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 December 31, 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 22-2332039
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 February 12, 1999
Common Stock, $ 2.00 par value 8,980,227 Shares
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of December 31, 1998 and June 30, 1998 ...1-2
Consolidated Statement of Stockholders' Equity
for the Six Months ended December 31, 1998 ....3
Consolidated Statements of Operations
for the Three Months and Six Months ended
December 31, 1998 and 1997 ...................4
Consolidated Statements of Cash Flows
for the Six Months ended
December 31, 1998 and 1997 ....................5
Notes to Financial Statements ....................6-21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................22-28
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders ......................................29
Item 6. Exhibits and Reports on Form 8-K ...................29
SIGNATURES .....................................................30
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1998
ASSETS
December 31,
1998 June 30,
(UNAUDITED) 1998
----------- ---------
CURRENT ASSETS:
Cash and Cash Equivalents ................ $ 166,344 $ 213,795
Reserve Escrow Deposits .................. 8,095,191 10,460,881
Accounts Receivable ...................... 33,294 36,838
Prepaid Expenses ......................... 175,473 322,313
Other Current Assets ..................... 238,063 325,756
Net Assets of Discontinued
Operations - Current 12,228,066 12,235,217
---------- ----------
TOTAL CURRENT ASSETS ................ 20,936,431 23,594,800
---------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS - Long Term 44,846,448 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 ................................ 801,484 814,927
---------- ---------
1,015,581 1,029,024
LESS: Accumulated Depreciation
and Amortization 323,936 308,162
---------- ---------
TOTAL LAND, BUILDINGS AND
EQUIPMENT, NET .................... 691,645 720,862
------- -------
OTHER ASSETS:
Deposits and Other Assets ................ 3,172 3,172
Deferred Financing Costs, Net ............ 1,343,850 2,872,453
--------- ---------
TOTAL OTHER ASSETS .................. 1,347,022 2,875,625
--------- ---------
TOTAL ASSETS ..................................... $115,205,971 $120,252,901
============ ============
See Notes to Consolidated Financial Statements.
1
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1998 June 30,
(UNAUDITED) 1998
----------- -----------
CURRENT LIABILITIES:
Accounts Payable .....................$ 311,742 $ 278,786
Accrued Expenses ..................... 3,847,696 4,852,328
Current Maturities of Long-Term Debt . 55,069,475 55,208,426
---------- ----------
TOTAL CURRENT LIABILITIES ....... 59,228,913 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,
Authorized25,000,000 Shares,
Issued and Outstanding,
13,978,107 and 13,978,099 Shares,
Respectively........................ 27,956,213 27,956,197
Capital in Excess of Par ............. 25,878,108 25,878,224
(Deficit) (subsequent to
June 30, 1993,date of
quasi-reorganization) .............. (34,071,171) (30,132,368)
----------- -----------
TOTAL ........................... 56,011,225 59,950,028
LESS: Deferred Compensation, Net ..... 34,167 36,667
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ...... 55,977,058 59,913,361
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 115,205,971 $ 120,252,901
============= =============
See Notes to Consolidated Financial Statements.
2
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 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 8 16
Amortization of Deferred
Compensation Costs .... -- -- -- --
Net (Loss) for the
Six Months Ended
December 31, 1998 .... -- -- -- --
------ ------ ------ ------
BALANCE - DECEMBER 31, 1998 . 362,481 $ 36,248,075 13,978,107 $27,956,213
======= ============== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
<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
StockSplit effected
on March 13, 1992 ..... (116) -- -- --
Amortization of Deferred
Compensation Costs .... -- -- 2,500 2,500
Net (Loss) for the
Six Months Ended
December 31, 1998 .... -- (3,938,803) -- (3,938,803)
------------ ------------ -------- ------------
BALANCE - DECEMBER 31, 1998 . $ 25,878,108 $(34,071,171) $(34,167) $ 55,977,058
============ ============ ======== ============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
EXPENSES:
General & Administrative Expenses .. $ 1,422,746 $ 2,106,656 $ 2,735,322 $ 4,169,608
Interest Expense ................... 1,741,703 1,796,057 3,523,973 3,579,157
Interest Income .................... (80,621) (215,233) (213,081) (424,837)
Amortization of Financing Costs .... 765,813 762,776 1,529,602 1,523,980
El Rancho Property Carrying Costs .. 203,551 201,548 619,533 574,042
(LOSS) FROM CONTINUING OPERATIONS ---------- ---------- ---------- ----------
BEFORE DISCONTINUED OPERATIONS .......... (4,053,192) (4,651,804) (8,195,348) (9,421,950)
INCOME FROM DISCONTINUED OPERATIONS
Income from operations
of discontinued racetrack
operations (less applicable
incometaxes of $65,500 and
$19,722 for the three months
ended December 31, 1998 and
1997, respectively,
and $127,500 and $69,837
for the six months
ended December 31, 1998
and 1997, respectively) .......... 2,113,840 2,453,968 4,256,544 4,180,232
--------- --------- --------- ---------
NET (LOSS) ................................. $ (1,939,352) $ (2,197,836) $ (3,938,805) $ (5,241,718)
============ ============ ============ ============
BASIC PER SHARE DATA:
(LOSS) BEFORE DISCONTINUED OPERATIONS ...... $ (0.28) $ (0.33) $ (0.58) $ (0.67)
INCOME FROM DISCONTINUED OPERATIONS ........ 0.15 0.18 0.30 0.30
--------- --------- --------- ---------
NET (LOSS) ................................. $ (0.14) $ (0.16) $ (0.28) $ (0.37)
============ ============ ============ ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING ................ 13,978,103 13,978,076 13,978,107 13,978,064
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
Six Months Ended
December 31,
---------------------------
1998 1997
---- ----
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) FROM CONTINUING OPERATIONS ........................... $(8,195,348) $(9,421,950)
----------- -----------
Adjustments to reconcile (loss) to net cash (used)
provided by operating activities:
Income from discontinued racetrack operations ....... 4,256,544 4,180,232
Depreciation and Amortization ....................... 1,564,029 2,389,593
Compensation for Options Granted .................... 0 808,275
Loss on Sale of Fixed Assets ........................ 32,673
Changes in Assets and Liabilities -
(Increase) in Restricted Cash and Investments .... 0 2,174,908
(Increase) in Accounts Receivable ................ 3,544 (651,336)
