FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------------------------------
Commission file number 0-9624
----------------------
International Thoroughbred Breeders, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2332039
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 1232, Cherry Hill, New Jersey 08034
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(856) 488-3838
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the latest practicable date.
Class Outstanding at May 5, 2000
- ------------------------------ --------------------------
Common Stock, $ 2.00 par value 8,980,252 Shares
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
for the Nine Months ended March 31, 2000
(Unaudited)
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND JUNE 30, 1999
ASSETS
March 31,
2000 June 30,
(UNAUDITED) 1999
----------------- ------------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 94,018 $ 1,358,200
Reserve Escrow Deposits 0 182,154
Accounts Receivable 2,235 234,774
Prepaid Expenses 130,781 349,182
Other Current Assets 39,003 53,771
Net Assets of Discontinued
Operations - Current (279,427) 494,699
----------------- ------------------
TOTAL CURRENT ASSETS (13,390) 2,672,780
----------------- ------------------
NET ASSETS OF DISCONTINUED
OPERATIONS - Long Term 30,000,000 30,000,000
----------------- ------------------
PROPERTY HELD FOR SALE 42,149,755 42,149,755
----------------- ------------------
LAND, BUILDINGS AND EQUIPMENT:
Land and Buildings 214,097 214,097
Equipment 685,886 683,428
----------------- ------------------
899,983 897,525
LESS: Accumulated Depreciation
and Amortization 373,060 329,667
----------------- ------------------
TOTAL LAND, BUILDINGS AND
EQUIPMENT, NET 526,923 567,858
----------------- ------------------
OTHER ASSETS:
Deposits and Other Assets 1,003,172 1,198,172
----------------- ------------------
TOTAL OTHER ASSETS 1,003,172 1,198,172
----------------- ------------------
TOTAL ASSETS $ 73,666,460 $ 76,588,565
================= ==================
See Notes to Consolidated Financial Statements.
1
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND JUNE 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
2000 June 30,
(UNAUDITED) 1999
---------------------------
CURRENT LIABILITIES:
Accounts Payable $ 129,487 $ 267,941
Accrued Expenses 1,586,480 1,176,796
Current Maturities of
Long-Term Debt 36,713,200 34,297,145
Deferred Income 500,000 0
-------------- --------------
TOTAL CURRENT LIABILITIES 38,929,167 35,741,882
-------------- --------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Series A Preferred Stock,
$100.00 Par Value,
Authorized 500,000 Shares,
Issued and Outstanding,
362,482 and 362,482 Shares,
Respectively 36,248,375 36,248,175
Common Stock, $2.00 Par Value,
Authorized 25,000,000 Shares,
Issued, 11,884,260 and
11,884,249 Shares,
and Outstanding, 8,980,244 and
8,980,233 Shares, Respectively 23,768,527 23,768,497
Capital in Excess of Par 26,144,552 26,144,782
(Deficit) (subsequent to
June 30, 1993, date of
quasi-reorganization) (44,136,204) (38,023,064)
-------------- --------------
TOTAL 42,025,250 48,138,390
LESS:
Treasury Stock, 2,904,016
Shares, at Cost (7,260,040) (7,260,040)
Deferred Compensation, Net (27,917) (31,667)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 34,737,293 40,846,683
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,666,460 $ 76,588,565
============== ==============
See Notes to Consolidated Financial Statements.
