================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------
For the transition period from to
Commission file number 0-9624
International Thoroughbred Breeders, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
----------
22-2332039
(I.R.S. Employer Identification No.)
P.O. Box 1232, Cherry Hill, New Jersey 08034
(Address of principal executive offices)
(Zip Code)
(609) 488-3838
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. Yes|X| No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at November 13, 1998
Common Stock, $ 2.00 par value 13,978,104 Shares
================================================================================
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
for the Three Months ended September 30, 1998
(Unaudited)
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of September 30, 1998 and June 30, 1998.....1-2
Consolidated Statement of Stockholders' Equity
for the Three Months ended September 30, 1998....3
Consolidated Statements of Operations
for the Three Months ended
September 30, 1998 and 1997......................4
Consolidated Statements of Cash Flows
for the Three Months ended
September 30, 1998 and 1997......................5
Notes to Consolidated Financial Statements.....6-22
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....23-27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................28
SIGNATURES .......................................................29
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND JUNE 30, 1998
ASSETS
September 30,
1998 June 30,
(UNAUDITED) 1998
----------- ----
CURRENT ASSETS:
Cash and Cash Equivalents ..................... $ 604,110 $ 213,795
Reserve Escrow Deposits ....................... 8,473,296 10,460,881
Accounts Receivable ........................... 36,991 36,838
Prepaid Expenses .............................. 233,808 322,313
Other Current Assets .......................... 261,732 325,756
Net Assets of Discontinued Operations - Current 12,757,568 12,235,217
---------- ----------
TOTAL CURRENT ASSETS ..................... 22,367,505 23,594,800
---------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS - Long Term 45,461,904 45,626,944
---------- ----------
PROPERTY HELD FOR SALE .......................... 47,384,425 47,434,670
---------- ----------
LAND, BUILDINGS AND EQUIPMENT:
Land and Buildings ............................ 214,097 214,097
Equipment ..................................... 799,516 814,927
------- -------
1,013,613 1,029,024
LESS: Accumulated Depreciation and Amortization 307,988 308,162
------- -------
TOTAL LAND, BUILDINGS AND EQUIPMENT, NET . 705,625 720,862
------- -------
OTHER ASSETS:
Deposits and Other Assets ..................... 3,172 3,172
Deferred Financing Costs, Net ................. 2,109,664 2,872,453
--------- ---------
TOTAL OTHER ASSETS ....................... 2,112,836 2,875,625
--------- ---------
TOTAL ASSETS .................................... $118,032,295 $120,252,901
============ ============
See Notes to Consolidated Financial Statements.
1
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND JUNE 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
September 30,
1998 June 30,
(UNAUDITED) 1998
----------- ----
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable ............................................ $ 389,648 $ 278,786
Accrued Expenses ............................................ 4,588,537 4,852,328
Current Maturities of Long-Term Debt ........................ 55,138,950 55,208,426
---------- ----------
TOTAL CURRENT LIABILITIES .............................. 60,117,135 60,339,540
---------- ----------
COMMITMENTS AND CONTINGENCIES ................................. -- --
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100.00 Par Value,
Authorized 500,000 Shares, Issued and Outstanding,
362,481 and 362,480 Shares, Respectively ................. 36,248,075 36,247,975
Common Stock, $2.00 Par Value, Authorized 25,000,000 Shares,
Issued and Outstanding, 13,978,104 and 13,978,099 Shares,
Respectively ............................................. 27,956,207 27,956,197
Capital in Excess of Par ................................... 25,878,114 25,878,224
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) ........................... (32,131,819) (30,132,368)
----------- -----------
TOTAL ................................................. 57,950,577 59,950,028
LESS: Deferred Compensation, Net ........................... 35,417 36,667
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................ 57,915,160 59,913,361
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $ 118,032,295 $ 120,252,901
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
Preferred Common
--------- ------
Number of Number of
Shares Amount Shares Amount
------ ------ ------ ------
<CAPTION>
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1998 ........................................... 362,480 $36,247,975 13,978,099 $27,956,197
Shares Issued for Fractional Exchanges With Respect to the
One-for-twenty Reverse Stock Split effected on March 13, 1992 1 100 5 10
Amortization of Deferred Compensation Costs .................... -- -- -- --
Net (Loss) for the Three Months Ended September 30, 1998 ....... -- -- -- --
------- ----------- ---------- -----------
BALANCE - SEPTEMBER 30, 1998 ...................................... 362,481 $36,248,075 13,978,104 $27,956,207
------- ----------- ---------- -----------
</TABLE>
<TABLE>
Capital Retained
in Excess Earnings Deferred
of Par (Deficit) Compensation Total
------ --------- ------------ -----
<CAPTION>
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1998 ........................................... $ 25,878,224 $(30,132,368) $(36,667) $ 59,913,361
Shares Issued for Fractional Exchanges With Respect to the
One-for-twenty Reverse Stock Split effected on March 13, 1992 (110) -- -- --
Amortization of Deferred Compensation Costs .................... -- -- 1,250 1,250
Net (Loss) for the Three Months Ended September 30, 1998 ....... -- (1,999,452) -- (1,999,452)
------------ ------------ -------- ------------
BALANCE - SEPTEMBER 30, 1998 ...................................... $ 25,878,114 $(32,131,819) $(35,417) $ 57,915,160
------------ ------------ -------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Three Months Ended
September 30,
-------------
1998 1997
---- ----
EXPENSES:
General & Administrative Expenses .............. $ 1,312,576 $ 2,062,952
Interest Expense ............................... 1,782,270 1,783,100
Interest Income ................................ (132,461) (209,604)
Amortization of Financing Costs ................ 763,789 761,204
El Rancho Property Carrying Costs .............. 415,982 372,494
(LOSS) FROM CONTINUING OPERATIONS ---------- ----------
BEFORE DISCONTINUED OPERATIONS ................ (4,142,156) (4,770,146)
INCOME FROM DISCONTINUED OPERATIONS
Income from operations of discontinued
racetrack operations (less applicable income
taxes of $62,000 and $50,115) ................ 2,142,704 1,726,264
------- ------- --------- ---------
NET (LOSS) ....................................... $ (1,999,452) $ (3,043,882)
============ ============
BASIC PER SHARE DATA:
(LOSS) BEFORE DISCONTINUED OPERATIONS ............ $ (0.29) $ (0.34)
INCOME FROM DISCONTINUED OPERATIONS .............. 0.15 0.12
---- ----
NET (LOSS) ....................................... $ (0.14) $ (0.22)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ....... 13,978,100 13,978,067
========== ==========
See Notes to Consolidated Financial Statements.
4
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
Three Months Ended
September 30,
-------------
1998 1997
---- ----
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
(LOSS) FROM CONTINUING OPERATIONS ..................................... $(4,142,156) $(4,770,146)
----------- -----------
Adjustments to reconcile (loss) to net cash (used)
provided by operating activities:
Income from discontinued racetrack operations ................. 2,142,704 1,726,264
Depreciation and Amortization ................................. 781,018 1,190,808
Compensation for Options Granted .............................. 0 797,138
Changes in Assets and Liabilities -
(Increase) in Restricted Cash and Investments .............. 0 (369,260)
(Increase) in Accounts Receivable .......................... (153) (884,788)
Decrease (Increase) in Other Assets ........................ 64,024 (36,920)
Decrease in Prepaid Expenses ............................... 88,505 220,675
(Decrease) Increase in Accounts and Purses Payable
and Accrued Expenses ...................................... (97,564) 993,984
Increase in Deferred Revenue ............................... 0 1,182,669
----------
CASH (USED IN) CONTINUING OPERATING ACTIVITIES .................. (1,163,623)
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES .............. 681,340
-------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES ................ (482,283) 50,424
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development of El Rancho Property ................................... 0 (53,139)
Deposits on New Mexico Racetrack Options ............................ 0 (600,000)
Capital Expenditures ................................................ (741) (302,090)
(Increase) in Other Investments ..................................... 0 (33,657)
------------
CASH (USED IN) CONTINUING INVESTING ACTIVITIES .................. (741)
CASH (USED IN) DISCONTINUED INVESTING ACTIVITIES ................ (18,762)
------- --------
NET CASH (USED IN) INVESTING ACTIVITIES ......................... (19,503) (988,886)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred Financing Costs ............................................ 0 (21,545)
Escrow Deposits Utilized ............................................ 1,987,585 1,604,952
Decrease in Balances Due From Discontinued Subsidiaries.............. 1,779,273 0
Principal Payments on Short Term Notes .............................. (69,475) (503,277)
Principal Payments on Long Term Notes ............................... 0 (136,871)
----------
CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES ................ 3,697,383
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES ................ (1,956,840)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....................... 1,740,543 943,259
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................... 1,238,757 4,797
LESS CASH AND CASH EQUIVALENTS
FROM DISCONTINUED OPERATIONS ....................................... (848,442) --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
FROM CONTINUING OPERATIONS ......................................... 213,795 3,784,895
------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 604,110 $ 3,789,692
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest ..................................................... $ 1,824,856 $ 1,848,987
Income Taxes ................................................. $ 0 $ 100,000
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the three months ended September 30, 1998, the Company recorded an
unrealized gain of $10,840 on trading securities.
During the three months ended September 30, 1997, the Company issued
options to purchase 300,000 shares of Common Stock at a fair value of $786,000
to three of the Company's directors.
See Notes to Consolidated Financial Statements.
5
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
Prior to June 30, 1998, the Company determined to sell its racetracks.
Accordingly, the operating results of the racetrack subsidiaries have been
segregated and reported as discontinued operations for each of the periods
presented. Additionally, on July 2, 1998 the Company entered into an asset
purchase agreement to sell the real property and related assets at Freehold
Raceway and to lease the real property and related assets of Garden State Park
for $100,000 per year over a period of seven years, subject to various
approvals. The purchase price for Freehold Raceway is $45 million, consisting of
$33 million in cash and a seven-year noncontingent promissory note in the amount
of $12 million, with an additional $10 million in contingent promissory notes
becoming effective upon, among other things, New Jersey's approval of off-track
betting facilities or telephone account pari-mutuel wagering on horse racing.