Decrease (Increase) in Other Assets .............. 87,693 (251,824)
Decrease in Prepaid Expenses ..................... 146,840 406,934
(Decrease) Increase in Accounts and Purses Payable
and Accrued Expenses ............................ (916,311) (1,975,138)
Increase in Deferred Revenue ..................... 0 (936,198)
-----------
CASH (USED IN) CONTINUING OPERATING ACTIVITIES .............. (3,053,009)
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES .......... 1,120,561
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES ..................... (1,932,448) (3,243,831)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Land ...................................... 0 8,449,904
Development of El Rancho Property ............................... 0 (114,251)
Deposits on New Mexico Racetrack Options ........................ 0 (600,000)
Capital Expenditures ............................................ (2,709) (449,373)
(Increase) in Other Investments ................................. 0 (27,235)
-----------
CASH (USED IN) CONTINUING INVESTING ACTIVITIES .............. (2,709)
CASH(USED IN) DISCONTINUED INVESTING ACTIVITIES ............. (52,404)
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ......... (55,113) 7,259,045
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred Financing Costs ........................................ 0 (22,445)
Escrow Deposits Utilized ........................................ 2,365,690 5,661,749
Deposits to Reserve Escrow Deposits from Land Sale .............. 0 (1,370,120)
Decrease in Balances Due From Discontinued Subsidiaries ......... 5,038,071 0
Principal Payments on Sun Mortgage .............................. 0 (6,000,000)
Principal Payments on Short Term Notes .......................... (138,950) (773,122)
Principal Payments on Long Term Notes ........................... 0 (247,832)
-----------
CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES ............ 7,264,811
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES ............ (6,018,205)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......... 1,246,606 (2,751,770)
--------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................ (740,955) 1,263,444
LESS CASH AND CASH EQUIVALENTS (USED IN)
DISCONTINUED OPERATIONS ................................. 693,504 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
FROM CONTINUING OPERATIONS ................................ 213,795 3,784,895
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 166,344 $ 5,048,339
============= ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,926,622 $ 3,535,751
Income Taxes $ 0 $ 100,000
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the six months ended December 31, 1998 and 1997, the Company
recorded an unrealized loss of $10,840 and $20,000, respectively, on
trading securities.
During the six months ended December 31, 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
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 14)
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 six months ended December 31, 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
Notes 2, 7 and 14, the Company has obtained waivers in connection with the
violation of several non-financial loan covenants with its primary lender.
However, the remaining debt to the Company's primary lender is due June 1, 1999
unless an extension is obtained. 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 $4 million for the six months ended December 31, 1998. 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.
In connection with the sale and lease of the Company's racetrack
operations, the Company is considering the acquisition of one or more operating
businesses.
(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, 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
6
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $1.475 million from its escrow reserves for working
capital purposes. (See note 6.)
(3) LITIGATION SETTLEMENT
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").
The Company also 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"). Under 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, plus the assumption by ITB of
NPD's $5.8 million promissory note (the "NPD Note") held by Donald F. Conway,
Chapter 11 Trustee for the Bankruptcy Estate of Robert E. Brennan (the
"Bankruptcy Trustee"). The purchase price for the NPD Shares was reached in
settlement of certain claims against NPD and certain directors. In addition, $2
million pledged to secure the NPD Note, plus accrued interest thereon, was
returned to AutoLend Group, Inc., a company in which Nunzio P. DeSantis is the
Chairman, President and principal stockholder and Anthony Coelho is a director.
In connection with the Delaware Settlement, the Company sought the approval
of the United States Bankruptcy Court for the District of New Jersey in the
action captioned In re Robert E. Brennan, Case No. 95-35502, of the Delaware
Settlement, including the Company's purchase of the NPD Shares and its
assumption of the NPD Note. This approval was received, and the Company
consummated a settlement with the Bankruptcy Trustee, as holder of the NPD
Shares and the NPD Note (the "Trustee Settlement"). Pursuant to the Trustee
Settlement, the Bankruptcy Trustee received (a) a pay down of the $5,808,032 NPD
Note to $3,558,032; (b) a newly executed "ITB Note" in the amount of $3,558,032,
on substantially the same terms as the NPD Note (except that the ITB Note
matures on the earlier of January 15, 2001 or the closing of the sale of the
Company's non-operating El Rancho hotel and casino site in Las Vegas, Nevada
(the "El Rancho Property") or of Garden State Park (the "Garden State
Property")); (c) a security interest in the former NPD Shares now held pursuant
to a pledge and escrow agreement between the Company and the Bankruptcy Trustee;
(d) payment of the Bankruptcy Trustee's expenses in connection with the Trustee
Settlement; (e) subordinate interests in the land and collateral on 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. Pursuant to the Trustee Settlement
(a) the Company was able to consummate the terms of the Delaware Settlement, (b)
the Bankruptcy Trustee executed and delivered releases in favor of all parties
to the Delaware Settlement, and (c) the Company received the right to defer the
payment of certain interest payments due under the ITB Note until the maturity
of such ITB Note.
Upon the consummation of the Delaware Settlement, Anthony Coelho,
Nunzio P. DeSantis and Joseph Zappala resigned from the Company's Board of
Directors and terminated their employment and consulting agreements with the
Company. The continuing directors of the Company are Francis W. Murray and
Robert J. Quigley.
