FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
------------------------
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 22-2332039
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 May 14, 1999
Common Stock, $2.00 par value 8,980,232 Shares
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
for the Nine Months ended March 31, 1998
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of March 31, 1999 and June 30, 1998...............1-2
Consolidated Statement of Stockholders' Equity
for the Nine Months ended March 31, 1999 ............3
Consolidated Statements of Operations
for the Three and Nine Months ended
March 31, 1999 and 1998 ...............................4
Consolidated Statements of Cash Flows
for the Nine Months ended
March 31, 1999 and 1998................................5
Notes to Financial Statements ...............................6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....18-21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................22
SIGNATURES ......................................................23
<PAGE>
<TABLE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND JUNE 30, 1998
ASSETS
March 31,
1999 June 30,
(UNAUDITED) 1998
----------- ----
<CAPTION>
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents ..................... $ 2,160,594 $ 213,795
Reserve Escrow Deposits ....................... 1,149,156 10,460,881
Accounts Receivable ........................... 0 36,838
Prepaid Expenses .............................. 121,827 322,313
Other Current Assets .......................... 145,856 325,756
Net Assets of Discontinued Operations - Current 574,715 12,235,217
------- ----------
TOTAL CURRENT ASSETS ..................... 4,152,148 23,594,800
--------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS-Long Term. 30,000,000 45,626,944
---------- ----------
PROPERTY HELD FOR SALE ......................... 42,149,755 47,434,670
---------- ----------
LAND, BUILDINGS AND EQUIPMENT:
Land and Buildings ............................ 214,097 214,097
Equipment ..................................... 652,058 814,927
------- -------
866,155 1,029,024
LESS: Accumulated Depreciation and Amortization 313,017 308,162
------- -------
TOTAL LAND, BUILDINGS AND EQUIPMENT, NET . 553,138 720,862
------- -------
OTHER ASSETS:
Deposits and Other Assets ..................... 1,198,172 3,172
Deferred Financing Costs, Net ................. 299,011 2,872,453
------- ---------
TOTAL OTHER ASSETS ....................... 1,497,183 2,875,625
--------- ---------
TOTAL ASSETS ................................... $ 78,352,224 $120,252,901
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
<TABLE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND JUNE 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
1999 June 30,
(UNAUDITED) 1998
----------- ----
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable ............................................ $ 181,427 $ 278,786
Accrued Expenses ............................................ 886,824 4,852,328
Current Maturities of Long-Term Debt ........................ 30,500,000 55,208,426
---------- ----------
TOTAL CURRENT LIABILITIES .............................. 31,568,251 60,339,540
---------- ----------
LONG-TERM DEBT, Net of Current Portion ........................ 3,558,032 0
---------- ----------
COMMITMENTS AND CONTINGENCIES ................................. -- --
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100.00 Par Value,
Authorized 500,000 Shares, Issued and Outstanding,
362,482 and 362,480 Shares, Respectively .................. 36,248,175 36,247,975
Common Stock, $2.00 Par Value, Authorized 25,000,000 Shares,
Issued, 11,884,245 and 13,978,099 Shares,
and Outstanding, 8,980,228 and 13,978,099 Shares ........... 23,768,489 27,956,197
Capital in Excess of Par .................................... 26,073,944 25,878,224
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) ............................ (35,571,710) (30,132,368)
----------- -----------
TOTAL .................................................. 50,518,898 59,950,028
LESS:
Treasury Stock, 2,904,016 Shares, at Cost ................ (7,260,040) 0
Deferred Compensation, Net ............................... (32,917) (36,667)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ............................. 43,225,941 59,913,361
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $ 78,352,224 $ 120,252,901
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1999
Preferred Common
--------- ------ Capital
Number of Number of in Excess
Shares Amount Shares Amount of Par
------ ------ ------ ------ ------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JUNE 30, 1998 ...................... 362,480 $ 36,247,975 13,978,099 $ 27,956,197 $ 25,878,224
Shares Canceled in connection with
Delaware Settlement ......................... -- -- (2,093,868) (4,187,736) (1,046,934)
Purchase of 2,904,016 Shares for
Treasury in connection with
Delaware Settlement ......................... -- -- -- -- --
Shares Issued for Fractional Exchanges
With Respect to the
One-for-twenty Reverse Stock Split
effected on March 13, 1992 .................. 2 200 14 28 (228)
Warrants Issued in Connection With Debt
Retirement (See Note 11-B) .................. 1,242,882
Amortization of Deferred Compensation Costs -- -- -- -- --
Net (Loss) for the Nine Months
Ended March 31, 1999 ....................... -- -- -- -- --
------- -------------- ---------- ------------ ------------
BALANCE - MARCH 31, 1999 ..................... 362,482 $ 36,248,175 11,884,245 $ 23,768,489 $ 26,073,944
======= ============== ========== ============ ============
</TABLE>
<TABLE>
Retained Treasury Deferred
Earnings Stock, Compen-
(Deficit) At Cost sation Total
--------- ------- ------ -----
<CAPTION>
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1998 ...................... $(30,132,367) $ 0 $ (36,667) $ 59,913,361
Shares Canceled in connection with
Delaware Settlement ........................ -- -- -- (5,234,670)
Purchase of 2,904,016 Shares for
Treasury in connection with
Delaware Settlement ........................ -- (7,260,040) -- (7,260,040)
Shares Issued for Fractional Exchanges
With Respect to the
One-for-twenty Reverse Stock Split
effected on March 13, 1992 ................. -- -- -- --
Warrants Issued in Connection With Debt
Retirement (See Note 11-B) 1,242,882
Amortization of Deferred Compensation Costs -- -- 3,750 3,750
Net (Loss) for the Nine Months
Ended March 31, 1999 ....................... (5,439,343) -- -- (5,439,343)
------------ ------------ ------------ ------------
BALANCE - MARCH 31, 1999 ..................... $(35,571,710) $ (7,260,040) $ (32,917) $ 43,225,941
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<CAPTION>
EXPENSES:
<S> <C> <C> <C> <C>
General & Administrative Expenses ................... $ 836,955 $ 1,508,824 $ 3,572,277 $ 5,678,432
Interest and Financing Expenses ..................... 3,270,275 1,744,989 6,794,248 5,324,146
Interest Income ..................................... (85,411) (134,062) (298,492) (558,899)
Amortization of Financing Costs ..................... 1,044,839 764,801 2,574,441 2,288,781
El Rancho Property Carrying Costs ................... 303,029 203,448 922,562 777,490
(LOSS) FROM CONTINUING OPERATIONS ---------- ---------- ----------- -----------
BEFORE DISCONTINUED OPERATIONS ........................... (5,369,687) (4,088,000) (13,565,036) (13,509,950)
---------- ---------- ----------- -----------
INCOME FROM DISCONTINUED OPERATIONS:
Gain on Sale of Net Assets of Discontinued Operations 3,621,507 -- 3,621,507 --
(less applicable state income taxes of $1,300,000)
Income from operations of discontinued racetrack
operations (less
applicable state income taxes of $22,500
and $50,863 for the three
months ended March 31, 1999 and 1998, respectively,
and $150,000 and
$121,100 for the nine months
ended March 31, 1999 and 1998, respectively) ...... 247,640 1,401,825 4,504,184 5,582,057
---------- ---------- ----------- -----------
INCOME FROM DISCONTINUED OPERATIONS ................. 3,869,147 1,401,825 8,125,691 5,582,057
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
NET (LOSS) .................................................. $(1,500,540) $ (2,686,175) $ (5,439,345) $ (7,927,893)
=========== ========== =========== ==========
BASIC PER SHARE DATA:
(LOSS) FROM CONTINUING OPERATIONS .......................... $ (0.59) $ (0.29) $ (1.08) $ (0.97)
INCOME FROM DISCONTINUED OPERATIONS ......................... 0.43 0.10 0.65 0.40
---------- ---------- ---------- -----------
NET (LOSS) .................................................. $ (0.16) $ (0.19) $ (0.43) $ (0.57)
========== ========== ========== ==========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING ................................. 8,980,226 13,978,076 12,409,426 13,978,084
========== ========== ========== ==========
</TABLE>
See Notes to Consolideated Financial Statements.