Further adjustments could be made to increase the purchase price if certain
additional regulatory gaming changes are approved in New Jersey in the future.
If the Company accepts a superior proposal prior to the closing of this
agreement, it will be obligated to pay $1 million to terminate this agreement,
if the initial purchaser does not exercise its right of first refusal.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ended June 30, 1999. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the fiscal year ended
June 30, 1998.
The accompanying consolidated financial statements have been prepared
assuming International Thoroughbred Breeders, Inc. and subsidiaries
(collectively, the "Company") will continue as a going concern. As discussed in
Note 5, the Company is in violation of several non-financial loan covenants with
its major lender. Accordingly, payments could be demanded immediately. The
Company is continuing discussions with this lender as to the grant of waivers or
other remedies that could be reached in connection with the litigation
settlement described below. Additionally, the Company is considering alternative
financing sources. However, there can be no assurance that the Company will be
successful in such endeavors.
The Company has sustained losses of approximately $18.3 million and $17.4
million during fiscals 1998 and 1997, respectively, and a net loss of
approximately $2 million for the three months ended September 30, 1998. The
Company believes its projected cash flows from its current operations will be
sufficient until February 1999, and there can be no assurances beyond that date.
These projections do not reflect the impact of its default under the above
mentioned credit facility or the effects of the above mentioned litigation or
settlement.
The Company and certain of its directors and stockholders are involved in
various legal proceedings, as more fully described in Note 7. On July 2, 1998,
the Company entered into a Stipulation and Agreement of Compromise, Settlement
and Release ("Delaware Stipulation") to resolve the pending stockholder
derivative litigation in the Delaware Court of Chancery. The settlement (the
"Delaware Settlement") is subject to number of conditions, including without
limitation, Delaware court approval (which was issued on October 6, 1998), the
consent of the Company's primary lender and the grant of certain approvals by
the U.S. bankruptcy courts. The Delaware Settlement will result in, among other
things, the Company's purchase from NPD, Inc. ("NPD"), a company owned by the
Company's Chief Executive Officer and the Company's Chairman of the Board, of
approximately 2.9 million shares of the Company's Common Stock, the retirement
of approximately 2.1 million shares of the Company's Common Stock owned by Las
Vegas Entertainment Network, Inc. ("LVEN") and the termination of various
agreements. There can be no assurance that conditions to the Delaware Settlement
will be satisfied and thus, that a final settlement will be achieved. In the
event the Delaware Settlement is not consummated, it is not possible to
determine with any precision the probable outcome of the pending litigation or
the amount of liability, if any, and the resultant effects on the Company's
financial position, results of operations
6
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
or cash flows.
The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
In connection with the proposed sale and/or lease of the Company's
racetrack operations, the Company is considering the acquisition of one or more
operating businesses.
(2) DISCONTINUED OPERATIONS
Prior to June 30, 1998, the Company determined to sell its racetracks.
On July 2, 1998, the Company announced that it had entered into an asset
purchase agreement to sell the real property and related assets at Freehold
Raceway and to lease the real property and related assets of Garden State Park
for a seven year period. (See Note 1).
The discontinued operations are summarized as follows:
Three Months Ended September 30,
Discontinued Racetrack Operations: 1998 1997
----------- -----------
Revenue ....................................... $ 14,305,381 $14,542,287
---------- -----------
Expenses:
Cost of Revenues:
Purses ....................................... 4,050,649 4,061,104
Operating Expenses ........................... 6,456,240 6,906,399
Depreciation & Amortization .................. 419,017 415,515
General & Administrative Expenses ............... 971,848 1,158,902
Interest Expenses ............................... 202,923 223,988
---------- -----------
Total Expenses ....................... 12,100,677 12,765,908
---------- -----------
Income From Discontinued Racetrack
Operations Before Taxes ............................. 2,204,704 1,776,379
Income Tax Expense .............................. 62,000 50,115
---------- -----------
Net Income From Discontinued
Racetrack Operation ................................ $ 2,142,704 $ 1,726,264
========== ===========
7
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The net assets of the operations to be disposed of included in the
accompanying consolidated balance sheet as of September 30, 1998 consist of the
following:
Freehold Garden State
Raceway Park
Classified As: Current Non-Current
---------- ------------
Current Assets .........................$ 4,568,851 $ 5,935,043
Land, Building and Equipment, Net ...... 22,096,497 45,867,633
Other Assets ........................... 2,923,040 225,081
---------- ----------
Total Assets .................. 29,588,388 52,027,757
---------- ----------
Current Liabilities .................... 5,315,022 6,190,373
Long-Term Debt, Net of Current Portion . 11,515,799 375,480
---------- ----------
Total Liabilities ...................... 16,830,821 6,565,853
---------- ----------
Net Assets of Discontinued Operations$ 12,757,567 $45,461,904
========== ==========
The Company anticipates realizing a gain in connection with a sale of
the Freehold net assets. Such gain will be deferred and applied as a reduction
of the carrying value of the Garden State Park net assets. The Company
anticipates that the ultimate disposition of the Garden State Park net assets,
after application of anticipated Freehold gain, will result in a recovery in
excess of such adjusted amount.
Cash flows from discontinued operations for the three months ended
September 30, 1998 consist of the following:
Cash Flows From Discontinued Operating Activities:
Income .......................................................... $ 2,142,704
-----------
Adjustments to reconcile income to net cash provided by
discontinued operating activities
Depreciation and Amortization ............................. 419,017
Changes in Assets and Liabilities:
Decrease in Restricted Cash
and Investments .......................... (270,884)
Decrease in Accounts Receivable ................. (898,956)
Decrease in Other Assets ........................ 4,746
Decrease in Prepaid Expenses .................... 138,764
Decrease in Accounts and Purses Payable and
Accrued Expenses ............................. 961,945
Increase in Deferred Revenue .................... 326,708
-----------
Net Cash Provided by Discontinued Operating
Activities (Excluding Income) ....................... 681,340
-----------
8
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Flows From Discontinued Investing Activities:
Capital Expenditures ................................ (15,701)
(Decrease) in Other Investments ..................... (3,061)
-----------
Net Cash (Used In) Discontinued Investing
Activities ........................................ (18,762)
-----------
Cash Flows from Discontinued Financing Activities:
Principal Payments on Short Term Notes .............. (70,115)
Decrease in Balances Due To Parent Company .......... (1,779,273)
Principal Payments on Long Term Notes ............... (107,452)
-----------
Net Cash (Used In) Discontinued
Financing Activities .......................... (1,956,840)
-----------
Net Increase in Cash and Cash Equivalents
From Discontinued Operations .................... 848,442
Cash and Cash Equivalents at Beginning
of Year From Discontinued Operations ........ 3,166,904
-----------
Cash and Cash Equivalents at End of
Period From Discontinued Operations ......... $ 4,015,346
===========
(3) PROPERTY HELD FOR SALE
Property Held for Sale - On July 2, 1998, the Company entered into the
Delaware Stipulation and as part of the Delaware Stipulation, the Company has
provided for the sale of the El Rancho Property. As of June 30, 1998, the El
Rancho Property has been reclassified to "Property held for Sale" after
recording an impairment charge during the fourth quarter of Fiscal 1998 of
approximately $3,430,000 to adjust it to fair value, after taking into account
the estimated fair value of the reversion of the LVEN shares. In the absence of
a public market for the Company's Common Stock, management has determined the
estimated fair value of the Common Stock to be the anticipated book value
attributable to the Common Stock after taking into account the estimated
operating results until the disposition of the racetrack operations assumed to
occur on December 31, 1998, the disposal of the racetrack assets and the El
Rancho Property, and other transactions contemplated in the Delaware Settlement.
There can be no assurance that all of these transactions will occur or if they
will occur at the estimated amounts.
(4) RESERVE ESCROW DEPOSITS
At September 30, 1998, $8,473,296 was held in various reserve cash
escrow deposit accounts that were established in connection with the Company's
two-year $55 million credit facility with Credit Suisse First Boston Mortgage
Capital LLC ("Credit Suisse"). The financing agreement provided for reserve
accounts to be held by LaSalle National Bank ("the Depository"). The Company is
currently in default with respect to the Credit Suisse credit facility and as a
result, Credit Suisse could apply any remaining escrow amounts to any
outstanding borrowings. On the maturity date of the credit facility, any amounts
remaining on deposit shall, at Credit Suisse's option, be applied against
outstanding borrowings or returned to the Company.
9
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest Reserve Account. $10,000,000 of the loan proceeds were deposited
in a Interest Reserve Account to fund the monthly interest due on the
$55,000,000 loan (approximately $588,000 per month).
El Rancho Reserve Account. $3,759,615 of the loan proceeds were deposited
to reimburse the Company for expenditures in connection with the development and
carrying costs of the El Rancho property. Through September 30, 1998, the
Company has been reimbursed $1,465,949 from this account.
Working Capital Account. $760,000 of the loan proceeds were deposited for
working capital purposes. In October 1997, upon the sale of certain Garden State
property, the Company deposited an additional $1,370,122 in this account.
Tax and Insurance Reserve Account. $916,898 of the loan proceeds were
deposited into a Tax and Insurance Reserve Account. Each month the Company makes
deposits equal to one-twelfth, or approximately $300,000, of the amount
reasonably estimated by Credit Suisse to be sufficient to pay all taxes, general
and special assessments, water and sewer rents and charges and other similar
charges levied against certain of the Company's properties.
Deferred Maintenance Account. $500,000 of the loan proceeds were deposited
to be used to reimburse the Company for maintenance expenditures at its
racetracks.
Environmental Remediation Account.$1,000,000 of the loan proceeds were
deposited to be used to reimburse the Company for expenditures made in
connection with approved environmental remediation expenditures.
