................................... $300,000
Legal fees................................................ $500,000
Printing, mailing and administrative fees................. $400,000
Nasdaq and TSX listing fees............................... $75,000
Trustee fee and expenses.................................. $50,000
Rating agency fees........................................ $75,000
Miscellaneous............................................. $25,000
TOTAL..................................................... $1,540,000
-----------
* All amounts are estimated.
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 director of the Company and may, at the
option of the Company's board of directors, indemnify any officer, employee or
agent of the Company, 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
The following documents are filed as part of this Registration Statement.
Exhibit No. Description of Document
----------- -----------------------
1.1 Form of Equity Underwriting Agreement*
51
1.2 Form of Debt Underwriting Agreement*
4.1 Form of Senior Debt Indenture
4.2 Form of Subordinated Debt Indenture
4.3 Form of Equity Warrant Agreement*
4.4 Form of Debt Warrant Agreement*
4.5 Form of Senior Debt Security*
4.6 Form of Subordinated Debt Security*
5.1 Opinion of Sidley Austin Brown & Wood LLP
12.1 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 Powers of Attorney (included as part of signature pages to this
registration statement)
25.1 Form T-1 Statement of Eligibility and Qualification of the Trustee
under the Senior Debt Indenture*
25.2. Form T-1 Statement of Eligibility and Qualification of the Trustee
under the Subordinated Debt Indenture*
- -----------
* To be filed, if necessary, subsequent to the effectiveness of this
registration statement as a post-effective amendment hereto or incorporated by
reference to a Current Report on Form 8-K in connection with an offering of
securities.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of the
securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this 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 the 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) promulgated under the Securities Act 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
(iii) 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 the undertakings set forth in clauses (i) and (ii)
above shall not apply if the information required to be included in a
post-effective amendment by those clauses is
52
contained in periodic reports filed with or furnished to the SEC by the
registrant pursuant to Section 13 or 15(d) of the Exchange Act that are
incorporated by reference in this registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act, 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 the purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) 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;
and
(5) To file an application for the purpose of determining the eligibility of
the trustee to act under subsection (a) of Section 310 of the Trust
Indenture Act in accordance with the rules and regulations prescribed by
the SEC under Section 305(b)(2) of the Trust Indenture Act.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and persons controlling
the registrant pursuant to the provisions described under 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 director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted against the registrant 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.
53
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 23rd
day of October, 2003.
MAGNA ENTERTAINMENT CORP.
By: /s/ Jim McAlpine
--------------------------------------
Jim McAlpine
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints Frank Stronach, Jim McAlpine and Gary M. Cohn, and
each of them acting alone, his or her true and lawful attorney-in-fact, with
full power of substitution and resubstitution, for him or her in any and all
capacities to execute and cause to be filed with the SEC any and all
amendments and post-effective amendments to this registration statement with
exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or said
attorney-in-fact's substitute or substitutes may do or cause to be done by
virtue hereof.
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 23rd day of October, 2003.
Signature Title
- --------- -----
/s/ Jim McAlpine President and Chief Executive Officer and
- ------------------------ Director (Principal Executive Officer)
Jim McAlpine
/s/ Blake Tohana Executive Vice-President and Chief
- ------------------------ Financial Officer (Principal Financial Officer)
Blake Tohana
/s/ Douglas R. Tatters Vice-President and Controller (Principal
- ------------------------ Accounting Officer)
Douglas R. Tatters
54
/s/ Jerry D. Campbell Director
- ------------------------
Jerry D. Campbell
/s/ William G. Davis Director
- ------------------------
William G. Davis
/s/ Louis E. Lataif Director
- ------------------------
Louis E. Lataif
/s/ F. Jack Liebau Director
- ------------------------
F. Jack Liebau
/s/ Edward C. Lumley Director
- ------------------------
Edward C. Lumley
/s/ William J. Menear Director
- ------------------------
William J. Menear
/s/ Gino Roncelli Director
- ------------------------
Gino Roncelli
/s/ Frank Stronach Chairman and Director
- ------------------------
Frank Stronach
55
INDEX TO EXHIBITS
Exhibit No. Description of Document
----------- -----------------------
1.1 Form of Equity Underwriting Agreement*
1.2 Form of Debt Underwriting Agreement*
4.1 Form of Senior Debt Indenture
4.2 Form of Subordinated Debt Indenture
4.3 Form of Equity Warrant Agreement*
4.4 Form of Debt Warrant Agreement*
4.5 Form of Senior Debt Security*
4.6 Form of Subordinated Debt Security*
5.1 Opinion of Sidley Austin Brown & Wood LLP
12.1 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 Powers of Attorney (included as part of signature pages to this
registration statement)
25.1 Form T-1 Statement of Eligibility and Qualification of the
Trustee under the Senior Debt Indenture*
25.2 Form T-1 Statement of Eligibility and Qualification of the
Trustee under the Subordinated Debt Indenture*
- -----------
* To be filed, if necessary, subsequent to the effectiveness of this
registration statement as a post-effective amendment hereto or incorporated by
reference to a Current Report on Form 8-K in connection with an offering of
securities.
56