4
<PAGE>
<TABLE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
Nine Months Ended
March 31,
-----------------------------
1999 1998
---- ----
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
(LOSS) FROM CONTINUING OPERATIONS .................... $(13,565,036) $(13,509,950)
------------ ------------
Adjustments to reconcile (loss) to net cash (used in)
provided by operating activities:
Income from discontinued racetrack operations 8,125,691 5,582,057
Depreciation and Amortization ................ 2,613,859 3,586,519
Compensation for Options Granted ............. 0 819,413
Loss on Disposal of Fixed Assets ............. 146,238 32,673
Changes in Assets and Liabilities -
Decrease in Restricted Cash and Investments 0 1,317,851
Decrease (Increase) in Accounts Receivable 36,838 (1,288,198)
Decrease (Increase) in Other Assets ....... 179,900 (328,811)
Decrease in Prepaid Expenses .............. 200,486 875,681
(Decrease) in Accounts and Purses Payable
and Accrued Expenses ..................... (914,871) (351,571)
(Decrease) in Deferred Revenue ............ 0 (608,030)
------------
CASH (USED IN) CONTINUING OPERATING ACTIVITIES ....... (3,176,895)
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES ... 2,629,637
------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES .............. (547,258) (3,872,366)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Freehold ........................... 17,900,000 0
Proceeds from Sale of Land at Garden State Park .......... 2,000,000 8,449,904
Purchase of 2,904,016 Shares of Treasury Stock ........... (6,850,000) 0
Development of El Rancho Property ........................ 0 (239,588)
Deposits on New Mexico Racetrack Options ................. 0 (600,000)
Capital Expenditures ..................................... (69,044) (409,891)
(Increase) in Other Investments .......................... 0 (60,417)
------------
CASH PROVIDED CONTINUING INVESTING ACTIVITIES ........ 12,980,957
CASH(USED IN) DISCONTINUED INVESTING ACTIVITIES ...... (85,068)
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES ............ 12,895,888 7,140,008
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred Financing Costs ................................. 0 (22,445)
Escrow Deposits Utilized ................................. 9,311,725 6,790,994
Deposits to Reserve Escrow Deposits from Land Sale ....... 0 (1,370,120)
(Increase) in Balances Due From Discontinued Subsidiaries (14,460,563) 0
Principal Payments on Sun Mortgage ....................... 0 (6,000,000)
Principal Payments on Short Term Notes ................... (2,708,426) (908,370)
Principal Payments on Long Term Notes .................... 0 (1,006,070)
------------
CASH (USED IN) CONTINUING FINANCING ACTIVITIES ....... (7,857,264)
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES ..... (4,644,520)
------------ ------------
NET CASH (USED IN) FINANCING ACTIVITIES .............. (12,501,784) (2,516,011)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......... (153,153) 751,630
LESS CASH AND CASH EQUIVALENTS PROVIDED BY
DISCONTINUED OPERATIONS .......................... 2,099,952 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
FROM CONTINUING OPERATIONS ......................... 213,795 3,784,895
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 2,160,594 $ 4,536,525
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,636,979 $ 5,832,726
Income Taxes $ 1,500,000 $ 100,000
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the nine months ended March 31, 1999 and 1998, the Company
recorded an unrealized loss of $12,078 and $3,334, respectively, on
trading securities.
During the nine months ended March 31, 1999, the Company issued warrants
to purchase 497,153 shares of Common Stock at a fair value of
$1,242,883 in connection with financing agreements.
During the nine months ended March 31, 1998, 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.
During the nine months ended March 31, 1999, the Company canceled
2,093,868 shares of Common Stock in connection with the Delaware
Settlement.
During the nine months ended March 31, 1999, the purchase of 2,904,016
shares of Common Stock was financed, in part, through a long term note
in the amount of $3,558,032.
During the nine months ended March 31, 1999, $22,000,000 of the
Company's short term debt was assumed by the the purchaser in in
connection with the sale of certain assets at Freehold Raceway and
Garden State Park.
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
(1) BASIS OF PRESENTATION
On January 28, 1999, the Company completed the sale of Freehold Raceway and
a ten-acre parcel at the Garden State Park facility and the lease of the Garden
State Park facilities. Prior to June 30, 1998, the Company determined to sell
its racetracks and, accordingly, the operating results of the racetrack
subsidiaries have been segregated and reported as discontinued operations for
each of the periods presented. (See Notes 2 and 4)
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 nine months ended March 31, 1999 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. The remaining
debt to the Company's primary lender is due June 1, 1999, unless an extension is
obtained. On May 7, 1999, the Company notified their primary lender, Credit
Suisse First Boston Mortgage Capital LLC ("Credit Suisse"), of its intent to
extend the loan maturity date to June 1, 2000. The Company will be required to
deposit sufficient funds into an escrow account to cover interest and fees of
approximately $4 million. The Company is currently considering financing sources
for the funds required to extend the debt payment date. 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 $5.4 million for the nine months ended March 31, 1999. The Company
believes its projected cash flows from its current operations will be sufficient
until June 1, 1999 when the debt to the Company's primary lender is due, and
there can be no assurances beyond that date.