The Escrow Accounts are summarized below:
Account September 30, 1998
- ------------------------------------------------ ------------------
Interest Reserve ....................................$ 974,471
El Rancho Reserve ................................... 2,293,666
Working Capital ..................................... 2,130,121
Tax and Insurance Reserve ........................... 1,666,172
Deferred Maintenance ................................ 408,866
Environmental Remediation ........................... 1,000,000
---------
Total ......$ 8,473,296
=========
10
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) NOTES AND MORTGAGES PAYABLE
<TABLE>
Notes and Mortgages Payable are summarized below:
September 30, 1998
-----------------------------------------------------------
Interest % Per Annum Current Long-Term
------------------------ ----------------- -------------
<CAPTION>
International Thoroughbred Breeders
Inc.:
<S> <C> <C>
Credit Suisse First Boston (A) LIBOR Rate plus 7%
(9/30/98 rate 12.34%) $ 55,000,000 $ -0-
Other Various 138,950 -0-
Freehold Raceway:
Kenneth R. Fisher (B) 80% of Prime (not to exceed 6%) 625,000 10,000,000
(9/30/98 rate 6%)
Kenneth R. Fisher (C) 80% of Prime 225,000 1,515,799
(9/30/98 rate 6.6%)
Garden State Park:
Other Various 281,314 375,480
------------ ------------
Totals $ 56,270,264 $ 11,891,279
Less Amounts Reclassified to:
Net Assets of Discontinued
Operations - Current 850,000 11,515,799
Net Assets of Discontinued
Operations - Long Term 281,314 375,480
------------ ------------
Totals $ 55,138,950 $ -0-
============ ============
</TABLE>
The effective LIBOR Rate and the Prime Rate at September 30, 1998 was 5.34% and
8.25%, respectively.
(A) On May 23, 1997, the Company entered into a two-year $55 million
credit facility with Credit Suisse secured by a pledge of certain of the
personal and real property of the Company and its subsidiaries (the "Credit
Suisse Credit Facility"). Proceeds of this facility were used to repay in full
the Company's $30 million credit facility with Foothill Capital Corporation and
to provide funds for working capital and other general corporate purposes,
including, but not limited to, preliminary development of the El Rancho
Property. Interest under the Credit Suisse Credit Facility is payable monthly in
arrears at 7% over the London interbank offered rate ("LIBOR"). The scheduled
maturity date of the facility is June 1, 1999. Of the remaining facility
borrowings, approximately $16.8 million was placed in escrow accounts, financing
and closing fees of $4.3 million were incurred and $3.9 million was used by the
Company for general corporate purposes and repayment of certain financial
obligations.
The Credit Suisse Credit Facility is evidenced by a convertible
promissory note (the "Credit Suisse Note") pursuant to which up to $10 million
of the aggregate principal amount can be converted, in certain circumstances,
including upon the maturity date of the Credit Suisse Note upon the prepayment
of $10 million in aggregate principal amount of the Credit Suisse Note or upon
acceleration of the Credit Suisse Note, at the option of Credit Suisse, into
shares of the Company's Common Stock at a conversion price of $8.75 per share
(subject to adjustment in certain events). In addition, Credit Suisse was
granted warrants to purchase 1,044,000 shares at an exercise price of $4.375 per
share (subject to adjustment in certain events). The warrants to purchase
546,847 shares are immediately exercisable, have been valued at approximately
$1.6 million and have been recorded as original issue discount. The warrants to
11
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
purchase 497,153 shares become exercisable at such time as Credit Suisse
delivers to the Company a firm commitment for additional funding of no less than
$50 million in connection with the development of the El Rancho Property.
Credit Suisse also received 232,652 shares of Common Stock upon the
conversion of a $10.5 million promissory note issued by the Company to LVEN into
Common Stock in consideration for Credit Suisse's consent and advisory services
in connection with this transaction. Credit Suisse has the right to receive
further shares upon the consummation of a proposed related acquisition by the
Company of Casino-Co Corporation ("Casino-Co"), a wholly-owned subsidiary of
LVEN, equal to 10% of the stock consideration paid by the Company for such
acquisition. The Company has granted Credit Suisse certain registration rights
with respect to the warrants and the shares.
The Credit Suisse Credit Facility also provides for both affirmative
and negative covenants, including financial covenants such as tangible net
worth, as defined in the Credit Suisse Credit Facility. The Company is not in
compliance with certain non-financial covenants. As a result of not obtaining
waivers of these violations, this amount could be demanded immediately.
In connection with pending litigation which is currently stayed and
will be dismissed if the Delaware Settlement is consummated, the minority Board
members have challenged the authorization and enforceability of certain
agreements entered into and actions taken by the Company, including the Credit
Suisse Credit Facility and certain related agreements and related actions.
Consummation of the Delaware Settlement will not result in any release of claims
by the Company against Credit Suisse, absent any new financing agreement
acceptable to the Company and Credit Suisse.
(B) On February 2, 1995, the Company entered into an agreement with the
former owner of Freehold Raceway whereby the $12.5 million balance of the
purchase price of the Freehold Raceway was financed by an eight (8) year
promissory note at 80% of the prevailing prime rate, not to exceed 6%. Yearly
principal and interest payments during the first five (5) years commencing
January 1, 1996 are based upon a twenty (20) year principal amortization
schedule. During each of the next three (3) years, commencing January 1, 2001,
yearly principal and interest payments shall be based upon a ten (10) year
amortization schedule. On January 1, 2003, the entire unpaid principal balance,
together with any accrued interest becomes due and payable. The note is secured
by a mortgage on the land and buildings at Freehold Raceway. This note has been
netted against "Net Assets of Discontinued Operations - Current" for the periods
presented.
(C) On February 2, 1995, the seller of Freehold Raceway advanced to
Freehold Raceway $2,584,549 towards the retirement of $5.2 million of existing
debt on Freehold Raceway. The seller received from Freehold Raceway in fiscal
1995, a promissory note evidencing the indebtedness secured by mortgage on the
racetrack property and other collateral. Equal monthly principal installments of
$18,750 beginning on February 1, 1995 is paid to the seller together with
accrued interest. Interest is calculated at 80% of the prime rate at January 1
of each year. The note is secured by a mortgage on the land and buildings at
Freehold Raceway. This note has been netted against "Net Assets of Discontinued
Operations - Current" for the periods presented.
(6) INCOME TAX EXPENSE
The Company's income tax expense for the three month periods ending
September 30, 1998 and 1997 relates to New Jersey income taxes for its Freehold
Raceway operations.
(7) COMMITMENTS AND CONTINGENCIES
(A) On July 2, 1998, the Company entered into the Delaware
Stipulation to resolve the pending stockholder derivative litigation in the
Delaware Court of Chancery. The Delaware Settlement is subject to a number of
conditions, including without limitation, Delaware court approval (which was
issued on October 6, 1998), the consent of the Company's primary lender and the
grant of certain approvals by the U.S. bankruptcy courts. The Delaware
12
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Settlement will result in, among other things, the dismissal of the pending
litigation with prejudice, the Company's purchase from NPD of approximately 2.9
million shares of the Company's Common Stock for $4.6 million plus the
assumption by the Company of NPD's $5.8 million promissory note now held by
Robert E. Brennan's Bankruptcy Trustee and the termination of the Company's
option agreement with D&C in the amount of $600,000. As a result, during the
fourth quarter of fiscal 1998, the Company has recorded a charge of
approximately $3.7 million based on the estimated fair value of $2.50 per share.
Approximately $3.1 million of this charge is reflected in accrued expenses for
the periods presented.
Upon the mailing of the settlement notice to the Company's stockholders
on July 23, 1998, Michael C. Abraham, Charles R. Dees, Jr., Frank A. Leo and
Kenneth S. Scholl resigned from the Company's Board of Directors. Upon the
purchase of the NPD shares by the Company, Anthony Coelho, Nunzio P. DeSantis
and Joseph Zappala will also resign from the Board and terminate their
employment and consulting agreements with the Company.
The Delaware Settlement also contemplates the disposition of the
Company's non-operating El Rancho hotel and casino site in Las Vegas, Nevada. Of
the proceeds, a minimum of $44.2 million will be used to reduce the Company's
outstanding debt to the Company's primary lender. As part of the Delaware
Settlement, LVEN will return to the Company for cancellation approximately 2.1
million shares of the Company's Common Stock and will terminate all of its
contractual arrangements with the Company.
The consummation of the Delaware Settlement will have a material effect
on the Commitments and Contingencies disclosed below:
As discussed in Note 3, during January 1996 the Company purchased the
El Rancho Property from LVEN. The original agreement provided that, following
the development of the property, LVEN would receive as additional consideration
an interest in the "adjusted cash flow" in the amount of 50% for the first six
(6) years following the opening of a casino and 25% thereafter until such time
as LVEN has received $160,000,000, but only after (a) the Company recouped: 1)
the aggregate amount of cash payments applied to the purchase price; 2) payments
made under the $6.5 million note and the $10.5 million note; 3) $2 million; and
4) any amounts that the Company invested in the property after the purchase,
together with interest at eight percent (8%) per annum from the date of the
investment; (b) LVEN has (i) received payment of all principal and interest, if
any, remaining outstanding under the $6.5 million note and/or the $10.5 million
note and (ii) recouped $4 million plus any amount invested in the El Rancho
Property after the purchase and approved by the Company, together with interest
thereon at a rate of 8% per annum from the date of investment; and (c) the
Company has received an additional $2 million, together with interest thereon at
the rate of 8% per annum from the date of the purchase. This agreement was
amended on May 23, 1997 by the Bi-Lateral Agreement between the Company and LVEN
to limit to $35 million the aggregate amount for which the Company is entitled
to recover above.
The term "adjusted cash flow," as defined, refers to cash flow from the
property before taxes, less the payment of any debt retirements and capital
lease payments and less certain fees received or accrued for certain inital rent
or lease payments. The Bi-Lateral Agreement, signed in connection with the $55
million Credit Suisse Credit Facility, limited the maximum debt service to be
netted against cash flow from operation of the El Rancho Property in computing
"adjusted cash flow" to $65 million, with a further limitation to $27 million in
the event that additional financing over the $55 million is not required for the
development of the El Rancho Property.