The Delaware Settlement also contemplates a potential disposition on or
before 4/20/99 (subject to a possible extension) of the Company's non-operating
El Rancho hotel and casino site in Las Vegas, Nevada (See Notes 3 and 9a). Of
the proceeds of any such sale, a required minimum of $44.2 million will be paid
to the Company, which will be used to retire the Company's outstanding debt to
Credit Suisse. These can be no assurance that the Company will be able to
dispose of the El Rancho property on terms contemplated by the Delaware
Settlement.
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 and has terminated all of its contractual
arrangements with the Company.
7
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) DISCONTINUED OPERATIONS
On January 28, 1999, the Company completed the sale of the real property
and 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 related assets
of Garden State Park for a seven-year period. (See Notes 2 and 14).
<TABLE>
The discontinued operations are summarized as follows:
Three Months Ended Six Months Ended
December 31, December 31,
Discontinued Racetrack Operations: 1998 1997 1998 1997
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Revenue ............................. $19,918,240 $20,643,514 $34,223,621 $35,185,801
----------- ----------- ----------- -----------
Expenses:
Cost of Revenues:
Purses ....................... 8,023,818 7,958,659 12,074,467 12,019,763
Operating Expenses ........... 7,792,461 8,434,144 14,248,701 15,340,543
Depreciation & Amortization .. 404,306 416,783 823,323 832,298
General & Administrative Expenses 1,316,563 1,135,572 2,288,411 2,294,474
Interest Expenses ............... 201,752 224,666 404,675 448,654
----------- ----------- ----------- -----------
Total Expenses ....... 17,738,900 18,169,824 29,839,577 30,935,732
----------- ----------- ----------- -----------
Income From Discontinued Racetrack
Operations Before Taxes ............... 2,179,340 2,473,690 4,384,044 4,250,069
Income Tax Expense .............. 65,500 19,722 127,500 69,837
----------- ----------- ----------- -----------
Income From Discontinued
Racetrack Operations ................. $ 2,113,840 $ 2,453,968 $ 4,256,544 $ 4,180,232
=========== =========== =========== ===========
</TABLE>
8
<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 December 31, 1998 consist of the
following:
Freehold Garden State
Raceway Park
Classified As: Current Non-Current
------------- ------------
Current Assets ........................$ 4,803,947 $ 2,589,251
Land, Building and Equipment, Net ..... 21,915,573 45,704,977
Other Assets .......................... 2,895,392 225,644
------------- -----------
Total Assets ........................ 29,614,912 48,519,872
------------- -----------
Current Liabilities ................... 6,552,297 3,349,147
Long-Term Debt, Net of Current Portion 10,834,549 324,278
------------- -----------
Total Liabilities ..................... 17,386,846 3,673,425
------------- -----------
Net Assets of Discontinued
Operations......................$ 12,228,066 $ 44,846,447
============ ===========
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 six months ended December 31,
1998 consist of the following:
Cash Flows From Discontinued Operating Activities:
Income ........................................................ $ 4,256,544
Adjustments to reconcile income to to net cash provided
by discontinued operating activities
Depreciation and Amortization ......................... 823,323
Changes in Assets and Liabilities:
Decrease in Restricted Cash
and Investments ............................ 1,932,372
Increase in Accounts Receivable ............. (1,872,252)
Increase in Other Assets .................... (2,373)
Decrease in Prepaid Expenses ................ 484,674
Increase in Accounts and
Purses Payable and Accrued Expenses ........ 261,283
Decrease in Deferred Revenue ................ (506,466)
----------
Net Cash Provided by Discontinued
operating Activities(Excluding Income) ....................... 1,120,561
-----------
9
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Flows From Discontinued Investing Activities:
Capital Expenditures .................................... (49,906)
(Increase) in Other Investments ......................... (2,498)
-----------
Net Cash (Used In) Discontinued Investing Activities .... (52,404)
-----------
Cash Flows from Discontinued Financing Activities:
Principal Payments on Short Term Notes .................. (140,230)
Decrease in Balances Due To Parent Company .............. (5,038,071)
Principal Payments on Long Term Notes ................... (839,904)
-----------
Net Cash (Used In) Discontinued Financing Activities .... (6,018,205)
-----------
Net Decrease in Cash and Cash Equivalents From
Discontinued Operations ............................... (693,504)
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 ..................... $ 2,473,400
===========
(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 sale of the El Rancho
Property (See Note 3). As of June 30, 1998, the El Rancho Property had 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 (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 operations, the disposal of the racetrack assets
and the El Rancho Property, and other transactions contemplated in the Delaware
Settlement. (See Notes 2,3 and 14).
(6) RESERVE ESCROW DEPOSITS
At December 31, 1998, $8,095,191 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"). 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. 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 $1.475 million
from its escrow reserves for working capital purposes. At January 28, 1999, the
balance in the Interest Reserve, the El
10
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Rancho Reserve and the Income Tax Reserve accounts totaled $3.635 million
and the Company used $3 million to pay down debt and related fees.(See Notes 2,
3 and 14)
The Escrow Accounts are summarized below:
Account December 31, 1998
- ------------------------- -------------------
Interest Reserve $ -0-
El Rancho Reserve 2,293,666
Working Capital 2,130,121
Tax and Insurance Reserve 2,262,537
Deferred Maintenance 408,867
Environmental Remediation 1,000,000
------------
Total $ 8,095,191
============
(7) NOTES AND MORTGAGES PAYABLE
<TABLE>
Notes and Mortgages Payable are summarized below:
December 31, 1998
----------------------------
Interest % Per Annum Current Long-Term
---------------------- ---------------- -----------
<CAPTION>
International Thoroughbred Breeders Inc.:
<S> <C> <C> <C>
Credit Suisse First Boston (A) LIBOR Rate plus 7% (12/31/98 $ 55,000,000 $ -0-
rate 12.34%)
Other Various 69,475 -0-
Freehold Raceway:
Kenneth R. Fisher (B) 80% of Prime (not to exceed 6%) 625,000 9,375,000
(12/31/98 rate 6%)
Kenneth R. Fisher (C) 80% of Prime 225,000 1,459,549
(12/31/98 rate 6.2%)
Garden State Park:
Other Various 211,199 324,278
------------- -----------
Totals $ 56,130,674 $ 11,158,827
Less Amounts Reclassified to:
Net Assets of Discontinued
Operations - Current 850,000 10,834,549
Net Assets of Discontinued
Operations - Long Term 211,199 324,278
------------- -----------
Totals $ 55,069,475 $ -0-
============= ===========
</TABLE>
The effective LIBOR Rate and the Prime Rate at December 31, 1998 were 5.34% and
7.75%, respectively.