The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
(2) SALE AND LEASE OF ASSETS
On January 28, 1999, the Company completed the sale of Freehold Raceway,
the sale of a ten-acre parcel at Garden State Park and the lease of the Garden
State Park facilities to subsidiaries of Greenwood Racing, Inc., which owns
Philadelphia Park racetrack, the Turf Clubs and Phonebet (the "Greenwood
Transaction"). The purchase price was $46 million ($1 million of which will be
held in escrow to cover certain indemnification and other obligations of the
Company), with an additional $10 million in contingent promissory notes (the
"Contingent Notes") which become effective upon, among other things, the New
Jersey Legislatures'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 by the New Jersey Legislature in the future. Greenwood Racing, Inc.
has guaranteed the performance by the purchaser of all obligations under the
Contingent Notes, and following a consummation of a joint venture between
Greenwood Racing, Inc. and Penn National Gaming, Inc. ("Penn National"), which
owns Penn National Race Course, Pocono Downs Racetrack, Charles Town Races and
at least ten off-track betting parlors in Pennsylvania, will also guarantee the
Contingent Notes.
The proceeds of the Greenwood Transaction were principally used by the
Company to pay off the first lien on the assets of Freehold Raceway, reduce the
outstanding balance on the Company's loan from Credit Suisse to $30.5 million
and to consummate the Delaware Settlement. (See Note 3) In addition, Credit
Suisse also released to the Company approximately $4.475 million from its escrow
reserves for working capital purposes. (See Note 6)
The Company recognized a net gain of $3,621,507, following the write down
to fair value of the remaining assets
6
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
of Garden State Park, on the sale of Freehold Raceway, the sale of a ten-acre
parcel at the Garden State Park facility and the lease of the Garden State Park
facilities during the third quarter of Fiscal 1999.
(3) LITIGATION SETTLEMENT
On January 28, 1999, the Company fully and finally consummated the
settlement and dismissal of the following actions discussed in the Legal
Proceedings Section of this 10Q: Quigley et al. v. DeSantis et al., C.A. No.
15919, in the Court of Chancery of the State of Delaware; Rekulak v. DeSantis et
al., C.A. No. 15920, in the Court of Chancery of the State of Delaware; Green v.
DeSantis, et al., C.A. No. 97-CV-5657, in the New Jersey District Court. These
actions were settled in connection and accordance with the Stipulation and
Agreement of Compromise, Settlement and Release entered into on July 2, 1998 to
resolve the above action entitled Quigley et al. v. DeSantis et al. (the
"Delaware Settlement").
Pursuant to the terms of the Delaware Settlement, the Company purchased
from NPD, Inc. ("NPD") approximately 2.9 million shares of ITB common stock (the
"NPD Shares") for $4.6 million cash and the assumption by ITB of a $5.8 million
promissory note originally issued by NPD to acquire the NPD Shares, held by
Donald F. Conway, Chapter 11 Trustee for the Bankruptcy Estate of Robert E.
Brennan (the "Bankruptcy Trustee"). In addition, pursuant to the terms of the
Delaware Settlement and with the approval of the United States Bankruptcy Court
for the District of New Mexico in an action in which AutoLend Group, Inc. is the
debtor, NPD returned to AutoLend Group, Inc. the $2 million originally pledged
by AutoLend Group, Inc. to secure the aforementioned $5.8 million promissory
note (the "NPD Note"). ITB understands that former ITB director Nunzio P.
DeSantis is Chairman, President and a principal stockholder of AutoLend Group,
Inc., and former ITB director Anthony Coelho is a director of AutoLend Group
Inc.
The approval of certain transactions between ITB and the Bankruptcy Trustee
by the United States Bankruptcy Court for the District of New Jersey in the
action entitled In re Robert E. Brennan, C.A. No. 95-35502, was a condition
precedent to the consummation of the Delaware Settlement. This approval was duly
received and the Company consummated a separate settlement with the Bankruptcy
Trustee necessary to consummate the Delaware Settlement (the "Trustee
Settlement"). Pursuant to the Trustee Settlement, the Bankruptcy Trustee
received: (a) a pay down on the NPD Note from the original principal balance of
$5,808,032 to $3,558,032 (see Note7-B); (b) a promissory note from ITB in the
amount of $3,558,032 (the "ITB Note"), on substantially the same terms as the
NPD Note, except that the ITB Note becomes due and payable on the earlier to
occur of (i) January 15, 2001, or (ii) the closing of either the sale of the
Company's non-operating El Rancho hotel and casino property in Las Vegas, Nevada
(the "El Rancho Property"), or the sale of Garden State Park (the "Garden State
Property"); (c) a security interest in the NPD Shares; (d) the payment of the
costs and expenses incurred by the Bankruptcy Trustee in connection with the
Delaware Settlement and the Trustee Settlement; (e) subordinate interests in
both the El Rancho Property and the Garden State Property; and (f) an escrow of
the July 15, 1999 interest payment due on the ITB Note. As a result of the
Trustee Settlement, the Company secured (a) the power to consummate the Delaware
Settlement, (b) releases from the Bankruptcy Trustee in favor of all parties to
the Delaware Settlement, including the Company, and (c) the right to defer
certain interest payments due under the ITB Note until the maturity of such
note.
Upon consummation of the Delaware Settlement, Nunzio P. DeSantis, Anthony
Coelho, and Joseph Zappala immediately resigned from the Company's board of
directors and terminated any and all employment agreements or consulting
arrangements with the Company. Francis W. Murray and Robert J. Quigley remained
directors, and during the quarter ended Maech 31,1999, John U. Mariucci and
James J. Murray were elected by the remaining directors to serve on the board of
directions until the next annual stockholders' meeting.