Upon consummation of the Delaware Settlement, the Company will deposit
title to the El Rancho Property into escrow for a period of up to 270 days to
permit LVEN to sell the El Rancho Property. LVEN will have the exclusive right
to sell the El Rancho Property until November 20, 1998, 120 days after the date
the notice of the Delaware Settlement was mailed to the Company's stockholders,
and up to an additional 60 days thereafter upon the occurrence of certain
events. Both LVEN and the Company will have the right to sell the El Rancho
Property between November 20, 1998 and April 19, 1999, 270 days after the
mailing of the notice, upon the payment of at least $44.2 million to the
Company. If, within 30 days prior to end of the escrow period, LVEN obtains a
$44.2 million loan for the benefit of the Company, LVEN will have a
non-exclusive right to sell the El Rancho Property for an additional year, upon
the payment of $44.2 million to the Company. On March 27, 1998, LVEN entered
into an agreement for the sale of the El
13
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Rancho Property for a sales price of $62,500,000. If consummated, the Company
would realize proceeds of $44,200,000 as provided in the Delaware Stipulation,
and of the remaining proceeds, $4,375,000 will be paid to an unrelated party for
a structuring fee, $7,100,000 will be paid to Nunzio P. DeSantis (less any
amounts previously paid to him pursuant to the Delaware Stipulation), $1,000,000
will be paid to Joseph Zappala (less $200,000 Mr. Zappala has agreed to pay the
Company in settlement of certain compensation issues pursuant to the Delaware
Stipulation) and the balance will be paid to LVEN. There can be no assurance
that this contract or any other contract for the sale of the El Rancho Property
will be consummated.
On May 23, 1997, the original agreement with LVEN was also amended by
a Tri-Party Agreement among the Company, LVEN and Credit Suisse whereby the
Company is required to acquire Casino-Co, whose principal asset is the $160
million profit participation note described in the preceding paragraphs. The
acquisition may be accomplished by the purchase of all the stock of Casino-Co or
a merger of the companies. The Company would be required to issue its stock, the
price of which will be subject to fairness opinions from independent investment
banking firms independently representing the Company and LVEN, to: i) LVEN in an
amount equal to 90% of the greater of the fairness opinions obtained by the
Company and LVEN; and to ii) Credit Suisse in an amount equal to 10% of the
greater of the fairness opinions obtained by the Company and LVEN. If this
acquisition is approved by the Company's stockholders and Board of Directors,
and completed, the Company's requirement for the sharing of cash flow, described
above, will be canceled.
In connection with the purchase of the El Rancho Property, Las Vegas
Communications Corporation ("LVCC"), a wholly-owned subsidiary of LVEN retained
the exclusive right to manage all aspects of the property's entertainment
activities. The term of the agreement is for ten (10) years commencing on the
date which is six (6) months prior to the projected opening date of the
property, and LVCC shall have the option to renew the agreement for two (2)
consecutive five year terms. The agreement provides LVCC with an annual fee of
$800,000 subject to annual increases and other additional amounts. Pursuant to
the Bi-Lateral Agreement entered into by the Company and LVEN in connection with
the Credit Suisse Credit Facility, the parties agreed to amend the entertainment
management agreement to provide for a lease by the Company to LVCC of space
within the El Rancho Property on or from which all food, beverage and retail
activities will be conducted (exclusive of the mezzanine space, the rights to
which will be retained by the Company).
The terms of such lease arrangement have not been finalized.
In connection with the pending litigation which will be dismissed with
prejudice if the Delaware Settlement is consummated, the minority Board members
have challenged the authorization and enforceability of certain agreements
entered into and actions taken by the Company including the Credit Suisse Credit
Facility, and certain related agreements and related actions.
Upon consummation of the Delaware Settlement, the Bi-Lateral Agreement,
Tri-Party Agreement, $160 million profit participation note and entertainment
management agreement will be terminated.
Effective January 15, 1997, the Company entered into a ten-year
employment contract with Nunzio P. DeSantis, the Company's Chief Executive
Officer. The contract provides for annual compensation of $450,000, adjusted
annually by increases, if any, in certain Consumer Price Indexes. Mr. DeSantis
will also receive a performance bonus for each fiscal year during the term of
the agreement equal to the excess of the amount, if any, by which the pre-tax
income of the Company exceeds $2 million, limited to an amount equal to his base
salary. As part of his contract, Mr. DeSantis was awarded options, subject to
stockholder approval, to purchase 5,000,000 shares of the Company's common stock
at $4 per share. Upon obtaining stockholder approval for the awarding of the
options, the Company may need to record as compensation an expense calculated by
multiplying the number of shares covered by the option by the difference between
the intrinsic value of each share and the exercise price at the measurement
date. An expense would only be recorded if the exercise price is below the
market price at the measurement date. Options to purchase 500,000 shares of
Common Stock would be exercisable immediately and options to purchase an
additional 500,000 shares of Common Stock shall become exercisable on each
succeeding anniversary of the effective date of the agreement, provided,
however, that all options shall be fully vested if Mr. DeSantis resigns for good
reason (as defined in the agreement), resigns upon a change of control, or is
discharged without cause. Mr. DeSantis is entitled to additional fringe benefits
including the use of a private jet in connection with the performance of his
duties. Such aircraft is operated by a
14
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company owned by Mr. DeSantis' son and was partially financed by Mr. DeSantis
and the Chairman of the Board of LVEN. In the pending litigation, which is
currently stayed and will be dismissed with prejudice upon consummation of the
Delaware Settlement, the minority Board members have challenged the
authorization and enforceability of certain agreements, including Mr. DeSantis'
employment agreement. Under the terms of the Delaware Settlement, neither the
Company nor any of its affiliates are to make any payments to Mr. DeSantis
except for his base salary and automobile allowance and continuation of his
insurance benefits under the terms set forth in the employment agreement. Upon
consummation of the Delaware Settlement, Mr. DeSantis' employment agreement will
be terminated and his options will be canceled.
Effective January 15, 1997 the Company entered into a consulting
contract with Anthony Coelho, the Company's Chairman of the Board, that provides
for $10,000 per month in consulting fees on a month-to-month basis, $2,500 for
each director's meeting he attends and other fringe benefits. As part of this
contract, Mr. Coelho was awarded options, subject to stockholder approval, to
acquire 1,000,000 shares of the Company's Common Stock at $4 per share. Options
to purchase 100,000 shares would become exercisable immediately and options to
purchase an additional 100,000 shares would become exercisable on each
succeeding anniversary of the effective date of the agreement. Upon obtaining
stockholder approval for the awarding of these options, the Company will need to
record an expense calculated by using the fair value of the options at that
date. In the pending litigation, which is currently stayed and will be dismissed
with prejudice upon consummation of the Delaware Settlement, the minority Board
members have challenged the authorization and enforceability of certain
agreements, including Mr. Coelho's consulting agreement. Under the terms of the
Delaware Settlement, neither the Company nor its subsidiaries shall pay to Mr.
Coelho more than $10,000 per month as consulting fees and payment of regular
directors fees and upon consummation of the Delaware Settlement, Mr. Coelho's
consulting agreement will be terminated and his options will be canceled.
On January 15, 1997, the Company obtained a commitment for a $5,000,000
revolving line of credit from Mr. DeSantis. The line of credit has not been
drawn upon and it is unlikely that it will be utilized in the future. The line
of credit is a subject of the pending litigation, which is currently stayed and
will be dismissed with prejudice upon consummation of the Delaware Settlement.
Upon consummation of the Delaware Settlement, the line of credit will be
terminated.
(B) The Company has entered into lease agreements for certain equipment
and maintenance contracts at Garden State Park and Freehold Raceway. Two of
these agreements are based upon the daily average of the total amount wagered
and number of live racing days at the Company's racetracks. Minimum rental
payments for the next five years are based on projected racing dates. During
July 1997, the Company executed an agreement to lease office space in
Albuquerque, New Mexico for a five year period, expiring on July 31, 2002. The
lease provides for a monthly rent of approximately $10,000 when the space is
fully occupied. In connection with this lease, the Company has sub-leased a
portion of the premises to AutoLend Group Inc. ("AutoLend"), a company in which
Nunzio P. DeSantis is the Chairman, President and principal stockholder and
Anthony Coelho is a director, for $600 per month. The sublease is terminable on
30 days written notice. In connection with the pending litigation, which is
currently stayed and will be dismissed with prejudice if the Delaware Settlement
is consummated, the minority Board members have challenged the authorization and
enforceability of certain agreements, including the Albuquerque lease. However,
upon consummation of the Delaware Settlement, the Albuquerque lease will be
assumed by AutoLend.
(C) Garden State Park has granted the exclusive right to operate all
food and retail services and to sell or rent all food products and merchandise
sold or rented at the racetrack facility to Service America Corporation. The
term of the agreement is for the 15 year period terminating during March 2000.
Service America agreed to invest $7,000,000 in the concession premises at the
racetrack facility. As of September 30, 1998, the Company is contingently liable
for approximately $800,000, the undepreciated value of the equipment Service
America installed at the track, if this agreement were to be terminated. At the
end of the agreement or upon termination, Garden State Park would take title to
such equipment.
(D) The New Jersey Division of Gaming Enforcement ("DGE") has conducted
an investigation of the Company and its directors and significant stockholders
in connection with Garden State Park's and Freehold Raceway's licenses with the
Casino Control Commission ("CCC") and the Racing Commission. The DGE issued a
report to the CCC in September 1998 in which it objected to the qualification of
the one director who did not file an application and
15
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
requested hearings for three stockholders. The director and one of the three
stockholders have requested hearings with the CCC and if the Delaware Settlement
is consummated, the other two stockholders will no longer be required to
qualify. The DGE also reserved the right to continue its investigation as to
additional directors in the event the Delaware Settlement is not consummated. As
a result of such report and subject to the consummation of the Delaware
Settlement, the CCC and/or the Racing Commission may undertake further
proceedings which could potentially jeopardize the Company's racing licenses and
ability to conduct business with any casino licensees, including simulcasting to
Atlantic City casinos.