11
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. 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
purchase 497,153 shares became exercisable January 28, 1999, following the
consummation of the Delaware Settlement and will been recorded as a cost on
disposition of the Freehold Property in the amount of $1,242,883.(See Note 3)
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'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 consummation of the Delaware Settlement. 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's non- compliance with
certain non-financial covenants at December 31, 1998 were waived on January 28,
1999 in connection with the Deleware Settlement. (See Notes 3 and 14)
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. (See Notes 2 and 14)
(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%. The note
was secured by a mortgage on the land and buildings at Freehold Raceway. This
note which was paid on January 28, 1999 as part of the sale of Freehold Assets,
has been netted against "Net Assets of Discontinued Operations - Current" for
the periods presented. (See Note 2)
(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,
12
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
a promissory note evidencing the indebtedness secured by mortgage on the
racetrack property and other collateral. This note which was paid on January 28,
1999 as part of the sale of Freehold Assets, has been netted against "Net Assets
of Discontinued Operations - Current" for the periods presented. (See Note 2)
(8) INCOME TAX EXPENSE
The Company's income tax expense for the three and six month periods ending
December 31, 1998 and 1997 relates to New Jersey income taxes for its Freehold
Raceway operations.
(9) 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 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, 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 (NPD Shares) for $4.6 million plus
the assumption by the Company of NPD's $5.8 million promissory note held by
Robert E. Brennan's Bankruptcy Trustee and the termination of the Company's
option agreement with D&C Gaming Inc.. (See Notes 3 and 14) During the fourth
quarter of fiscal 1998, the Company recorded a charge of approximately $3.7
million based on the estimated fair value of $2.50 per share for the purchase of
the approximate 2.9 million shares of the Company's Common Stock. 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 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.
The Delaware Settlement also contemplates a potential disposition of
the El Rancho Property. As previously reported, the Delaware Settlement requires
that a minimum of $44.2 million of the proceeds of such sale be paid to the
Company, which will use such amount to retire its outstanding debt to the
Company's primary lender. There can be no assurance that any such disposition
will occur.(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
2,904,016 NPD shares being repurchased by the Company, the number of outstanding
shares of the Company's common stock was reduced to 8,980,227 shares.
Upon consummation of the Delaware Settlement, the Company deposited 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 had 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. Both LVEN and
the Company 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, for a sales
price resulting in a payment of at least $44.2 million to the Company.
13
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 Settlement, 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
Settlement), $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.
(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 is fully occupied. In connection with this lease, the Company
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. Upon
consummation of the Delaware Settlement on January 28, 1999, the Albuquerque
lease was assumed by AutoLend. (See Notes 2 and 14)
In connection with the Greenwood Transaction (See Note 2), Mr. Richard E.
Orbann, Vice President of Racing Operations of the Company, and the Company have
entered into an agreement terminating Mr. Orbann's employment with the Company.
Such termination will be effective upon Mr. Orbann entering into an employment
agreement with affiliates of Greenwood Racing, Inc.
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 were fully and finally dismissed with prejudice, and the
parties provide mutual releases of all claims related to the actions thereunder
(the "Delaware Settlement"). (See Note 3 and "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."
14
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Quigley, et al. v. DeSantis, et al.
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 alleged, among other things, that the New Directors 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 alleged 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 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 sought (i) a declaratory judgement that (a)
certain actions taken by the New Directors were 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 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
sought 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 claim and
sought monetary damages.
15
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Subsequent to the scheduling of the Director Litigation for trial, the
parties reached an agreement in principle to settle the Quigley action which
resulted in the Delaware Settlement (See Note 3). 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.
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 was fully and finally dismissed with prejudice. See "Delaware
Settlement."
Delaware Settlement
The Quigley and Rekulak actions, and the NPD and Green actions described
more fully below were in accordance with the Delaware Settlement, the Quigley,
Rekulak, NPD and Green actions are to be fully and finally dismissed with
prejudice. (See Note 3 and 9a).
16
<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
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, and the parties are
to provide mutual releases of all claims related to the action. See "New Jersey
Settlement."
17
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The
settlement of the New Jersey Action remains subject to the execution of the
definitive Settlement Documents and Court approvals.
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 (formally 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 alleged, 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
By-laws 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
18
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of control of the Company and perpetuating the control of Brennan and his
associates. The NPD suit sought compensatory and punitive damages. On January 8,
1998, the defendants served a motion to dismiss NPD's complaint. The NPD action,
in accordance with the Delaware Settlement described above was dismissed with
prejudice in January, 1999.
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
alleged, among other things, that the defendants 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"). Green sought (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 raised claims
substantially similar to those made in the Quigley action. The Green action in
accordance described above was dismissed with prejudice in January, 1999.
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 December 31, 1998 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 $4,894,881, are being
expensed over the two-year life of the loan. Amortization expense for the three
months ended December 31, 1998 and 1997 was $765,813 and $762,776, respectively.
Amortization expense for the six months ended December 31, 1998 and 1997 was
$1,529,602 and $1,523,980, respectively.
On January 28, 1999, the Company reduced its outstanding debt with CSFB to
$30,500,000 upon the sale of Freehold Raceway and the lease of the Garden State
Park facility. Deferred financing costs will be reduced proportionately by
recording additional amortization expense in the third quarter of approximately
$600,000.