Also pursuant to the Delaware Settlement, Las Vegas Entertainment Network,
Inc. ("LVEN") was granted the exclusive right to sell the El Rancho Property
until November 20, 1998 and the co-extensive right, along with the Company, to
sell the El Rancho Property until April 19, 1999. Beginning January 19, 1999,
and ending upon the earlier of a sale of the El Rancho Property or April 19,
1999, LVEN is required to pay one-half of the carrying costs associated with
maintaining the El Rancho Property. LVEN also obtained the right, exercisable
from March 20, 1999 until April 19, 1999, to refinance the El Rancho Property
and thereby obtain the extended right to sell the El Rancho Property until the
earlier of (a) one year from April 19, 1999 or (b) the midpoint of the term of
the refinancing loan (the "Refinancing Option"). As of March 31, 1999, neither
LVEN, nor the Company have sold the El Rancho Property, and LVEN has not
7
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
exercised the Refinancing Option. There can be no assurances that the Company or
LVEN will be able to dispose of the El Rancho Property as contemplated by the
Delaware Settlement.
In exchange for the foregoing, LVEN (a) executed and delivered releases to
all parties to the Delaware Settlement, including the Company and Credit Suisse,
(b) returned to ITB for immediate cancellation the 2,093,868 shares of ITB
common stock (the "LVEN Shares") previously issued to Casino-Co Corporation, a
subsidiary of LVEN, in exchange for the cancellation of a certain $10.5 million
note plus accrued interest from ITB to LVEN, which note remains canceled, (c)
released any and all LVEN or Casino-Co Corporation interests in the NPD Shares,
and (d) cancellation of any and all agreements of any kind or nature whatsoever
between LVEN and its affiliates and ITB or any of its subsidiaries.
The foregoing summary of the terms and transactions relating to the
Delaware Settlement and the Trustee Settlement is qualified by reference to the
actual documents filed with the respective courts in the actions discussed
above.
There can be no assurances that the Company will be able to dispose of the
El Rancho Property as contemplated by the Delaware Settlement.
(4) DISCONTINUED OPERATIONS
On January 28, 1999, the Company completed the sale of the real property
and certain related assets at Freehold Raceway and a ten-acre parcel of land at
the Garden State Park facility, and the lease of the real property and certain
related assets of Garden State Park for a seven-year period. (See Note 2).
8
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
<TABLE>
The discontinued operations are summarized as follows:
Three Months Ended March 31, Nine Months Ended March 31,
Discontinued Racetrack Operations: 1999 1998 1999 1998
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Revenue ................................. $ 4,071,896 $18,850,288 $38,295,517 $54,036,089
----------- ----------- ----------- -----------
Expenses:
Cost of Revenues:
Purses ........................... 1,041,118 6,909,264 13,115,586 18,929,027
Operating Expenses ............... 2,276,779 8,748,513 16,525,480 24,089,056
Depreciation & Amortization ...... 255,378 413,909 1,078,701 1,246,207
General & Administrative Expenses ... 166,148 1,122,460 2,454,559 3,416,934
Interest Expenses ................... 67,437 203,054 472,112 651,708
----------- ----------- ----------- -----------
Total Expenses ........... 3,801,756 17,397,200 33,641,334 48,332,932
----------- ----------- ----------- -----------
Income From Discontinued Racetrack
Operations Before Taxes ................... 270,140 1,453,088 4,654,184 5,703,157
Income Tax Expense .................. 22,500 51,263 150,000 121,100
----------- ----------- ----------- -----------
247,640 1,401,825 4,504,184 5,582,057
Gain on Sale of Net Assets of Discontinued
Operations (Net of $1,300,000 state income
taxes) .................................... 3,621,507 -- 3,621,507 --
----------- ----------- ----------- -----------
Income From Discontinued
Racetrack Operations ..................... $ 3,869,147 $ 1,401,825 $ 8,125,691 $ 5,582,057
=========== =========== =========== ===========
</TABLE>
The net assets of the discontinued operations included in the accompanying
consolidated balance sheet as of March 31, 1999 consist of the following:
Classified As:
Current Assets .................................. $ 3,009,933
Current Liabilities ............................. 2,435,219
----------
Net Assets of Discontinued Operations - Current 574,715
Property Assets of Garden State Park ............ 30,000,000
----------
Net Assets of Discontinued Operations ......... $ 30,574,714
==========
9
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
<TABLE>
Cash flows from discontinued operations for the nine months ended March 31,
1999 consist of the following:
Cash Flows From Discontinued Operating Activities:
<CAPTION>
<S> <C>
Income ...................................................... $ 8,125,691
Adjustments to reconcile income to net cash provided by
discontinued operating activities
Gain on Sale of Discontinued Operations ............. (3,621,507)
Depreciation and Amortization ....................... 1,078,701
Changes in Assets and Liabilities:
Decrease in Restricted Cash and Investments 3,291,166
Increase in Accounts Receivable ........... (112,676)
Decrease in Other Assets .................. 21,142
Decrease in Prepaid Expenses .............. 565,249
Decrease in Accounts and Purses Payable and
Accrued Expenses ........................ (5,357,933)
Decrease in Deferred Revenue .............. (1,360,196)
------------
Net Cash Provided By Discontinued Operating Activities
(Excluding Income) ......................................... 2,629,637
------------
Cash Flows From Discontinued Investing Activities:
Capital Expenditures ........................................ (82,570)
(Increase) in Other Investments ............................. (2,498)
------------
Net Cash (Used In) Discontinued Investing Activities ........ (85,068)
------------
Cash Flows from Discontinued Financing Activities:
Principal Payments on Short Term Notes ...................... (723,545)
Decrease in Balances Due To Parent Company .................. 8,077,756
Principal Payments on Long Term Notes ....................... (11,998,731)
------------
Net Cash (Used In) Discontinued Financing Activities ........ (4,644,521)
------------
Net Decrease in Cash and Cash Equivalents From Discontinued
Operations ................................................. (2,099,952)
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 ............................. $ 1,066,952
============
</TABLE>
10
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
(5) PROPERTY HELD FOR SALE
On January 28, 1999, the Company consummated the settlement under the
Stipulation and Agreement of Compromise, Settlement and Release entered into on
July 2, 1998 to resolve the pending stockholder derivative litigation in the
Delaware Court of Chancery (the "Delaware Settlement"). (See Note 3). As part of
the Delaware Stipulation, the Company has provided for the possible sale of the
El Rancho Property pursuant to the terms enumerated by the Delaware Settlement.
(See Note 3) On June 30, 1998, the El Rancho Property was 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 the El Rancho
Property to fair value, after taking into account the estimated fair value of
the reversion of the LVEN Shares (See Note 3). 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 assets and operations, and the El Rancho Property,
and other transactions contemplated by the Delaware Settlement. (See Notes 2 and
3)
(6) RESERVE ESCROW DEPOSITS
At March 31, 1999, $1,149,156 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. The terms of such credit
facility provided that such reserve accounts be held by LaSalle National Bank
("the Depository"). On the maturity date of such credit facility, any amounts
remaining on deposit shall, at Credit Suisse's option, be applied against any
outstanding obligations of the Company under such credit facility or returned to
the Company. In connection with the January 28, 1999 sale of Freehold Raceway,
the sale of a ten-acre parcel at Garden State Park and the lease of the Garden
State Park facility, Credit Suisse released to the Company approximately $4.475
million from its escrow reserves to pay down debt and for working capital
purposes.