LEGAL PROCEEDINGS
On or about September 10, 1997, three actions were filed in Delaware
Chancery Court in and for New Castle County (the"Delaware Chancery Court"), each
of which named the Company as a nominal defendant and one of which was
subsequently dismissed (collectively, the "Delaware Actions"). Additionally, two
actions were filed in New Jersey naming the Company as a nominal defendant
(collectively, the "New Jersey Actions"), one of which is a derivative action
filed on or about February 24, 1998 in the United States District Court for the
District of New Jersey (the "New Jersey District Court"), and the other is a
purported class action filed on or about July 15, 1998 in the Superior Court of
New Jersey (the "New Jersey Superior Court"). As described more fully below,
pursuant to the terms of the Delaware Stipulation dated July 2, 1998, upon
satisfaction of certain conditions set forth in the Delaware Stipulation, the
Delaware Actions are to be fully and finally dismissed with prejudice, and the
parties are to provide mutual releases of all claims related to the actions
thereunder (the "Delaware Settlement"). See "Delaware Settlement." Further,
pursuant to a memorandum of understanding entered into on August 18, 1998 (the
"New Jersey Memorandum"), upon satisfaction of certain conditions, the New
Jersey Actions are to be fully and finally dismissed with prejudice, and the
parties are to provide mutual releases of all claims related to the actions
thereunder (the "New Jersey Settlement"). See "New Jersey Settlement."
Mariucci, et al. v. DeSantis, et al.
The first Delaware Action, captioned John Mariucci, Robert J. Quigley,
Charles R. Dees, Jr., James J. Murray, Francis W. Murray, Frank A. Leo, and The
Family Investment Trust (Henry Brennan as Trustee) v. Nunzio P. DeSantis,
Michael Abraham, Anthony Coelho, Kenneth W. Scholl and Joseph Zappala and
International Thoroughbred Breeders, Inc., C.A. No. 15918NC ("Mariucci"),
alleged, among other things, that (i) NPD had breached the terms of the NPD
Acquisition Agreement by failing to fund a line of credit, (ii) as a result of
such breach, the resignations of Messrs. Mariucci, James Murray and Keonemund
from the Board were ineffective and (iii) Messrs. DeSantis, Coelho, Abraham,
Scholl and Zappala (the "New Directors") were misusing the assets of the Company
for their personal benefit. The Mariucci complaint sought an order (a) pursuant
to Section 225 of the Delaware General Corporation Law, determining that (1) the
New Directors were never validly appointed or elected to the Board and (2) Frank
Koenemund, John Mariucci and James Murray, notwithstanding their resignations
upon the NPD Acquisition, were directors of the Company (the "Section 225
Claims") and (b) preserving the status quo pending a final adjudication of the
Section 225 Claims. On September 18, 1997, the plaintiffs filed an amended
complaint. On September 26, 1997, the New Directors and the Company filed a
motion to dismiss, or in the alternative to strike allegations of the amended
complaint. The Delaware Chancery Court granted the motion to dismiss by opinion
dated October 14, 1997. The time for appeal of the Delaware Chancery Court Order
has expired and no appeal has been taken by the plaintiffs.
Quigley, et al. v. DeSantis, et al.
The second Delaware Action, captioned Robert J. Quigley, Frank A. Leo, and
The Family Investment Trust (Henry Brennan as Trustee) v. Nunzio P. DeSantis,
Michael Abraham, Anthony Coelho, Kenneth W. Scholl, Joseph Zappala, Joseph A.
Corazzi and Las Vegas Entertainment Network, Inc. and International Thoroughbred
Breeders, Inc., C.A. No. 15919NC ("Quigley"), is a derivative suit brought by
two then Directors (Messrs. Quigley and Leo) and the Family Investment Trust
(collectively, the "Quigley Plaintiffs") which alleges, among other things, that
the New Directors have breached their fiduciary duties to the Company, usurped
corporate opportunities belonging to the Company and incorrectly stated minutes
of Board meetings to omit material discussions. The Quigley complaint alleges
that the New Directors entered into certain agreements on behalf of the Company
in violation of the "super-majority" voting provisions of the Company's By-laws
and their fiduciary duty to the Company, including but not limited to, the
16
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit Suisse loan agreement, the Tri-Party Agreement, the Bi-Lateral Agreement,
the D&C option agreement, Mr. DeSantis' employment agreement and consulting
agreements with Messrs. Coelho and Zappala. The Quigley complaint seeks (i) a
declaratory judgement that (a) certain actions taken by the New Directors are
null and void and (b) the "super-majority" By-law provisions remain in full
force and effect, (ii) recision of certain actions taken by the New Directors
and (iii) damages as a result of the allegedly unauthorized and allegedly
unlawful conduct of the defendants. On November 7, 1997, the New Directors and
the Company filed answers to the Quigley complaint denying all allegations
contained in the Quigley complaint.
On November 18, 1997, the Company filed an amended answer and
counterclaim (the "Counterclaim") against Messrs. Quigley, Leo, Francis Murray
and Dees (collectively, the "Counterclaim Defendants"). The Counterclaim alleges
that the Counterclaim Defendants have breached their fiduciary duty to the
Company by (i) adopting, and subsequently refusing to recognize the repeal of
certain "super-majority" By-law provisions in order to aid Brennan in retaining
control of the Company's business affairs and jeopardizing the Company's
licenses and registrations, (ii) interfering in the Company's hiring of new
independent auditors thereby causing the Company to be delinquent in its
required filings with the SEC and causing the suspension of trading in the
Company's stock on AMEX, (iii) using corporate funds for their personal uses and
(iv) usurping corporate opportunities properly belonging to the Company. The
Counterclaim seeks injunctive relief enjoining the Counterclaim Defendants from,
among other things, interfering in the Company's day-to-day business operations,
the establishment of a constructive trust over certain assets of the
Counterclaim Defendants, a declaratory judgement that the "super-majority"
voting provisions have been repealed and money damages. The Counterclaim
Defendants filed an answer to the Counterclaim on January 12, 1998 denying all
of the material allegations and, in addition, Mr. Murray asserted a wrongful
discharge and seeks monetary damages.
Subsequent to the scheduling of the Director Litigation for trial, the
parties reached an agreement in principle to settle the litigation which
resulted in the Delaware Stipulation. As described more fully below under
"Delaware Settlement," upon satisfaction of the conditions set forth in the
Delaware Stipulation, the Director Litigation will be fully and finally
dismissed with prejudice, and the parties will provide mutual releases of all
claims related to such action.
See "Delaware Settlement."
Rekulak v. DeSantis, et al.
The third Delaware Action captioned James Rekulak v. Nunzio P. DeSantis,
Michael Abraham, Anthony Coelho, Kenneth W. Scholl, Joseph Zappala, Las Vegas
Entertainment Network, Inc. and Joseph A. Corazzi and International Thoroughbred
Breeders, Inc., C.A. No. 15920 ("Rekulak"), is a derivative suit which in
essence repeats the allegations contained in the Quigley complaint and seeks
similar relief. The Rekulak action was consolidated with the Quigley action
pursuant to a stipulation and order dated January 13, 1998.
The trustee of Brennan's Bankruptcy Estate, as well as the SEC, have
participated to a limited extent in discovery in the litigation of the Quigley
and Rekulak actions.
As described more fully below under "Delaware Settlement," upon
satisfaction of the conditions set forth in the Delaware Stipulation, the
Rekulak action will be fully and finally dismissed with prejudice. See "Delaware
Settlement."
Rekulak v. DeSantis, et al.
On or about October 8, 1997, James Rekulak filed a complaint in the
Delaware Chancery Court captioned Rekulak v. DeSantis, et al., CA No. 15978,
which purports to be a complaint under Section 225 of the Delaware General
Corporation Law and contains substantive allegations that are virtually
identical to those in the complaint in the Mariucci action described above. The
plaintiff in this action sought to have his complaint consolidated with the
complaint in the Mariucci action and represented to the Court that he was
willing to be bound by the Delaware Chancery Court's decision on defendants'
motion to dismiss the Mariucci action. As set forth above, the Mariucci action
was dismissed by the Delaware Chancery Courts opinion dated October 14, 1997,
and thereafter, this action was dismissed with prejudice by a stipulation and
order dated February 9, 1998.
17
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Delaware Settlement
The Quigley and Rekulak actions, and the NPD and Green actions
described more fully below, are currently at a standstill as the parties have
entered into the Delaware Stipulation to settle such litigation. Upon
consummation of the Delaware Settlement, the Quigley, Rekulak, NPD and Green
actions are to be fully and finally dismissed with prejudice, and the parties
are to provide mutual releases of all claims related to the actions.
Upon the satisfaction of certain conditions to the Delaware Settlement,
the Company will purchase for $4.6 million cash and the assumption by the
Company of the $5.8 million note issued by NPD and held by Brennan's Trustee in
Bankruptcy, the approximately 2.9 million shares of the Company's stock owned by
NPD. Simultaneous with such purchase, all contracts (including option grants and
employment and consulting agreements) between the Company, Messrs. DeSantis,
Coelho, Zappala, Scholl and Abraham, will be canceled, and effective upon such
purchase, Messrs. DeSantis, Coelho and Zappala will resign from the Company's
Board. Messrs. Scholl, Abraham, Leo and Dees resigned from the Company's Board
on July 23, 1998 upon the mailing of the Delaware Stipulation to the Company's
stockholders.
Upon satisfaction of certain conditions to the Delaware Settlement, the
Company will deposit title to the El Rancho Property into escrow for a period of
up to 270 days to permit LVEN to sell the El Rancho Property. LVEN will have the
exclusive right to sell the El Rancho Property until November 20, 1998, 120 days
after the date the notice of the Delaware Settlement was mailed to the Company's
stockholders and up to an additional 60 days thereafter upon the occurrence of
certain events. Both LVEN and the Company will have the right to sell the El
Rancho Property between November 20, 1998 and April 19, 1999, 270 days after the
mailing of the notice, upon the payment of at least $44.2 million to the
Company. If, within 30 days prior to the end of the escrow period, LVEN obtains
a $44.2 million loan for the benefit of the Company, LVEN will have a
non-exclusive right to sell the El Rancho Property for an additional year, upon
the payment of $44.2 million to the Company.
Upon consummation of the Delaware Settlement, certain agreements to
which the Company is a party will be terminated, including without limitation,
all agreements with LVEN (including the entertainment management agreement and
the $160 million profit participation note), the Bi-Lateral Agreement, the Tri-
Party Agreement (other than rights of thereunder), the option agreement with
D&C, the Albuquerque lease, Mr. DeSantis' employment agreement and the
consulting agreements with Messrs. Coelho, Zappala and Scholl.