2
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
Preferred Common
---------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
---------------------- ------------- ------------
<CAPTION>
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1999 362,482 $ 36,248,175 11,884,249 $ 23,768,497
Shares Issued for Fractional
Exchanges With Respect to the
One-for-twenty Reverse Stock Split
effected on March 13, 1992 2 200 15 30
Amortization of Deferred
Compensation Costs --- --- --- ---
Net (Loss) for the Nine Months
Ended March 31, 2000 --- --- --- ---
--------- ------------ ------------- ------------
BALANCE - MARCH 31, 2000 362,484 $ 36,248,375 11,884,264 $ 23,768,527
========= ============ ============= ============
</TABLE>
<TABLE>
Capital Retained Treasury Deferred
in Excess Earnings Stock, Compen-
of Par (Deficit) At Cost sation Total
------------ ------------ ----------- --------- -----------
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE - JUNE 30, 1999 $ 26,144,782 $ (38,023,064)$ (7,260,040)$ (31,667) $ 40,846,683
Shares Issued for Fractional
Exchanges With Respect to the
One-for-twenty Reverse Stock Split
effected on March 13, 1992 (230) --- --- --- ---
Amortization of Deferred
Compensation Costs --- --- --- 3,750 3,750
Net (Loss) for the Nine Months
Ended March 31, 2000 --- (6,113,140) --- --- (6,113,140)
------------- ------------- ------------ --------- -------------
BALANCE - MARCH 31, 2000 $ 26,144,552 $ (44,136,204)$ (7,260,040)$ (27,917) $ 34,737,293
============= ============= ============ ========= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------------------
2000 1999 2000 1999
------------- ------------ ----------- ------------
<CAPTION>
REVENUE:
<S> <C> <C> <C> <C>
Rental Income $ 76,199 $ 58,936 $ 230,154 $ 58,936
Interest Income 5,263 85,306 34,749 298,387
-------------- ------------ ----------- -------------
TOTAL REVENUES 81,462 144,242 264,903 357,323
-------------- ------------ ----------- -------------
EXPENSES:
General & Administrative Expenses 807,295 895,880 2,132,032 3,631,202
Interest and Financing Expenses 1,139,091 3,270,181 3,285,517 6,794,154
Amortization of Financing Costs 0 1,044,839 0 2,574,441
El Rancho Property Carrying Costs 307,291 303,029 960,494 922,562
-------------- ------------ ----------- -------------
TOTAL EXPENSES 2,253,676 5,513,929 6,378,043 13,922,359
-------------- ------------ ----------- -------------
(LOSS) FROM CONTINUING OPERATIONS
-------------- ------------ ----------- -------------
BEFORE DISCONTINUED OPERATIONS (2,172,215) (5,369,687) (6,113,140) (13,565,036)
-------------- ------------ ----------- -------------
INCOME FROM DISCONTINUED OPERATIONS:
Net Gain on Sale of Net Assets of
Discontinued Operations 0 3,621,507 0 3,621,507
(less applicable state income taxes
of $1,335,500)
Income from operations of discontinued
racetrack operations (less applicable
state income taxes of $22,500 and
$150,000 for the respective three
and nine months ended March 31, 1998) 0 247,640 0 4,504,184
-------------- ------------ ----------- -------------
INCOME FROM DISCONTINUED OPERATIONS 0 3,869,147 0 8,125,691
-------------- ------------ ----------- -------------
-------------- ------------ ----------- -------------
NET (LOSS) $ (2,172,215)$ (1,500,540)$ (6,113,140)$ (5,439,345)
============== ============ =========== =============
BASIC PER SHARE DATA:
(LOSS) BEFORE DISCONTINUED OPERATIONS $ (0.24)$ (0.59)$ (0.68)$ (1.08)
NET GAIN ON SALE OF NET ASSETS
OF DISCONTINUED OPERATIONS 0.00 0.40 0.00 0.29
INCOME FROM DISCONTINUED OPERATIONS 0.00 0.03 0.00 0.36
-------------- ------------ ----------- -------------
NET (LOSS) $ (0.24)$ (0.16)$ (0.68)$ (0.43)
============== ============ =========== =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,980,245 8,980,226 8,980,240 12,409,426
============== ============ =========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
Nine Months Ended
March 31,
--------------------------------
2000 1999
------------- -------------
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) FROM CONTINUING OPERATIONS $ (6,113,140) $ (13,565,036)
------------- ------------
Adjustments to reconcile (loss) to net cash
(used in) operating activities:
Depreciation and Amortization 47,143 2,613,859