The Escrow Accounts are summarized below:
Account March 31, 1999
- ------------------------------------------------ ----------------
Interest Reserve ............................. $ 959,776
El Rancho Reserve ............................ 6,750
Working Capital .............................. 182,630
---------
Total $ 1,149,156
================
(7) NOTES AND MORTGAGES PAYABLE
<TABLE>
Notes and Mortgages Payable are summarized below:
March 31, 1999
------------------------------
Interest % Per Annum Current Long-Term
------------------------------------------ -------------
<CAPTION>
International Thoroughbred Breeders Inc.:
<S> <C> <C> <C>
Credit Suisse First Boston(A) LIBOR Rate plus 7%
(3/31/99 rate 11.94%) $ 30,500,000 $ -0-
REB Bankruptcy Trustee(B) Prime Rate
(3/31/99 rate 7.75%) -0- 3,558,032
---------------- -------------
Total $ 30,500,000 $ 3,558,032
================ =============
The effective LIBOR Rate and the Prime Rate at March 31, 1999 were 4.94% and
7.75%, respectively.
</TABLE>
11
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
(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 ("Foothill") and
to provide funds for working capital and other general corporate purposes,
including, but not limited to, preliminary development of the El Rancho
Property. Of the remaining facility borrowings, approximately $16.8 million was
placed in escrow accounts, financing and closing fees of $4.3 million were
incurred by the Company and $3.9 million was used by the Company for general
corporate purposes and repayment of certain other financial obligations.
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 Credit Suisse Facility is June 1, 1999.
The Credit Suisse Credit Facility is evidenced by a convertible promissory
note (the "Credit Suisse Note"). 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 purchase 497,153
shares became exercisable January 28, 1999, following the consummation of the
Delaware Settlement and were recorded as financing expenses in the amount of
$1,242,883 during the third quarter of Fiscal 1999. (See Notes 2 and 11)
Credit Suisse also received 232,652 shares of the Company's Common Stock
upon the prior conversion of a $10.5 million promissory note issued by the
Company to LVEN in consideration for Credit Suisse's consent and advisory
services in connection with this transaction. Credit Suisse's 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, has been terminated by the above described Delaware Settlement. The
Company has granted Credit Suisse certain registration rights with respect to
the above described warrants and 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's non- compliance with
certain non-financial covenants at December 31, 1998 were waived on January 28,
1999 in connection with the Delaware Settlement. (See Note 3)
On January 28, 1999, a portion of the proceeds from the Greenwood
Transaction and $2,500,000 held in escrow was used to reduce the principal
balance on the Credit Suisse Note to $30.5 million and to pay a 2% prepayment
fee of $500,000, recorded as financing expenses, to Credit Suisse. (See Note 2)
The approval agreements signed on January 28, 1999 between the Company and
CSFB required the Company to register with the SEC the warrants and the shares
issued to CSFB within 90 days of the agreements. To date, the Company has not
completed the Registration Statement. The Company is currently seeking an
extension to register these warrants and shares and it is expected that a
resolution will be agreed upon by June 1, 1999.
(B) As discussed in Note 3 above, and in connection with the Delaware
Settlement, the Company executed a note in the principal Amount of $3,558,032 in
order to purchase the NPD Shares. The terms of such ITB Note are discussed in
Note 3.
(8) INCOME TAX EXPENSE
The Company's income tax expense for the three and nine month periods
ending March 31, 1999 and 1998 relates to New Jersey income taxes for its
Freehold Raceway operations and the gain on the sale of the Freehold Assets.
(9) COMMITMENTS AND CONTINGENCIES
(A) On July 2, 1998, the Company entered into the Delaware Stipulation to
resolve certain pending litigation. The Delaware Settlement was 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 (which was granted on January 28, 1999) (See Note 3) and the grant of
certain approvals by certain U.S. bankruptcy courts (which were issued on
January 15, 1999). The Delaware Settlement resulted in, among other things: (i)
the dismissal of the pending litigation with prejudice; and (ii) the
12
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
Company's purchase from NPD of approximately 2.9 million shares of the Company's
Common Stock (the "NPD Shares") for $4.6 million plus the assumption by the
Company of NPD's $5.8 million promissory note held by the Bankruptcy Trustee,
and (iii) the termination of the Company's option agreement with D & C Gaming,
Inc. During the fourth quarter of Fiscal 1998, the Company recorded a charge of
approximately $3.7 million, based on the difference between the estimated fair
value at June 30, 1998 of $2.50 per share and the agreed upon price per share of
$3.58, for the purchase of the NPD Shares. Approximately $3.1 million of this
charge, previously reflected in accrued expenses, was eliminated as part of the
Delaware Settlement on January 28, 1999.
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 on January 28, 1999, Anthony Coelho,
Nunzio P. DeSantis and Joseph Zappala resigned from the Board and terminated
their employment and consulting agreements with the Company.
As discussed above, the Delaware Settlement also contemplates a potential
disposition of the El Rancho Property. The proceeds of such sale will be used to
retire its outstanding debt to the Company's primary lender. There can be no
assurance that any such disposition will occur in the amounts contemplated by
the Delaware Settlement. (See Note 3).
As part of the Delaware Settlement, Las Vegas Entertainment Network, Inc.
has returned to the Company for cancellation approximately 2.1 million shares of
the Company's common stock (the "LVEN Shares"), and has terminated all of its
contractual arrangements with the Company.
As a result of the cancellation of the 2,093,868 LVEN Shares and the
repurchase of the NPD Shares by the Company (recorded as Treasury Stock), the
number of outstanding shares of the Company's common stock was reduced to
8,980,227 shares.
(B) The Company entered into lease agreements for certain equipment and
maintenance contracts at the Garden State Park facility and Freehold Raceway.
Two of these agreements were 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 were based on projected racing dates.