(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 six months ended December 31, 1998 and 1997 was $0 and $808,275,
respectively. At December 31, 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. 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
terminated. (See Note 9.)
19
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(B) WARRANTS
At December 31, 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.
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 shall become immediately exercisable by
CSFB. The fair value of the warrants of $1,242,883 will be recorded in
subsequent periods as a reduction of the gain on the sale of the Freehold
Racetrack.
(12) RELATED PARTY TRANSACTIONS
During the six months ended December 31, 1998, the Company paid $60,000 in
consulting fees, $15,000 for director fees, $3,000 for an auto allowance and
$8,227 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.
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.
The Company paid $10,000 per month to Mr. Zappala for consulting services
and for the first half of Fiscal 1999, Mr. Zappala was paid $6,000 for director
fees and $7,027 of reimbursed expenses. Upon consummation of the Delaware
Settlement on January 28, 1999, Mr. Zappala's consulting arrangement was
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.
(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 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.
(14) SUBSEQUENT EVENTS
(A) On January 28, 1999, the Company completed on 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 to subsidiaries of Greenwood Racing, Inc.,
which owns Philadelphia Park racetrack, the Turf Clubs and Phonebet (the
"Greenwood Transaction"). In connection with the transactions, the Company
purchased the undepreciated balance of equipment located at Garden State Park
and a liquor license owned by and an unaffiliated third party, Service America
Corporation, for $500,000 (100,000 of which will be paid by the lessee). (See
Notes 2, 4,7 and 9)
20
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(B) On January 28, 1999, The Company also 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 Notes 3, 5,7 and 9)
(C) On February 11, 1999, the Company and certain of its officers and
directors and former officers and directors received subpoenas from
the Securities and Exchange Commission requesting certain documents
relating to certain transaction for the period January 1, 1997 to the
present. It is the company's intent to cooperate fully with this
request.
(D) Pro Forma Financials
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998
<TABLE>
ASSETS
As Reported As Adjusted
December 31, Pro Forma
1998 Pro Forma Balance
(UNAUDITED) Adjustments Sheet
----------- ----------- -----
<CAPTION>
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 166,344 $ 1,475,039 (3) $ 3,992,642
(4,600,000) (1)
7,789,915 (4)
(2,250,000) (1)
1,411,344 (7)
Reserve Escrow Deposits 8,095,191 (3,000,000) (3) 3,620,152
(1,475,039) (3)
Accounts Receivable 33,294 2,261,850 (7) 2,295,144
Prepaid Expenses 175,473 195,000 (4) 370,473
Note Receivable 1,000,000 (4) 1,000,000
Net Assets of Discontinued
Operations - Current 12,228,066 (14,257,169) (4) (0)
2,029,103 (7)
Other Current Assets 238,063 238,063
---------- ---------
TOTAL CURRENT ASSETS 20,936,431 11,516,474
---------- ----------
NET ASSETS OF DISCONTINUED
OPERATIONS - Long Term 44,846,448 (2,402,782) (4) 29,861,585
400,000 (6)
(400,000) (6)
1,242,883 (5)
500,000 (3)
(14,324,964) (4)
---------- ----------
PROPERTY HELD FOR SALE 47,384,425 (5,234,670) (2) 42,149,755
---------- ----------
LAND, BUILDINGS AND EQUIPMENT:
Land and Buildings 214,097 214,097
Equipment 801,484 801,484
---------- ---------
1,015,581 1,015,581
LESS: Accumulated Depreciation
and Amortization 323,936 323,936
---------- ---------
TOTAL LAND, BUILDINGS AND
EQUIPMENT, NET 691,645 691,645
---------- ---------
OTHER ASSETS:
Deposits and Other Assets 3,172 3,172
Deferred Financing Costs, Net 1,343,850 1,343,850
---------- ---------
TOTAL OTHER ASSETS 1,347,022 1,347,022
---------- ---------
-------------- -------------- --------------
TOTAL ASSETS $ 115,205,971 $ (29,639,490) $ 85,566,481
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
As Reported As Adjusted
December 31, Pro Forma
1998 Pro Forma Balance
(UNAUDITED) Adjustments Sheet
----------- ----------- -----
<CAPTION>
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts Payable ......................$ 311,742 $ 3,173,260 (7) $ 3,485,002
Accrued Expenses ...................... 3,847,696 (3,147,992) (1) 2,768,940
87,328 (7)
1,981,908 (7)
Current Maturities of Long-Term Debt .. 55,069,475 (22,000,000) (4) 30,569,475
(2,500,000) (3)
---------- ----------
TOTAL CURRENT LIABILITIES ........ 59,228,913 36,823,417
---------- ----------
DEFERRED INCOME 0 459,801 (7) 459,801
LONG-TERM DEBT, Net of Current Portion ........ 0 5,808,032 (1) 3,558,032
(2,250,000) (1)
COMMITMENTS AND CONTINGENCIES ................. -- --
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100.00
Par Value........................... 36,248,075 36,248,075
Common Stock, $2.00 Par Value.......... 27,956,213 (4,187,736) (2) 23,768,477
Capital in Excess of Par .............. 25,878,108 (1,046,934) (2) 26,074,057
1,242,883 (5)
(Deficit) (subsequent to
June 30, 1993,
date of quasi-reorganization) ..... (34,071,171) (34,071,171)
----------- -----------
TOTAL ............................ 56,011,225 52,019,438
----------- -----------
LESS: Treasury Stock .................. (7,260,040) (1) (7,260,040)
LESS: Deferred Compensation, Net ...... (34,167) 34,167
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ....... 55,977,058 44,725,231
----------- -----------
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 115,205,971 $ (29,639,490) $ 85,566,481
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
UNAUDITED PRO FORMA ADJUSTED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
<TABLE>
As Reported