Pursuant to the Delaware Stipulation, the Company's By-laws have been
amended to reduce the authorized number of directors to six, and in connection
with such reduction, Messrs. Abraham, Scholl, Dees and Leo resigned from the
Company's Board. Until all of the transactions contemplated by the Delaware
Settlement are consummated or the Delaware Settlement is terminated according to
its terms, (a) the Company will not approve, amend or terminate any agreement or
incur any additional liabilities, expenses or obligations in excess of $10,000
without the prior written approval of directors Coelho and Quigley, and (b) the
Company and its subsidiaries will not take any significant action, including any
merger, purchase or sale of assets for $50,000 or more, issue any securities,
approve or amend employment or consulting agreements, borrow $50,000 or more,
fill any vacancy on the Company's Board, proceed with any meeting of
stockholders, declare or pay any dividend or other distribution, consummate any
tender offer, restructuring, recapitalization or reorganization, or amend the
Company's By-laws without the unanimous consent of the Company's Board.
The Delaware Settlement is subject to numerous conditions, including
without limitation, the Delaware Court dismissal order becoming final, the
approval of Credit Suisse or an alternative lender, and certain approvals by the
United States Bankruptcy Court handling the Brennan bankruptcy proceedings. The
approvals of the Delaware Court and AutoLend Bankruptcy Court have been
obtained. The consummation of the Delaware Settlement will not result in the
release by the Company of any claims against Credit Suisse or Standard Capital
Group. However, in the event that a new financing agreement is approved by the
Company and Credit Suisse, Credit Suisse will obtain a release of claims from
the Company.
18
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Harris v. DeSantis, et al.
The first New Jersey Action, filed on February 24, 1998 in the New Jersey
District Court, captioned Myron Harris, derivatively on behalf of International
Thoroughbred Breeders, Inc. v. Nunzio P. DeSantis, Anthony Coelho, Kenneth W.
Scholl, Michael Abraham, Joseph Zappala, Frank A. Leo, Robert J. Quigley,
Charles R. Dees, Jr. and Francis W. Murray ("Harris-Federal"), C.A. No.
98-CV-517(JBS), is a derivative suit brought by a stockholder of the Company.
The factual allegations and claims asserted in the Harris-Federal complaint are
virtually identical to the claims asserted in the Quigley complaint and in the
Counterclaim asserted by the Company in the Quigley action.
On May 4, 1998, all defendants filed a motion to dismiss, or, in the
alternative, a motion to stay the HarrisFederal action, pending resolution of
the Quigley action. The New Jersey District Court has not ruled on that motion.
On May 4, 1998, the plaintiff filed an amended complaint to, among other things,
add another stockholder as an additional plaintiff.
As described more fully below, pursuant to the New Jersey Memorandum
and the satisfaction of certain conditions set forth therein, the Harris-Federal
action is to be fully and finally dismissed with prejudice, and the parties are
to provide mutual releases of all claims related to the action. See "New Jersey
Settlement."
Harris v. DeSantis, et al.
The most recent New Jersey Action, filed on July 15, 1998 in the New
Jersey Superior Court, captioned Myron Harris and Howard Kaufman v. Nunzio P.
DeSantis, Anthony Coelho, Kenneth W. Scholl, Michael Abraham, Joseph Zappala,
Frank A. Leo, Robert J. Quigley and Charles R. Dees, Jr. ("Harris-State"),
Cam-L-5534-98, is a purported class action suit brought by the same plaintiffs
as the Harris-Federal action. The complaint alleges that the Harris-State
defendants breached their fiduciary duties to the Company's stockholders by
failing to file timely audited financial statements for the fiscal year ended
June 30, 1997, resulting in the indefinite suspension of trading of the
Company's stock on AMEX.
Prior to filing pleadings in response to the Harris-State complaints,
the defendants entered into the New Jersey Memorandum pursuant to which the
Harris-State action is to be fully and finally dismissed with prejudice, and the
parties are to provide mutual releases of all claims related to the action. See
"New Jersey Settlement."
New Jersey Settlement
The New Jersey Actions are currently at a standstill as the parties
have entered into the New Jersey Memorandum. Subject to the approval of the
court, the defendants and the Company will pay the aggregate sum of $150,000 for
plaintiffs' counsel fees and expenses in the New Jersey Litigation and any
incentive award to plaintiffs Harris and Kaufman would be paid out of this
$150,000 sum. Pursuant to the New Jersey Settlement, following the
implementation of the Delaware Settlement, the defendants will restructure the
Audit Committee of the Company so as to facilitate the procurement and timely
filing of audited financial statements in the future. Further, the Company will
take all appropriate actions necessary to promptly initiate the quotation of the
Company's Common Stock and Preferred Stock on the OTC Bulletin Board.
Pursuant to the New Jersey Settlement, the plaintiffs agreed not to
file objections to the Delaware Settlement. In addition, pursuant to the New
Jersey Settlement, upon consummation of the Delaware Settlement the plaintiffs
will move for a dismissal, with prejudice, of the Harris-Federal action, and
will provide releases to the defendants and the Company and all others acting on
the Company's behalf for any claims that were asserted or could have been
asserted in the Harris-Federal action. For settlement purposes only, a class
will be certified for Harris-State action consisting of all holders of the
Company's stock between October 13, 1997 (the date AMEX suspended trading of the
Company's stock) and the date the Company's stock is quoted for trading on the
OTC Bulletin Board. The plaintiffs and the class members will release the
defendants and the Company and all others acting on the Company's behalf from
any claims that were asserted or could have been asserted in the Harris-State
action.
19
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Litigation
In November 1997, two separate actions were filed in the New Jersey
District Court against various directors of the Company and other affiliated
parties. The Company is not a party to either of these actions, both of which
are summarized below:
NPD, Inc. v. Quigley, et al.
On November 18, 1997, NPD (the Company's largest stockholder and whose
stockholders are Messrs. DeSantis and Coelho), filed a complaint captioned NPD,
Inc. v. Robert J. Quigley, Francis W. Murray, Frank A. Leo, Charles R. Dees,
Jr., John Mariucci, Frank Koenemund and James J. Murray, C.A. 97-CV-5657
("NPD"), in the New Jersey District Court. The complaint alleges, among other
things, that Messrs. Quigley, Francis Murray, Leo and Dees, each of whom was at
the time a director of the Company, and Messrs. Mariucci, Koenemund and James
Murray, each of whom is a former director of the Company, conspired with one
another and Brennan to defraud NPD by (i) approving and subsequently concealing
from NPD the existence of the "super-majority" voting provision of the Company's
Bylaws and (ii) purporting to repeal such provision and subsequently filing suit
in an effort to restore such provision, all of which has had the effect of
attempting to deprive NPD of control of the Company and perpetuating the control
of Brennan and his associates. The NPD suit seeks compensatory and punitive
damages. On January 8, 1998, the defendants served a motion to dismiss NPD's
complaint. The NPD action is at a standstill as the parties have entered into
the Delaware Stipulation. Upon satisfaction of the conditions set forth in the
Delaware Stipulation, the NPD action is to be fully and finally dismissed with
prejudice, and the parties are to provide mutual releases of all claims related
to such actions. The Company is not a party to the NPD suit.
Green v. DeSantis, et al.
Certain officers, directors and affiliates of the Company are parties
to an action filed on November 30, 1997 by Robert William Green ("Green"), a
stockholder of the Company, captioned Robert William Green v. Nunzio DeSantis,
Joseph Corazzi, Anthony Coelho, Las Vegas Entertainment Network, Inc. and NPD,
Inc., C.A. 97-5359(JHR), in the New Jersey District Court. The complaint
alleges, among other things, that the defendants have usurped certain corporate
opportunities at the expense of the Company, have diluted Green's interest in
the Company through the issuance of shares of stock and have conspired to
deprive him of certain rights under an option granted to him by NPD (the "Green
Option"). Subject to regulatory approval, the Green Option grants Green the
right to purchase approximately 50% of the shares of the Company's Common Stock
which are held by NPD. The expiration date of the Green Option was January 15,
1998 and Green did not exercise the option by such date. Green seeks (i)
compensatory and punitive damages, (ii) an order enjoining defendants from
transferring, encumbering or alienating the Company's Common Stock subject to
the Green Option, (iii) an order declaring the issuance of certain shares of
Common Stock to be a nullity, and (iv) reformation of the Green Option to extend
the termination date. This action also raises claims substantially similar to
those made in the Quigley action. The parties to the Green action have
stipulated to take no action in the case pending consummation of the Delaware
Settlement. Upon satisfaction of the conditions set forth in the Delaware
Stipulation, the Green action is to be fully and finally dismissed with
prejudice, and the parties are to provide mutual releases of all claims related
to such actions. The Company is not a party to the Green action.
The Company is a defendant in various other lawsuits incidental to the
ordinary course of business. It is not possible to determine with any precision
the probable outcome or the amount of liability, if any, under these lawsuits;
however, in the opinion of the Company and its counsel, the disposition of these
lawsuits will not have material adverse effect on the Company's financial
position, results of operations, or cash flows.
(8) DEFERRED FINANCING COSTS
Deferred financing costs at September 30, 1998 include those amounts
associated with its May 23, 1997 financing agreement with Credit Suisse. (See
Note 5). These costs of $6,238,731, less amortization of $4,129,067, are being
expensed over the two year life of the loan. Amortization expense for the three
months ended September 30, 1998
20
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and 1997 was $763,789 and $761,204, respectively.
(9) STOCK OPTIONS AND WARRANTS
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
The fair value of options issued recognized as non-employee option
costs during the three months ended September 30, 1998 and 1997 was $0 and
$797,138, respectively. At September 30, 1998, total employee options
outstanding were 1,300,000 and total non-employee options outstanding were
600,000. Options to purchase an aggregate of 6,000,000 shares of Common Stock
have been granted, subject to stockholder approval, to the Company's Chief
Executive Officer and Chairman of the Board and are not reflected in the above
amounts. On August 21, 1997, the Company granted non-qualified stock options to
purchase an aggregate of 300,000 shares of Common Stock to certain directors.
Upon consummation of the Delaware Settlement, options to purchase an aggregate
of 6,300,000 shares of Common Stock will be terminated. (See Note 7.)