These lease agreements were transferred as part of the sale and lease
transactions completed on January 28, 1999. In connection with the January 28,
1999 transactions, the Company purchased the undepreciated balance of equipment
located at Garden State Park and a liquor license owned by an unaffiliated third
party, Service America Corporation, for $500,000 ($100,000 of which will be paid
by the lessee). 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 provided for a monthly rent of approximately $10,000 when
the space was fully occupied. In connection with this lease, the Company
sub-leased a portion of the premises to 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. Upon consummation of the Delaware Settlement
on January 28, 1999, the Albuquerque lease was assumed by AutoLend.
In connection with the Greenwood Transaction (See Note 2), Mr. Richard E.
Orbann, Vice President of Racing Operations of the Company, and the Company
entered into an agreement terminating Mr. Orbann's employment with the Company.
Such termination was effective on February 5, 1999. The cost of terminating the
contract in the amount of $132,548 was recorded during the third quarter.
As of December 31, 1998, the employment contracts of Edward Ryan and Kerry
Fitzpatrick expired. During the third quarter, the Company paid $119,036 in
severance payments in association with their employment contracts.
(C) The Company and certain of its officers and directors and former
officers and directors received subpoenas from the Securities and Exchange
Commission (the "SEC") relating to certain transactions for the period January
1, 1997 to the present. It is the Company's intent to cooperate fully with the
SEC's investigation.
(D) The approval agreements signed on January 28, 1999 between the Company
and CSFB required the Company to register with the SEC the warrants and the
shares issued to CSFB within 90 days of the agreements. To date, the Company has
not completed such registration statement. The Company is currently seeking an
extension to register these warrants and shares and it is expected that a
resolution will be agreed upon by June 1, 1999.
13
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
LEGAL PROCEEDINGS
Quigley et al. v. DeSantis et al.
Quigley, Leo and The Family Investment Trust v. DeSantis, Abraham, Coelho,
Scholl, Zappala, Corazzi and Las Vegas Entertainment Network, Inc. and
International Thoroughbred Breeders, Inc., C.A. No. 15919 (the "Quigley
Action"), was filed in the Delaware Court of Chancery on or about September 10,
1997, and alleged that the director defendants therein acted in contravention of
ITB's by-laws, Delaware law and their fiduciary duties. The Quigley Action
sought a declaratory judgement that the actions taken by the director defendants
violated ITB's by-laws, Delaware law and the director defendants' fiduciary
duties and that such actions are void and should be rescinded by the Court.
Moreover, the Quigley Action sought damages suffered by ITB in connection with
such challenged actions. ITB asserted counterclaims against Quigley, Leo,
Murray, and Dees Jr., alleging that such counterclaim defendants contravened
Delaware law and such counterclaim defendants' fiduciary duties. In connection
with such counterclaims, ITB sought injunctive relief preventing the
counterclaim defendants from interfering with the Company's day-to-day business
affairs, the establishment of a constructive trust over certain assets, a
declaration that a certain supermajority by-law was repealed and money damages.
Murray further counterclaimed against ITB for wrongful termination and failure
to pay certain compensation. All allegations of either the plaintiffs or the
counterclaim plaintiffs were denied.
The Quigley Action was fully and finally dismissed and settled in
connection with the January 28, 1999 consummation of the Delaware Settlement as
described in Note 3.
Rekulak v. DeSantis et al.
On or about September 11, 997, the action entitled Rekulak v. DeSantis,
Abraham, Coelho, Scholl, Zappala, Corazzi and Las Vegas Entertainment Network,
Inc. and International Thoroughbred Breeders, Inc., C.A. No. 15920, was brought
in the Delaware Court of Chancery alleging that the defendants therein acted in
contravention of ITB's by-laws, Delaware law and the director defendants'
fiduciary duties (the"Rekulak Action"). The allegations made and the relief
sought in the Rekulak Action are virtually identical to the allegations made and
relief sought in the Quigley Action.
The Rekulak Action was fully and finally dismissed in connection with the
January 28, 1999 consummation of the Delaware Settlement as described in Note 3.
Green v. DeSantis et al.
On or about October 30, 1997, the action entitled Green v. DeSantis,
Corazzi, Coelho, Las Vegas Entertainment Network, Inc. and NPD, Inc., C.A. No.
97-5359 (JHR), was filed int he United States District Court for the District of
New Jersey (the "Green Action"). The Green Action alleged that the defendants
therein acted in contravention of ITB's by-laws, their fiduciary duties and the
contractual obligations in connection with Robert Wm. Green's interests
pertaining to ITB. Plaintiff Green sought compensatory and punitive damages in
connection with the defendants' actions, an order enjoining defendants from
transferring, encumbering or alienating certain of the Company's common stock
which was subject to an option agreement between Green and NPD, Inc., an order
declaring certain shares of common stock of the Company to be a nullity,
reformation of the aforementioned option agreement to extend the termination
date. The action raised claims substantially similar to those made in the
Quigley Action. The Company was not a party to the Green Action.
The Green Action was fully and finally dismissed and settled in connection
with the January 28, 1999 consummation of the Delaware Settlement as described
in Note 3.
NPD, Inc. v. Quigley et al.
On or about November 17, 1997, an action entitled NPD, Inc. v. Quigley,
Francis W. Murray, Leo, Dees Jr., Mariucci, Koenemund and James J. Murray, C.A.
No. 97-CV-5657, was filed in the United States District Court for the District
of New Jersey, alleging that the defendants therein had engaged in fraudulent
and conspiratorial conduct in connection with a certain Stock Purchase Agreement
between Robert E. Brennan and NPD, Inc. ("the "NPD Action"). The NPD Action
sought
14
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
compensatory and punitive damages. The Company was not a party to the NPD
Action.
The NPD Action was fully and finally dismissed and settled in connection
with the January 28, 1999 consummation of the Delaware Settlement as described
in Note 3.
Harris v. DeSantis, et al.
On February 24, 1998, the action entitled 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), was brought in the District Court
for the District of New Jersey (the "Harris Federal Action"). The factual
allegations and claims asserted in the Harris-Federal Action are virtually
identical to the claims asserted in the Quigley Action and in the Counterclaims
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 Harris-Federal 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. 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 $175,000 for
plaintiffs' counsel fees and expenses in the New Jersey Litigation. 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, the plaintiffs will move for a dismissal, with prejudice, of the
Harris-Federal Action because the Delaware Settlement bars further prosecution
of the claims 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 after October 13, 1997 (the date AMEX suspended trading of the
Company's stock). If the New Jersey Settlement becomes final, 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. The Settlement of the Harris-State
Action remains subject to the execution of the definitive Settlement Documents
and court approvals.
15
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
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.
(10) DEFERRED FINANCING COSTS
Deferred financing costs at March 31, 1999 include those amounts associated
with its May 23, 1997 financing agreement with Credit Suisse. (See Note 7).