Six Months Ended As Adjusted
December 31, Pro Forma Company
1998 Adjustments Pro Forma
---- ----------- ---------
<CAPTION>
<S> <C> <C> <C> <C>
EXPENSES:
General & Administrative Expenses $ 2,735,322 $ $ 2,735,322
Interest Expense ................ 3,523,973 (1,583,260) (8) 1,940,713
Interest Income ................. (213,081) 96,461 (8) (116,620)
Amortization of Financing Costs . 1,529,602 (520,634) (8) 1,008,968
El Rancho Property Carrying Costs 619,533 619,533
(LOSS) FROM CONTINUING OPERATIONS ------------ ----------- -----------
BEFORE DISCONTINUED OPERATIONS ....... $ (8,195,348) $(2,007,433) $(6,187,716)
BASIC PER SHARE DATA:
(LOSS) BEFORE DISCONTINUED OPERATIONS ... $ (0.59) $ (0.68)
========== =========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING ............. 13,978,103 8,981,019
========== =========
</TABLE>
UNAUDITED PRO FORMA ADJUSTED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
As Reported As Adjusted
June 30, Pro Forma Company
1998 Adjustments Pro Forma
---- ----------- ---------
<CAPTION>
<S> <C> <C> <C>
EXPENSES:
General & Administrative Expenses ............ $ 11,615,972 $ $ 11,615,972
(including legal fees of $3,306,877,
$896,729, and $637,229,
respectively, and the estimated
charge in connection with the
repurchase of the NPD shares of
$3,748,000 for the 1998 year)
Interest Expense ............................. 7,084,968 (3,183,977) (7) 3,900,991
Interest Income .............................. (689,092) 310,957 (7) (378,135)
Amortization of Financing Costs .............. 3,053,583 (1,041,472) (7) 2,012,111
El Rancho Property Carrying Costs ............ 974,167 974,167
Impairment Loss on El Rancho Property ........ 3,429,251 3,429,251
(LOSS) FROM CONTINUING OPERATIONS ------------ ------------
BEFORE DISCONTINUED OPERATIONS .................... $(18,700,940) $(15,516,963)
AND EXTRAORDINARY ITEM
BASIC PER SHARE DATA:
(LOSS) BEFORE DISCONTINUED OPERATIONS ................ $ (1.34) $ (1.73)
========== =========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING .......................... 13,978,086 8,981,002
========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
(1) In connection with the Delaware Settlement, the Company purchased 2,904,016
shares from NPD, Inc. and assumed the NPD Note of $5,808,032 due to the REB
Bankruptcy Trustee. The Company recorded Treasury Stock in the amount of
$7,260,040. In addition, the Company paid $2,250,000 against the original
NPD Note and negotiated a new note under similar payment terms in the
amount of $3,558,032.
Debit Credit
Treasury Stock $ 7,260,040 $
Cash 4,600,000
Cash 2,250,000
Note Payable - REB 5,808,032
Note Payable - REB 2,250,000
Accrued Expenses 3,147,992
---------------------- ---------------------
$ 12,658,032 $ 12,658,032
====================== =====================
(2) 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. These
shares were valued by the Company at $2.50 per share, based on management's
estimate of their fair market value as of the filing of the Company's most
recent Form 10-K.
Debit Credit
Common Stock $ 4,187,736 $
Capital in Excess of Par 1,046,934
Property Held for Sale 5,234,670
-----------------------------
$ 5,234,670 $ 5,234,670
============= ===========
(3) In connection with the January 28, 1999 sale of certain assets 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 $1.475 million from its escrow reserves for working capital
purposes and used $3 million to pay down debt and related expenses.
Debit Credit
Current Maturities of LTD $ 2,500,000 $
Deferred Gain on Disposition 500,000
Cash & Cash Equivalents 1,475,039
Reserve Escrow Deposits 1,475,039
Reserve Escrow Deposits 3,000,000
--------------- --------------
$ 4,475,039 $ 4,475,039
================ ==============
<PAGE>
(4) Pro forma adjustment to record the sale of certain assets of Freehold
Raceway and the sale of a ten-acre parcel of land at the Garden State Park
facility.
Debit Credit
Cash & Cash Equivalents $ 7,789,915 $
Prepaid Expenses 195,000
Note Receivable 1,000,000
Net Assets of Discontinued
Operations - Current 14,257,169
Net Assets of Discontinued
Operations - Long-Term 2,402,782
Current Maturities of LTD 22,000,000
Deferred Gain on Disposition 14,324,964
---------------- ------------
$ 30,984,915 $ 30,984,915
=============== ============
(5) In connection with the Approval Agreement between the Company and Credit
Suisse First Boston, the Company has agreed that the warrants to purchase
497,153 shares of common stock at $4.375 per share shall become immediately
exercisable. The fair value of these warrants shall be used to reduce the
Deferred Gain on Disposition of certain assets of the Freehold Raceway.
Debit Credit
Deferred Gain on Disposition $ 1,242,883
Capital in Excess of Par $ 1,242,883
(6) In connection with the sale of the ten acre parcel of land of the Garden
State Park facility and the lease of the Garden State Park facility, the
Company purchased certain operating assets for consideration of $500,000
(with a credit due from the buyer of $100,000) at closing.
Debit Credit
Net Assets of Discontinued
Operations - Long-Term $ 400,000
Net Assets of Discontinued
Operations - Long-Term $ 400,000
<PAGE>
(7) To reclassify the remaining net assets and liabilities of Freehold Raceway
which were not sold in the January 28, 1999 asset sale.
Debit Credit
Cash $ 1,411,344 $
Accounts Receivable 2,261,850
Accounts Payable 3,173,260
Accrued Expenses 1,981,908
State Taxes Payable 87,328
Deferred Income 459,801
Net Assets of Discontinued
Operations - Current 2,029,103
--------------- -------------
$ 5,702,297 $ 5,702,297
=============== =============
(8) For both the year ended June 30, 1998 and the six months ended December 31,
1998, the pro forma adjustments eliminate the effects on interest income,
interest expense and the amortization of deferred financing costs
associated with the Credit Suisse debt repaid 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.