Loss on Disposal of Fixed Assets 146,238
Changes in Operating Assets and Liabilities -
Decrease in Accounts Receivable 232,541 36,838
(Increase)Decrease in Other Assets 14,768 179,900
Decrease in Prepaid Expenses 218,401 200,486
Increase (Decrease) in Accounts Payable
and Accrued Expenses 271,230 (914,871)
------------- ------------
CASH (USED IN) CONTINUING OPERATING ACTIVITIES (5,329,057) (11,302,586)
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 104,129 10,755,328
------------- ------------
NET CASH (USED IN) OPERATING ACTIVITIES (5,224,928) (547,258)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Non-refundable Deposit on El Rancho 500,000 0
Proceeds from Sale of Freehold 0 17,900,000
Proceeds from Sale of Land at Garden State Park 0 2,000,000
Purchase of 2,904,016 Shares of Treasury Stock 0 (6,850,000)
Capital Expenditures (2,458) (69,044)
------------- ------------
CASH PROVIDED BY (USED IN) CONTINUING
INVESTING ACTIVITIES 497,542 12,980,956
CASH (USED IN) DISCONTINUED
INVESTING ACTIVITIES (130,000) (85,068)
------------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 367,542 12,895,888
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Escrow Deposits Utilized 502,159 9,311,725
Deposit to Escrow Funds (320,000) 0
Decrease in Balances Due From
Discontinued Subsidiaries 2,611,679 (14,460,563)
Principal Payments on Short Term Notes 773,496 (2,708,426)
------------- ------------
CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES 3,567,334 (7,857,264)
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (678,312) (4,644,520)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,889,022 (12,501,784)
------------- ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,968,364) (153,154)
LESS CASH AND CASH EQUIVALENTS AT END OF PERIOD
FROM DISCONTINUED OPERATIONS 704,184 2,099,952
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
FROM CONTINUING OPERATIONS 1,358,200 213,795
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,018 $ 2,160,593
============= ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 0 $ 4,636,979
Income Taxes $ 61,415 $ 1,500,000
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the nine months ended March 31, 1999, the Company recorded an
unrealized loss of $12,078 on trading securities.
During the nine months ended March 31, 1999, the Company issued warrants to
purchase 497,153 shares of Common Stock at a fair value of $1,242,883
in connection with financing agreements.
During the nine months ended March 31, 1999, the Company canceled 2,093,868
shares of Common Stock in connection with the Delaware Settlement.
During the nine months ended March 31, 1999, the purchase of 2,904,016
shares of Common Stock was financed, in part, through a long term note
in the amount of $3,558,032.
During the nine months ended March 31, 1999, $22,000,000 of the Company's
short term debt was assumed by the the purchaser in in connection with
the sale of certain assets at Freehold Raceway and Garden State Park.
See Notes to Consolidated Financial Statements.
5
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
(1) BASIS OF PRESENTATION
On January 28, 1999, the Company completed the sale of Freehold Raceway and
a ten-acre parcel at the Garden State Park facility and the lease of the Garden
State Park facilities. Prior to June 30, 1998, the Company determined to sell
its racetracks and, accordingly, the operating results of the racetrack
subsidiaries have been segregated and reported as discontinued operations for
each of the periods presented.
The accompanying consolidated financial statements have been prepared
assuming International Thoroughbred Breeders, Inc. and subsidiaries
(collectively, the "Company") will continue as a going concern. The remaining
debt to the Company's primary lender was due June 1, 1999. On May 7, 1999, the
Company notified their primary lender, Credit Suisse First Boston Mortgage
Capital LLC ("Credit Suisse"), of its intent to extend the loan maturity date to
June 1, 2000. On January 21, 2000 after obtaining the written consent of a
majority of the outstanding shares of stock of the Company entitled to vote
thereon, the Company entered into a restructuring agreement with Credit Suisse.