These costs of $6,238,731, less amortization of $5,939,720, are being expensed
over the two-year life of the loan. Amortization expense for the three months
ended March 31, 1999 and 1998 was $1,044,839 and $764,801, respectively.
Amortization expense for the nine months ended March 31, 1999 and 1998 was
$2,574,441 and $2,288,781, respectively.
The Fiscal 1999 amounts for interest and financing expenses include an
accellerated charge to existing deferred financing costs of $435,000 related to
the early debt payment in connection with the sale of Freehold and the lease of
the Garden State Park facility.
(11) STOCK OPTIONS AND WARRANTS
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
The fair value of options issued recognized as non-employee option costs
during the nine months ended March 31, 1999 and 1998 was $0 and $819,413,
respectively. At March 31, 1999, total employee options outstanding were
1,300,000 and total non-employee options outstanding were 300,000. Options to
purchase an aggregate of 6,000,000 shares of Common Stock were granted, subject
to stockholder approval, to the Company's Chief Executive Officer and Chairman
of the Board. 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 on January 28, 1999,
options to purchase an aggregate of 6,300,000 shares of Common Stock were
cancelled.
(B) WARRANTS
At March 31, 1999, total warrants outstanding were 2,169,000, 1,647,817 of
which have been accounted for as deferred financing costs and costs associated
with the acquisition of the El Rancho property and 497,153 of which were
recorded as financing expenses. 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.
Effective January 28, 1999, in connection with the Approval Agreement
between the Company and CSFB, the Company agreed that the warrants to purchase
497,153 shares of common stock at $4.375 were immediately exercisable by CSFB.
The fair value of the warrants of $1,242,883 was recorded as a financing
expense.
(12) RELATED PARTY TRANSACTIONS
During the nine months ended March 31, 1999, the Company paid $70,000 in
consulting fees, $25,000 for director fees, $3,500 for an auto allowance and
$25,765 in expense reimbursements to Anthony Coelho, the Company's Chairman,
pursuant to an agreement effective January 15, 1997. Mr. Coelho's consulting
agreement was month to month, under which he was paid $10,000 per month for
ongoing consulting services, $2,500 for each board meeting he attended and a
$500 monthly automobile allowance. Mr. Coelho's consulting agreement was
terminated and options granted to him in the consulting agreement were canceled,
effective January 28, 1999, the date of consummation of the Delaware Settlement.
The Company pays Mr. Scholl, $10,000 per month for ongoing consulting
services as project manager for the El Rancho Property. 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.
16
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
The Company paid $10,000 per month to Mr. Zappala for consulting services
and for the first nine months of Fiscal 1999, Mr. Zappala was paid $10,000 for
director fees and $11,777 of reimbursed expenses. Upon consummation of the
Delaware Settlement on January 28, 1999, Mr. Zappala's consulting arrangement
was terminated.
On February 22, 1999, James J. Murray was elected by the Board of Directors
to serve as a director of the Company until the next stockholder's meeting. Mr.
Murray is the brother of Francis W. Murray, a director and employee of the
Company. Mr. James J. Murray previously served as a director for the Company
from November 4, 1996 until January 15, 1997.
For additional information regarding related party transactions see Note 16
in the consolidated financial statements included in the Company's Form 10-K for
the fiscal year ended June 30, 1998.
(13) 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 have been traded on AMEX since October 13, 1997, the date on
which trading 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.
17
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1999
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 March 31, 1999, was a deficit of
($27,416,103) which represents a decrease of approximately $18,025,496 from the
March 31, 1998 working capital deficit of ($45,441,599). 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 the retirement of $24.5 million of the Credit Suisse debt and 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 this 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 rate. Of the remaining facility
borrowings, approximately $16.8 million was placed in escrow accounts (
including $10 million in an interest reserve account). 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. On
January 28, 1999, the credit facility was reduced to $30.5 million in connection
with the sale of certain assets of Freehold Raceway and the sale of a ten-acre
parcel land at the Garden State Park facility. At March 31, 1999, the interest
rate on the Credit Suisse Credit Facility was 11.94%. The Company was not in
compliance with certain non-financial covenants of the Credit Suisse Credit
Facility through January 28, 1999, however, Credit Suisse has waived those
violations. The loan matures June 1, 1999 unless, under certain conditions (See
Note 1), an extension is granted.
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 became exercisable on
January 28, 1999 in connection with the Delaware Settlement. The fair value of
the warrants of $1,242,883 was recorded as a financing expense. (See Notes 3 and
11-B)
The net loss for the nine months ended March 31, 1999 was ($5,439,345).
Cash flows used by operating activities amounted to approximately $547,258. The
net loss incurred by the Company includes approximately $4,343,000 of other
non-cash expenses.
Cash provided by investing activities was $12,895,888 during the nine
months ended March 31, 1999, primarily the result of cash proceeds of
approximately $19,900,000 from the sale of certain assets of Freehold Raceway
and the sale of a ten-acre parcel of land at the Garden State Park facility,
partially offset by the purchase of 2,904,016 shares of Treasury Stock for
$6,850,000. (See Notes 2, 3 and 7-B)
Cash used in financing activities was $12,501,784 during the nine months
ended March 31, 1999, consisting principally of amounts drawn from the Credit
Suisse interest escrow account in the amount of $9,311,725, a $2,500,000 payment
of the Credit Suisse note and principal payments of approximately $13,000,000
primarily associated with the retirement of the Freehold debt.
On January 28, 1999, the Company completed the sale of Freehold Raceway,
the sale of a ten-acre parcel at the Garden State Park facility and the lease of
the Garden State Park facilities to subsidiaries of Greenwood Racing, Inc.,
which owns Philadelphia Park racetrack, the Turf Clubs and Phonebet (the
"Greenwood Transaction"). The
18
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1999
purchase price was $46 million ($1 million of which will be held in escrow to
cover certain indemnification and other obligations of the Company), with an
additional $10 million in contingent promissory notes (the "Contingent Notes")
which become 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 the purchaser
of all obligations under the Contingent Notes, and following a consummation of a
joint venture with Greenwood Racing, Inc., Penn National Gaming, Inc. ("Penn
National"), which owns Penn National Race Course, Pocono Downs Racetrack,
Charles Town Races and at least ten off-track betting parlors in Pennsylvania),
will also guarantee the Contingent Notes.