<PAGE>
21
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 1998
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 December 31, 1998, was a deficit of
($38,292,452) which represents a decrease in the deficit of approximately
$4,814,000 from the December 31, 1997 working capital deficit of ($43,106,215).
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), 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 December 31, 1998, the interest rate on the Credit
Suisse Credit Facility was 12.08%. At December 31, 1998, the Company was not in
compliance with certain non-financial covenants of the Credit Suisse Credit
Facility, however on January 28, 1999, Credit Suisse waived those violations.
The loan matures June 1, 1999 unless, under certain conditions, a one year
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 will be recorded in subsequent periods as a
reductions of the gain on the sale of the Freehold Racetrack. (See Notes 3 and
14)
The net loss for the six months ended December 31, 1998 was ($3,938,805).
Cash flows used in operating activities amounted to approximately $1,932,448.
The net loss incurred by the Company includes approximately $2,300,000 of
non-cash expenses during the period.
Cash provided by financing activities was $1,246,606 during the six months
ended December 31, 1998, consisting principally of amounts drawn from the Credit
Suisse interest escrow account in the amount of $2,365,690.
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 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
22
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 1998
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 $1.475 million from its escrow reserves for working
capital purposes.
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. The Company is
considering alternative financing sources, however, there can be no assurances
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.
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 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) and the grant of certain approvals by the U.S. bankruptcy
courts (which was issued on January 15, 1999). The Delaware Settlement resulted
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. In addition, the settlement also resulted in the termination of the
Company's option agreement with D&C Gaming in the amount of $600,000, the
retirement of approximately 2.1 million additional shares of the Company's
Common Stock owned by LVEN and the resignation of certain of the Company's Board
members. The Delaware Settlement also contemplates the disposition of the
Company's non-operating El Rancho Property.
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 $4 million for the six months ended December 31, 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.
23
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 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. 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 December 31, 1998 and 1997
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 second quarter of Fiscal 1999, The Company's loss from continuing
operations was ($4,053,192) as compared to a loss from continuing operations for
the comparable period in prior fiscal year of ($4,651,804), a decrease in the
loss of $598,612. 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 legal fees and employee severance costs associated with
the Delaware Actions recognized in the prior fiscal year's second quarter,
partially offset by an increase in corporate costs associated with the
information statement provided to the Company's stockholders in the second
quarter of fiscal 1999.
Income from discontinued operations was $2,113,840 for the second quarter
of Fiscal 1999 as compared to income from discontinued operations for the second
quarter of Fiscal 1998 of $2,453,968, a decrease of $340,128. During the second
quarter of Fiscal 1999, revenues from racetrack operations at Freehold Raceway
and Garden State Park decreased by an aggregate of $1,100,398 from the
comparable prior fiscal quarter, primarily
24
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 1998
as a result of a decrease in wagering on simulcast and live racing and for
Freehold Raceway a 5 day decrease in live racing. Racetrack operating expenses
decreased by $806,048 during the same period, primarily as a result of a
decrease in purses, taxes, wages and benefits and outside services at the two
facilities. See the separate results for Garden State Park and Freehold Raceway
below.
During the second quarter of Fiscal 1999, the Company incurred a net loss
of ($1,939,352) as compared to a net loss of ($2,197,836) for the comparable
quarter in Fiscal 1998. The decrease in net loss of $258,484 was the result of
those differences described above.
Results of Operations for the Six Months Ended December 31, 1998 and 1997
The operating results of the racetrack subsidiaries for the six month
periods have been segregated and reported as discontinued operations for each of
the periods presented as a result of the decision made by the Company prior to
June 30, 1998 to sell its racetracks.
For the first half of Fiscal 1999, The Company's loss from continuing
operations was ($8,195,348) as compared to a loss from continuing operations for
the comparable period in prior fiscal year of ($9,421,950), a decrease in the
loss of $1,226,602. 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 and a decrease in legal fees and employee
severance costs associated with the Delaware Actions recognized in the prior
fiscal year's second quarter, partially offset by an increase in corporate costs
associated with the information statement provided to the Company's stockholders
in the second quarter of fiscal 1999 and a decrease in interest income.
Income from discontinued operations was $4,256,544 for the first half of
Fiscal 1999 as compared to income from discontinued operations for the first
half of Fiscal 1998 of $4,180,232, an increase of $76,312. During the first half
of Fiscal 1999, revenue from racetrack operations at Freehold Raceway and Garden
State Park decreased by an aggregate of $1,337,303 from the comparable prior
fiscal period and racetrack operating expenses decreased by $1,471,277 during
the same period, primarily as a result of a decrease in racetrack operating
revenues and expenses as discussed above. See the separate results for Garden
State Park and Freehold Raceway below.
During the first half of Fiscal 1999, the Company incurred a net loss of
($3,938,805) as compared to a net loss of ($5,241,718) for the comparable
quarter in Fiscal 1998. The decrease in net loss of $1,302,913 was the result of
those differences described above.
Garden State Park:
Garden State Park's Fiscal 1999 Harness Meet began September 4, 1998 and
ran 51 days until December 12, 1998. Garden State Park has received approval
from the New Jersey Racing Commission to run a 38 day Thoroughbred Meet from
March 19, 1999 to May 22, 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 and six months ended December 31, 1998, Garden State Park
realized net income of $607,769 and $1,467,155, respectively.
25
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 1998
Comparative quarterly and year-to-date income at Garden State Park are
as follows:
Income
-------------------------------- Net
Fiscal 1999 Fiscal 1998 Increase (Decrease)
------------- -------------
1st Quarter $ 859,386 $ 662,723 $ 196,663
2nd Quarter 607,769 755,422 (147,653)
------------ ------------ ---------
Year-to-Date $ 1,467,155 $ 1,418,145 $ 49,010
============ ============ =========
During the three months ended December 31, 1998, Garden State Park's
revenue decreased $662,056 or 7% to $9,082,181 from the $9,744,237 for the
corresponding three month period in the prior fiscal year, primarily reflecting
the effect of a decrease in revenues generated from simulcasting to and from
other racetracks and live wagering. Expenses decreased $514,403 or 8% for the
three months ended December 31, 1998. Wages and benefits decreased as a result
of the Company's effort to cut overhead and operating costs. Additional savings
were realized by reducing outside services during simulcast periods and a
reduction in real estate taxes, utilities, insurance and materials and supplies.