(B) WARRANTS
At September 30, 1998, total warrants outstanding were 1,671,847 and
have been accounted for as deferred financing costs and costs associated with
the acquisition of the El Rancho property. The deferred financing costs are
being amortized over the terms of the related indebtedness. The fair value of
the warrants issued in connection with the acquisition of the El Rancho property
has been capitalized and will be amortized when the facility becomes
operational; however, the Company has determined to dispose of the El Rancho
Property.
(10) RELATED PARTY TRANSACTIONS
During the three months ended September 30, 1998, the Company paid
$30,000 in consulting fees, $10,000 for director fees, $1,500 for an auto
allowance and $5,956 in expense reimbursements to Anthony Coelho, the Company's
Chairman, pursuant to an agreement effective January 15, 1997. Mr. Coelho's
consulting agreement is month to month, under which he is to be paid $10,000 per
month for ongoing consulting services, $2,500 for each board meeting he attends
and a $500 monthly automobile allowance. In the pending litigation, which is
currently stayed and will be dismissed with prejudice upon consummation of the
Delaware Settlement, the minority Board members have challenged the
authorization and enforceability of certain agreements, including Mr. Coelho's
consulting agreement. Under the terms of the Delaware Settlement, neither the
Company nor its subsidiaries shall pay to Mr. Coelho more than $10,000 per month
as consulting fees and payment of regular directors fees and upon consummation
of the Delaware Settlement, Mr. Coelho's consulting agreement will be terminated
and options granted to him in the consulting agreement will be canceled.
The Company pays Mr. Scholl, $10,000 per month for ongoing consulting
services as project manager for the El Rancho Property. Upon consummation of the
Delaware Settlement, Mr. Scholl's consulting arrangement will be terminated. Mr.
Scholl is currently the Secretary of Casino-Co and was President and a director
of Casino-Co from March 1996 to May 19, 1997.
The Company pays $10,000 per month to Mr. Zappala for ongoing
consulting services and for the first quarter of fiscal 1999, Mr. Zappala was
paid $4,000 for director fees and $1,277 of reimbursed expenses. Upon
consummation of the Delaware Settlement, Mr. Zappala's consulting arrangement
will be terminated.
For additional information regarding related party transactions see
Footnote16 in the consolidated financial statements included in the Company's
Form 10-K for the fiscal year ended June 30, 1998.
21
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11) STOCK TRADING INFORMATION
Effective August 7, 1998, the Company's Common Stock and its Preferred
Stock were delisted from trading on the American Stock Exchange ("AMEX") for the
failure to comply with certain listing criteria. Neither the Common Stock nor
the Preferred Stock has been traded on AMEX since October 13, 1997 when it was
suspended because the Company had not filed its Annual Report on Form 10-K for
fiscal 1997 within the Securities and Exchange Commission's prescribed time
period. Application is being made to initiate quotation of the Common Stock and
the Preferred Stock on the OTC Bulletin Board. In the interim, the stock is
listed for quotation on the NQB Pink Sheets.
SUBSEQUENT EVENTS
(A) On November 3,1998, New Jersey voters approved an amendment to
the state constitution giving the legislature the power to enact
laws authorizing the specific kind, restrictions and control of
wagering on horse races. The amendment will give the Legislature
the power to respond to the changing needs of New Jersey's horse
racing industry which faces strong competition from New York,
Pennsylvania, and Delaware racetracks and other forms of
gambling.
(B) The Company has been advised that Penn National Gaming, Inc., a
Pennsylvania corporation which owns, operates and conducts
wagering at racetracks and off-track wagering facilities in
Pennsylvania and West Virginia, has entered into a joint venture
agreement with Greenwood New Jersey, Inc., to purchase the
Company's racing operations. Greenwood New Jersey, Inc. had
previously entered into a July 2, 1998 asset purchase agreement
with the Company to purchase the real property and related assets
at Freehold Raceway and lease the real property and related
assets at Garden State Park. (See Note 2) Pursuant to the joint
venture, upon satisfaction of certain conditions (which include,
without limitation, the Company's approval New Jersey regulatory
approvals, Hart-Scott Rodino compliance and creditor approvals),
Penn National is to acquire a 50% interest in Greenwood New
Jersey, Inc. The Company is not a party to the joint venture
agreement.
22
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's working capital, as of September 30, 1998, was a deficit
of ($37,749,630) which represents a decrease in the deficit of approximately
$5,750,000 from the September 30, 1997 working capital deficit of ($43,499,328).
The decrease in the deficit was caused in part by the re-classification of
certain assets and current liabilities in connection with the discontinued
racetrack operations, offset by losses incurred from operations. On May 23,
1997, the Company obtained a credit facility from Credit Suisse. This two-year
$55 million facility was secured by a pledge of certain of the personal and real
property of the Company and its subsidiaries. Proceeds of the Credit Suisse
Credit Facility were used to repay in full the Company's $30 million credit
facility with Foothill Capital Corporation ("Foothill") and were used to provide
funds for working capital and other general corporate purposes, including, but
not limited to, preliminary development of the El Rancho Property. Interest
under the Credit Suisse Credit Facility is payable monthly in arrears at 7% over
the LIBOR. Of the remaining facility borrowings, approximately $16.8 million was
placed in various escrow accounts ( including $10 million in an interest reserve
account, which balance at September 30, 1998 was $974,471), financing and
closing fees of $4.3 million were paid and $3.9 million was used by the Company
for general corporate purposes and repayment of certain financial obligations.
At September 30, 1998, the interest rate on the Credit Suisse Credit Facility
was 12.34%. The Company is not in compliance with certain non-financial
covenants of the Credit Suisse Credit Facility. As a result of not receiving
waivers of these violations, Credit Suisse could accelerate the $55 million loan
at anytime. The loan matures June 1, 1999.
The Credit Suisse Credit Facility is evidenced by a convertible
promissory note (the "CSFB Note") pursuant to which $10 million of the aggregate
principal amount of the CSFB Note can be converted in certain circumstances,
including on the maturity date of the CSFB Note, upon the prepayment of at least
$10 million in an aggregate principal amount of the CSFB Note or upon
acceleration of the CSFB Note, at the option of Credit Suisse, into shares of
the Company's Common Stock at a conversion price of $8.75 per share (subject to
adjustment in certain events). In addition, pursuant to the Credit Suisse loan
agreement, Credit Suisse was granted warrants to purchase 1,044,000 shares of
Common Stock at an exercise price of $4.375 per share (subject to adjustment in
certain events). Warrants to purchase 546,847 shares of Common Stock are
immediately exercisable and warrants to purchase 497,153 shares of Common Stock
become exercisable upon certain events.
The net loss for the three months ended September 30, 1998 was
($1,999,452). Cash flows used in operating activities amounted to approximately
$482,000. The net loss incurred by the Company includes approximately $1,200,000
of non-cash expenses during the period.
Cash provided by financing activities was $1,740,543 during the three
months ended September 30, 1998, consisting principally of amounts drawn from
the Credit Suisse interest escrow account in the amount of $1,987,585.
The Company's scheduled principal payment on debt service are expected
to be approximately $55,514,000 during the twelve months ending September 30,
1999. Additionally, the Company may be obligated to repay an additional
indebtedness of approximately $11,500,000 in connection with Freehold Raceway if
a sale of such facility is consummated. (See discussion below).
Provided Credit Suisse does not make a demand for payment on the CSFB
Note, and continues to release funds in the interest reserve account, the
Company currently estimates that the funds made available from the Credit Suisse
Credit Facility and placed in the interest reserve account, together with cash
generated from the Company's operations prior to the sale of the discontinued
operations, will be sufficient to finance its current operations and expected
expenditures and carrying costs of the El Rancho Property until February 1999.
Prior to June 30, 1998, the Company determined to sell its racetracks. On
July 2, 1998 the Company announced that it had entered into an asset purchase
agreement with Greenwood New Jersey, Inc. ("Greenwood"), a wholly-owned
23
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
subsidiary of Greenwood Racing, Inc. which owns Philadelphia Park racetrack, the
Turf Clubs and Phonebet, for the sale of the real property and related assets at
Freehold Raceway and the lease for a period of seven years of the real property
and related assets at Garden State Park (the "Greenwood Agreement"). The
Greenwood Transaction is subject to the satisfaction of a number of conditions,
including without limitation, approval of the Company's stockholders, the
receipt by the Company of a fairness opinion from an independent investment
banker, and the receipt by Greenwood of approval from applicable regulatory
authorities. The purchase price is $45 million, consisting of $33 million in
cash and a seven-year non-contingent promissory note in the amount of $12
million, with an additional $10 million in contingent promissory notes becoming
effective upon, among other things, New Jersey's approval of off-track betting
facilities or telephone account pari-mutuel wagering on horse racing. Further
adjustments could be made to increase the purchase price if certain additional
regulatory gaming changes are approved in New Jersey in the future. Greenwood
Racing, Inc. will guarantee the performance by Greenwood of all obligations
under the notes.
If the Greenwood Transaction is not completed by December 31, 1998,
either party has the right to terminate. Subject to various conditions,
including Greenwoods' right of first refusal, the Company's Board has the right,
at any time prior to the closing, to exercise its fiduciary duties and accept a
superior proposal for the sale and/or lease of Freehold Raceway and Garden State
Park. The Company's Board is continuing to consider all of the Company's
strategic options to maximize stockholder value. Upon the sale of Freehold
Raceway and the lease or sale of Garden State Park, the Company will withdraw
from any gaming business regulated by the State of New Jersey. The Company's
Board is considering alternatives for the Company's future, including the
acquisition of one or more operating businesses.
On July 2, 1998, the Company entered into the Delaware Stipulation to
resolve the pending stockholder derivative litigation in the Delaware Court of
Chancery. The Delaware Settlement is subject to a number of conditions,
including, without limitation, an agreement with Credit Suisse or an alternate
lender. The Delaware Settlement will result in the Company's purchase from NPD
of approximately 2.9 million shares of the Company's Common Stock for $4.6
million, plus the assumption by the Company of NPD's $5.8 million promissory
note now held by Robert E. Brennan's Bankruptcy Trustee, the retirement of
approximately 2.1 million additional shares of the Company's Common Stock owned
by LVEN, the resignation of certain of the Company's Board members and the
termination of various agreements. The Delaware Settlement also contemplates the
disposition of the Company's non-operating El Rancho Property. The Delaware
Settlement will not result in the release by the Company of any claims against
Credit Suisse or Standard Capital Group.