The proceeds of the Greenwood Transaction were principally used by the
Company to pay off the first lien on the assets of Freehold Raceway, reduce the
outstanding balance on the Company's loan from Credit Suisse First Boston
Mortgage Capital LLC ("Credit Suisse") to $30.5 million and to consummate the
Delaware Settlement (See note 3). In addition, Credit Suisse also released to
the Company approximately $4.475 million from its escrow reserves of which
$1.475 million was used for working capital purposes and $3 million was used to
reduce debt and pay fees.
The Company currently estimates that the $1.475 million made available on
January 28, 1999 from the Credit Suisse Credit Facility and the funds placed in
the various reserve accounts on that date, 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 June 1, 1999. On May 7, 1999, the
Company notified their primary lender, Credit Suisse, of its intent to extend
the loan maturity date to June 1, 2000. The Company will be required to deposit
sufficient funds into an escrow account to cover interest and fees of
approximately $4 million. The Company is currently considering financing sources
for the funds required to extend the debt payment date. However, there can be no
assurance that the Company will be successful in such endeavors.
The Company's Board is continuing to consider all of the Company's
strategic options to maximize stockholder value. The Company's Board is
considering alternatives for the Company's future, including the acquisition of
one or more operating businesses.
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 has sustained a loss of
approximately $18.3 million for the year ended June 30, 1998 and a loss of
approximately $5.4 million for the nine months ended March 31, 1999, all of
which raise substantial doubt about its ability to continue as a going concern.
In addition, the debt to the Company's primary lender is due June 1, 1999,
unless an extension is obtained. 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.
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. 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.
19
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1999
OPERATIONS
- ----------
Results of Operations for the Three Months Ended March 31, 1999
- ----------------------------------------------------------------
On January 28, 1999, the Company completed the sale of Freehold Raceway,
the sale of a ten-acre parcel at Garden State Park, and the lease of the Garden
State Park facilities to subsidiaries of Greenwood Racing, Inc., which owns
Philadelphia Park racetrack, the Turf Clubs, and Phonebet (the "Greenwood
Transaction.") 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 consummated the
settlement under the Stipulation and Agreement of Compromise, Settlement and
Release entered into on July 2, 1998 to resolve the pending stockholder
derivative litigation in the Delaware Court of Chancery. Among other actions,
the Delaware Settlement contemplates the disposition of the El Rancho Property.
For the third quarter of Fiscal 1999, the Company's loss from continuing
operations was ($5,369,687) as compared to a loss from continuing operations for
the comparable period in the prior fiscal year of ($4,088,000), an increase in
the loss of $1,281,687. This increase in the loss from continuing operations was
primarily the result of: (i) an increase in amortization and financing costs of
$2,023,021 associated with the reduction of debt during the quarter and costs
associated with the Delaware Settlement; partially offset by (ii) a decrease in
general and administrative expenses of $617,648 or 41% as compared to the prior
fiscal quarter primarily as a result of a decrease in legal, accounting and
consulting fees during the comparable quarters; and (iii) a decrease from the
prior fiscal quarter in interest expense of $271,819 or 15% as a result of the
reduced debt.
Income from discontinued operations was $3,869,147 for the third quarter of
Fiscal 1999 as compared to income from discontinued operations for the third
quarter of Fiscal 1998 of $1,401,825, an increase of $2,467,322. The Company
recognized a net gain of $3,621,507, following the write down to fair value of
the remaining assets of Garden State Park, on the sale of Freehold Raceway and
the sale of a ten-acre parcel at the Garden State Park facility during the third
quarter. Income from racetrack operations was significantly reduced as a result
of the termination of racing on January 28, 1999.
During the third quarter of Fiscal 1999, the Company incurred a net loss of
($1,500,540) as compared to a net loss of ($2,686,174) for the comparable
quarter in Fiscal 1998. The decrease in net loss of $1,185,634 was the result of
those differences described above.
Results of Operations for the Nine Months Ended March 31, 1999
- --------------------------------------------------------------
As discussed above, the operating results of the racetrack subsidiaries for
the nine month periods have been segregated and reported as discontinued
operations for each of the periods presented as a result of the sale on January
28, 1999.
For the nine months ended March 31, 1999, The Company's loss from
continuing operations was ($13,565,036) as compared to a loss from continuing
operations for the comparable period in prior fiscal year of ($13,509,950), an
increase in the loss of $55,086. This increase in the loss from continuing
operations was primarily the result of: (i) an increase in amortization and
financing costs of $2,232,105 associated with reducing the debt during the
quarter and costs associated with the Delaware Settlement; (ii) an increase in
corporate costs associated with the information statement provided to the
Company's stockholders in the second quarter of fiscal 1999; (iii) a decrease in
interest income; partially offset by (iv) a decrease in general and
administrative expenses of $2,106,155 or 37% primarily as a result of
non-employee option expense of $819,413 recognized in the prior fiscal year's
first quarter and an approximate $1,368,000 decrease in legal, accounting and
professional fees and employee severance costs.
Income from discontinued operations was $8,125,691 and $5,582,058 for the
nine months ended March 31, 1999 and 1998, respectively. The increase in income
was primarily the result of the net gain, following the write down to fair value
of the remaining assets of Garden State Park, on the sale of the racetrack
operations partially offset by the termination of racing as discussed above.
20
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1999
During the nine months ended March 31, 1999, the Company incurred a net
loss of ($5,439,345) as compared to a net loss of ($7,927,893) for the
comparable period in Fiscal 1998. The decrease in net loss of $2,488,548 was the
result of those differences described above.
21
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended March 31, 1999, the registrant filed the
following Current Reports on Form 8-K:
Date Subject Matter
- ---------------------- ---------------------------------------------
January 28, 1999 Sale and lease of racetrack assets
22
<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.
May 14, 1999 /s/William H. Warner
--------------------
William H. Warner
Treasurer
(Principal Financial and Accounting Officer)
23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,160,594
<SECURITIES> 8,746
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,152,148
<PP&E> 866,155
<DEPRECIATION> 313,017
<TOTAL-ASSETS> 78,352,224
<CURRENT-LIABILITIES> 31,568,251
<BONDS> 30,500,000
0
36,248,175
<COMMON> 23,768,489
<OTHER-SE> (16,790,723)
<TOTAL-LIABILITY-AND-EQUITY> 78,352,224
<SALES> 0
<TOTAL-REVENUES> 298,492
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,863,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,794,248
<INCOME-PRETAX> (13,565,036)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,565,036)
<DISCONTINUED> 4,504,184
<EXTRAORDINARY> 3,621,507
<CHANGES> 0
<NET-INCOME> (5,439,345)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
