02/23/2005 12:00AM

$95M loss puts Magna in tenuous position


Magna Entertainment Corp., the owner and operator of 13 racetracks, lost $95 million and had negative cash flow of $39.1 million in 2004, according to financial statements released late Tuesday night.

Magna has not turned a profit since 2001, when net income was $13.5 million. In 2002, Magna lost $14.4 million, and in 2003 the company lost $105 million, making its three-year net loss $214 million.

In 2003, Magna took an $82 million cash charge to reflect the declining value of its racetracks. In 2004, Magna also took a charge against its racetracks, specifically, $26.2 million against Gulfstream Park in Florida and a $433,000 charge against its operations in Maryland at Pimlico Race Course and Laurel Park, according to the financial statements.

Revenues in 2004 were $731.6 million, compared to $708.9 million in 2003. Expenses last year were $828.8 million, compared to $872 million in 2003. (Magna's full charge on its racetracks that year was $134 million, but the company received a $52.8 million tax benefit from the charge.) The 2003 results did not include revenues and expenses from Magna's Austrian racetrack and casino or from international simulcasting, the company said.

Magna chief executive Jim McAlpine, during a conference call on Wednesday morning, said the 2004 loss was due to the company's start-up costs for the Austrian racetrack and casino; $20 million in expenses for lobbying for slot machines, compared with $10 million in 2003; and declining business at its racetracks, among other costs. He called the year "challenging" for the company.

Commitment to cut costs

McAlpine said that Magna will concentrate on cutting costs in 2005, a contention that was criticized by several analysts on the conference call who complained that Magna officials have made similar promises in the past only to see results at the company worsen.

According to the financial statements, Magna had $60.6 million in cash at the end of the year, down from $99.8 million at the end of 2003. In December 2004, Magna borrowed $192 million from its parent company, MI Developments, to pay for the rebuilding of Gulfstream Park and a planned renovation of Magna's The Meadows racetrack in Pennsylva-nia.

Magna officials conceded that the company is in a tight position, considering the negative cash flow and the inability of the company to take on more debt.

"There's minimal debt capacity right now," said Blake Tohana, the chief financial officer of the company.

McAlpine said that Magna had already taken steps to close unprofitable businesses, citing the company's decision to shutter Multnomah Greyhound Park in Oregon and recent firings in Magna's television unit, HorseRacing TV. He also said that Magna would explore partnerships for its projects in the future, in an apparent effort to reduce the amount of cash that Magna would have to devote to the business, but at a cost of reducing the amount of cash that the business would generate for Magna in the future.

"We're very focused on the operations of the business to reduce any unnecessary expenses and maximize the cash flow from operations," McAlpine said. "We're certain that we can manage the cash requirements to meet our plan as it sits today, but the world is full of uncertainty. We think we can get through these times."

One possible source of future revenue is the addition of slot machines at Magna tracks. On March 8, voters in Dade County, Fla., will vote on whether to allow slot machines at racetracks, including Gulfstream, and in Maryland, legislators are debating the merits of bills to legalize slot machines at up to a dozen sites in the states, including racetracks.

Slots will dictate track renovations

Magna officials said it was unclear how Magna would proceed with any renovations to the racetracks in states that approve slots, and said that revenues from the operations would be dependent on how profits from the slots are split up and how many machines are allowed at each site. For example, McAlpine said that the company may need to spend anywhere from $50 million to $150 million on further renovations at Gulfstream to accommodate a casino depending on the elements of the bill.

In Maryland, legislators are debating a bill that would possibly allow slots machines at Laurel, but not Pimlico. When asked how the company might proceed if slots are limited to Laurel, McAlpine said, "The one that gets gaming is going to be a heck of a lot more attractive than the one that doesn't."