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Tuesday, May 02, 2006

Read the Fine Print

- Magna posts profit, reads Matt Hegarty’s headline in the Form. MEC Director Says Company 'Hit Bottom in 2005', relates Tom LaMarra in Bloodhorse. "We're optimistic about the future of your company. We think you'll be happier with next year's results," says the company’s director Jerry Campbell.

But read the fine print, as the Toronto Globe and Mail did, and you’ll find an ominous little footnote, which cautioned that Magna’s ability to continue as a going concern is in "substantial doubt" amid high debt, poor cash flow and delays in a key asset sale.

The rare warning was issued in a footnote to the horse racing and gambling company's first-quarter financial report, which was released during MEC's annual meeting yesterday. Neither Mr. Stronach, who is chairman of MEC, nor chief financial officer Blake Tohana mentioned the issue during presentations to shareholders and there were no questions at the meeting, also an unusual event in Mr. Stronach's universe.

There was one question about the going-concern warning during a conference call with analysts and investors yesterday afternoon. MEC officials said the warning was related to the delay in the sale of The Meadows track near Pittsburgh, which is being held up by regulators in Pennsylvania. The delay means MEC had a working capital deficiency of $112.1-million as of March 31. [Toronto Globe and Mail]
The sale of the Meadows is pending only until its slots license is approved, which is considered to be only a matter of time. So the footnote is likely just a cautious formality to avoid future liability in the unlikely event that the sale is scuttled. Still, it should be highlighted to those who will help determine the next franchise holder in New York. I don’t believe they would want NY racing in the hands of a company whose very continued existence would at all depend on a sale of assets. They certainly didn’t look very kindly on NYRA when they were in that same situation.