As a result of the decreased revenues and expenses, Garden State Park realized
income of $607,769, as compared to income of $755,422 in the same quarter of the
prior fiscal year.
During the six months ended December 31, 1998, Garden State Park's revenue
decreased $940,795 or 6% to $15,157,229 from $16,098,024 for the corresponding
six month period in the prior fiscal year, primarily reflecting again the effect
of decreased revenues generated from simulcasting and live wagering as discussed
above. Expenses decreased $989,805 or 6% for the six months ended December 31,
1998, primarily as a result of the cost savings for real estate taxes, wages and
benefits, insurance, utilities and outside services. As a result of the
decreased revenues and expenses, Garden State Park realized income of $1,467,155
as compared to income of $1,418,145 during the comparable six month period in
the prior fiscal year.
During the three month period of harness racing ended December 31, 1998,
the average live wagering at Garden State Park was $104,619, an 18% decrease
from the corresponding prior period amount of $127,343. During this period 36
live days of wagering were conducted for the current year and 37 days for the
prior year. 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 20% over the prior year. During periods 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 $284,904 for the three months ended December 31, 1998 as compared
to the corresponding prior period amount of $283,225.
During the six month period of harness racing ended December 31, 1998, the
average live wagering at Garden State Park was $108,503 a 19% decrease from the
corresponding prior period amount of $133,862. During both fiscal periods 51
live days of wagering 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 18% over the
prior year. During periods 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 $285,042 for the six months ended
December 31, 1998, a 2% decrease from the corresponding prior period amount of
$291,447.
26
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 1998
Freehold Raceway:
The Company conducted its Harness Meet through Freehold Racing Association,
Inc. ("FRA") and Atlantic City Harness, Inc. ("ACH"), the operating companies of
Freehold Raceway. Freehold Raceway races under two separate identities. FRA
raced 92 days from August 13, 1998 thru December 31, 1998. ACH will race 101
days from January 1, 1999 through May 31, 1999.
During the three and six months ended December 31, 1998, Freehold Raceway
realized net income before taxes of $1,571,570 and $2,916,888, respectively.
Comparative quarterly and year-to-date income before taxes at Freehold
Raceway are as follows:
Income Before Taxes
----------------------------------- Net
Fiscal 1999 Fiscal 1998 Increase (Decrease)
=========== ===========
1st Quarter $ 1,345,318 $ 1,113,657 $ 231,661
2nd Quarter 1,571,570 1,718,267 (146,697)
------------- -------------- ------------
Year-to-Date $ 2,916,888 $ 2,831,924 $ 84,964
============= ============== ============
During the three months ended December 31, 1998, Freehold Raceway's revenue
was $10,836,059, a slight decrease when compared to the corresponding three
month period in the prior fiscal year. Expenses increased slightly when compared
to the same period in the prior fiscal year primarily as a result of a $300,000
contribution for the support of horse racing in New Jersey partially offset by
the cost savings for wages and benefits, insurance, utilities and outside
services from the Company's effort to cut overhead and operating costs. The
decrease in revenues and increase in expenses primarily accounted for the
racetrack realizing income before taxes of $1,571,570 for the three months ended
December 31, 1998 as compared to income before taxes of $1,718,267 during the
three months ended December 31, 1997.
During the six months ended December 31, 1998 Freehold Raceway's revenue
was $19,066,392, a slight decrease when compared to the corresponding period in
the prior fiscal year. Expenses decreased slightly for the six months ended
December 31, 1997 when compared to the same period in the prior fiscal year
primarily as a result of the contribution offset by decreases in wages and
benefits, insurance, utilities and outside services as discussed above. As a
result of decreased revenues and expenses, Freehold Raceway realized income
before taxes of $2,916,888 for the first half of fiscal 1999 as compared to
income before taxes of $2,831,924 for the first half of fiscal 1998.
During the three month period of harness racing ended December 31, 1997,
the average live wagering at Freehold Raceway was $197,870 a 5% decrease from
the corresponding prior period amount of $208,308. During this period 57 live
days of wagering were conducted during the current year and 62 days for the
prior year. 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 increased 11% 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 simulcast
was $348,887 for the three months ended December 31, 1998, a slight decrease
from the corresponding prior period amount of $350,645.
27
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 1998
During the six month period of harness racing ending December 31, 1998, the
average live wagering at Freehold Raceway was $204,304 a 6% decrease from the
corresponding prior period amount of $216,829. During this period 92 live days
of wagering were conducted during the current year as compared to 99 days for
the prior year. 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 increased 5% 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 simulcast was $337,234 for the six months ended December 31, 1998 a
9% increase from the corresponding prior period amount of $309,361.
28
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On December 9, 1998, 7,619,446 shares of Common Stock representing 54.5% of
the outstanding Common Stock were voted in favor of the following:
(C) The sale of Freehold Raceway and a ten-acre parcel of land at Garden
State Park to Greenwood New Jersey.
(D) The lease of substantially all of the real property and related assets
of Garden State Park.
(E) The disposition by sale, exchange or otherwise of all or a portion of
Garden State Park in Cherry Hill, New Jersey and the non-operating
former El Rancho Hotel and Casino in Las Vegas, Nevada.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K with respect to the
quarter ended December 31, 1998.
29
<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.
February 16, 1999 /s/William H. Warner
-------------------------------------
William H. Warner,
Treasurer
(Principal Financial and Accounting Officer)
30
<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
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<SECURITIES> 13,333
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0
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<TOTAL-LIABILITY-AND-EQUITY> 115,205,971
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