The timing of the events stated above cannot be estimated at this time
(however, it is expected that the racetrack properties will be sold or leased by
June 30, 1999) and will materially affect the liquidity of the Company. When the
sale and lease of the racetrack properties occurs as outlined above, a portion
of cash proceeds from the Greenwood Transaction and sale of the El Rancho
Property will be used to reduce the Company's outstanding debt; the Company does
not know how much, if any, of such proceeds will be available to the Company
after repayment of its debt. Due to the materiality of these outstanding events,
the timing and the proceeds to be received from the asset sales, and the timing
of the consummation of the Delaware Settlement, it is impossible to estimate the
liquidity needs of the Company at this time. In the event the Company and its
lenders are unable to agree upon satisfactory terms, the Company will need to
complete a financing arrangement with an alternative lender in order to complete
the anticipated Delaware Settlement and to provide liquidity beyond February
1999.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Footnote 1 to the
consolidated financial statements, the Company is in violation of several loan
covenants with its major lender, is party to various legal proceedings and their
proposed settlements, and has sustained a loss of approximately $18.3 million
for the year ended June 30, 1998 and a loss of approximately $2,000,000 for the
three months ended September 30, 1998, all of which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Footnote 1 to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
24
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Seasonality and Effect of Inclement Weather
Because horse racing is conducted outdoors, a number of variables
contribute to the seasonality of the business, most importantly the weather.
Weather conditions, particularly during the winter months, sometimes cause
cancellations of races or severely curtail attendance, which reduces both live
racing and simulcast wagering at on-site and off-site facilities.
In addition, a disproportionate amount of the Company's revenue is
received during the period September through May of each year because Garden
State Park and Freehold Raceway conduct only simulcast receiving (not live
racing) during the summer months. As a result, the Company's revenue has been
the greatest in the second and third quarters of its fiscal year.
Inflation
To date, inflation has not had a material effect on the Company's
operations.
Impact of Year 2000 on the Company's Systems
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year, which may
result in systems failures and disruptions to operations at January 1, 2000.
Management is in the process of determining whether all of the Company's
accounting and operational systems are year 2000 compliant. The Company has
initiated formal communications with its suppliers of the racetrack pari-mutuel
computer systems to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 issue. Although
there can be no assurance, management does not expect the costs associated with
any required conversions of systems to ensure year 2000 compliance to be
significant and expects to be Year 2000 compliant by its fiscal 1999 year end.
Results of Operations for the Three Months Ended September 30, 1998 and 1997
Prior to June 30, 1998, the Company determined to sell its racetracks.
On July 2, 1998, the Company entered into the Greenwood Agreement. Accordingly,
the operating results of the racetrack subsidiaries have been segregated and
reported as discontinued operations for each of the periods presented. Also, on
the same date, the Company entered into the Delaware Stipulation to settle
certain pending litigation. Among other actions, the Delaware Settlement
contemplates the disposition of the El Rancho Property.
For the first quarter of Fiscal 1999, The Company's loss from
continuing operations was ($4,142,156) as compared to a loss from continuing
operations for the comparable period in prior fiscal year of ($4,770,146), a
decrease in the loss of $627,990. This decrease in the loss from continuing
operations was primarily the result of a decrease in general and administrative
expenses primarily as a result of non-employee option expense of $795,858
recognized in the prior fiscal year's first quarter, partially offset by a
decrease in interest income and an increase in amortization of finance costs and
casino carrying costs in the comparable quarters.
Income from discontinued operations was $2,142,704 for the first
quarter of Fiscal 1999 as compared to income from discontinued operations for
the first quarter of Fiscal 1998 of $1,726,264, an increase of $416,440. During
the first quarter of Fiscal 1999, revenue from racetrack operations at Freehold
Raceway and Garden State Park decreased by an aggregate of $236,905 from the
comparable prior fiscal quarter and racetrack operating expenses decreased by
$665,229 during the same period, primarily as a result of a decrease in wages
and benefits and outside services at the two facilities.
See the separate results for Garden State Park and Freehold Raceway below.
During the first quarter of Fiscal 1999, the Company incurred a net
loss of ($1,999,452) as compared to a net loss of ($3,043,882) for the
comparable quarter in Fiscal 1998. The decrease in net loss of $1,044,430 was
the result of those differences described above.
25
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
The New Jersey Division of Gaming Enforcement ("DGE") has conducted an
investigation of the Company and its directors and significant stockholders in
connection with Garden State Park's and Freehold Raceway's licenses with the
Casino Control Commission ("CCC") and the Racing Commission. The DGE issued a
report to the CCC in September 1998 in which it objected to the qualification of
one director who did not file an application and requested hearings for three
stockholders. The director and one of the stockholders have requested hearings
with the CCC and if the Delaware Settlement is consummated, the other two
stockholders will no longer be required to qualify. The DGE also reserved the
right to continue its investigation as to additional directors in the event the
Delaware Settlement is not consummated. As a result of the DGE's report and
subject to the consummation of the Delaware Settlement, the CCC and/or Racing
Commission may undertake further proceedings which potentially could jeopardize
the Company's racing licenses and ability to conduct business with any casino
licensees, including simulcasting to Atlantic City casinos, which could have a
significant negative impact on the Company's operations until the racetracks are
sold or leased.
o Garden State Park
Garden State Park's Fiscal 1999 Harness Meet began September 4, 1998
and is scheduled to run 51 days until December 12, 1998. Garden State Park has
requested approval from the New Jersey Racing Commission to run a 31 day
Thoroughbred Meet from April 9, 1999 to May 29, 1999 and a 52 day Harness Meet
in fiscal 2000 from August 27, 1999 to December 18, 1999. During these race
meetings, Garden State Park simulcasts its live racing to other racetracks,
other licensed venues and certain Atlantic City casinos. Simulcasting into the
racetrack from other racetracks continues throughout the year.
During the three months ended September 30, 1998, Garden State Park's
revenue of $6,075,048 decreased ($278,739) from the $6,353,787 for the
corresponding three month period, primarily reflecting the effect of a decrease
in revenues generated from simulcasting to other racetracks and in live wagering
income. Expenses decreased $475,402 or 8%. The decreased expense is principally
attributable to a decrease in wages and benefits of $80,000 or 4% as a result of
the Company's effort to cut overhead and operating costs, a reduction of outside
services during simulcast periods and a reduction in utilities, insurance and
materials and supplies. As a result of the decreased revenues and an even
greater decrease in expenses, Garden State Park realized net income of $859,386,
as compared to net income of $662,723 in the same quarter of the prior fiscal
year.
During the three month period ended September 30, 1998, the average
live wagering at Garden State Park was $118,000, a 22% decrease from the
corresponding prior period. During the first quarters of Fiscals 1998 and 1997,
15 and 14 days, respectively, of live racing were conducted. During the periods
of live racing, Garden State Park also simulcasted its racing signal to other
race tracks around the country. The average simulcast wagering at these tracks
decreased 17% over the prior year. During the period of live racing and most
other days, Garden State Park receives simulcasts from other racetracks during
the day and evening. The average daily wagering on simulcasts was $285,000 for
the three months ended September 30, 1998, a 5% decrease from the corresponding
prior period amount of $300,000.
o Freehold Raceway
The Company conducts its Harness Meet through Freehold Racing
Association, Inc. ("FRA") and Atlantic City Harness, Inc. ("ACH"), the operating
companies of Freehold Raceway. The FRA Fiscal 1999 Harness Meet began August 13,
1998 and is scheduled to run for 99 days thru December 31, 1998. ACH has
requested approval from the New Jersey Racing Commission to run its Fiscal 1999
Harness Meet for 101 days from January 1, 1998 through May 31, 1999. FRA has
applied for approval from the New Jersey Racing Commission to run its fiscal
2000 Harness Meet for 91 days from August 12, 1999 through December 31, 1999.
During the three months ended September 30, 1998, Freehold Raceway's
revenue was $8,230,333, a slight increase from the corresponding three month
period of the prior year, primarily reflecting the result of an increase in
revenues from receiving simulcasting, partially offset by a decrease in revenues
resulting from a 2 day decrease in the number of live race days and decreases in
average wagering from live racing and sending simulcasting. Expenses decreased
$189,827 or 3% for the three months ended September 30, 1998 when compared to
the same period last year, primarily as a result of the Company's continued
effort to cut overhead and operating costs. As a result of the overall increased
revenues and decreased expenses, Freehold Raceway realized net income of
$1,283,318 as compared to net
26
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
income of $1,063,542 in the same quarter last year.
During the three month period of harness racing ended September 30,
1998, the average live wagering at Freehold Raceway was $217,638, a 6% decrease
from the corresponding prior period amount of $230,573. During the three month
period ended September 30, 1998, 35 live days of wagering were conducted and 37
days were conducted in the corresponding prior period. During the periods of
live racing, Freehold Raceway also simulcasted its racing signal to other race
tracks around the country. The average simulcast wagering at these tracks
decreased 6% over the prior year. During periods of live racing and most other
days, Freehold Raceway receives simulcasts from other racetracks during the day
and evening. The average daily wagering on simulcasts was $325,880 for the three
months ended September 30, 1998, a 4% increase from the corresponding prior
period amount of $312,880.
27
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
Part II
OTHER INFORMATION
Item 6.
During the quarter ended September 30, 1998, the registrant filed the
following Current Reports on Form 8-K:
Date Subject Matter
- ---------------------- -------------------------------------------------
July 2, 1998 Sale and lease of racetrack assets
August 7, 1998 Delisting of the Company's Common and
Preferred Stock from the American Stock
Exchange
28
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
November 13, 1998 /s/Nunzio P. DeSantis
Nunzio P. DeSantis, President,
Chief Executive Officer and Director
(Principal Executive Officer)
November 13, 1998 /s/William H. Warner
William H. Warner
Treasurer
(Principal Financial and Accounting Officer)
29
<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
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