Prior to this agreement, the Company had been in a maturity default with Credit
Suisse for its loan due on June 1, 1999 (the "CSFB Loan") in the principal
amount of $30,500,000 plus unpaid interest since June 1, 1999. The restructure
agreement returns the loan to a good standing position and extends the maturity
date of the CSFB Loan to June 30, 2000.
On January 25, 2000, the Company entered into agreements with unrelated
third parties for the sale of the Garden State Park and the El Rancho
properties. Unless the scheduled closing of the El Rancho property on June 1,
2000, is consummated and the closing of the Garden State Park property is
consummated, the Company will be in default with respect to the Credit Suisse
loan due on June 30, 2000. The Company does not have any committed source of
working capital and there are no assurances that the Company would be successful
in obtaining working capital from other sources. There can be no assurances that
either sale of the El Rancho or the Garden State Park properties will be
consummated or to the timing thereof.
The Company has sustained losses of approximately $7.9 million and $18.3
million during fiscals 1999 and 1998, respectively and a net loss of
approximately $6.1 million for the nine months ended March 31, 2000.. The
Company believes its projected cash flows from its current operations will be
sufficient until June 30, 2000. There can be no assurances beyond that date.
The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
(2) CLASSIFICATIONS
Certain prior years' amounts have been reclassified to conform with the
current years' presentation.
(3) DISCONTINUED OPERATIONS
On January 28, 1999, the Company completed the sale of the real property
and certain related assets at Freehold Raceway and a ten-acre parcel of land at
the Garden State Park facility, and the lease of the real property and certain
related assets of Garden State Park for a seven-year period.
6
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
The net assets of the operations to be disposed of included in the accompanying
consolidated balance sheets as of March 31, 2000 consist of the following:
March 31, 2000
-------------------
Classified As:
Current Assets $ 1,197,873
Current Liabilities 1,477,300
-------------------
Net Assets of Discontinued
Operations - Current (279,427)
Long-Term Property Assets of Garden State Park 30,000,000
-------------------
Net Assets of Discontinued Operations $ 29,720,573
===================
(4) 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 stockholder derivative litigation in the Delaware
Court of Chancery (the "Delaware Settlement"). As part of the Delaware
Stipulation, the Company has provided for the possible sale of the El Rancho
Property pursuant to the terms enumerated by the Delaware Settlement.
On March 1, 2000, International Thoroughbred Breeders, Inc. signed an
agreement for the sale of the El Rancho property in Las Vegas, Nevada to
Turnberry/Las Vegas Boulevard, LLC on basically the same terms previously
reported in the Company's Form 8-k dated January 21,2000. The purchase price is
$45,000,000. The purchase price will be paid by: (i) a $100,000 deposit into
escrow at the signing of the Purchase and Sale Agreement; (ii) a $400,000
additional deposit into escrow due on March 15, 2000, and (iii) the balance of
the purchase price due at the closing, payable in cash.
The closing, originally scheduled to occur by March 31, 2000, had been
extended to April 30, 2000 after the buyer: (i) agreed to pay the approximate
$100,000 carrying costs of the El Rancho property for the month of April 2000;
(ii) agreed to pay the interest due to Credit Suisse First Boston Mortgage
Capital, LLC on a principal amount of $20,000,000 at 12% for the month of April
2000; and (iii) released $1,600,000, which included the above $100,000 and
$400,000 deposits, as a non-refundable deposit to the Company. The closing date
was further extended to June 1, 2000 provided the buyer: (i) agreed to pay the
approximate $100,000 carrying costs of the El Rancho property for the month of
May 2000; (ii) pays the interest due to Credit Suisse First Boston Mortgage
Capital, LLC on a principal amount of $19,000,000 at 12% for the month of May
2000; (iii) pays an additional deposit of $900,000 to the Company by April 30,
2000, of which $400,000 has been received; and (iv) demonstrates it has the
financial ability to close.
The Company has separately agreed to purchase a promissory note of the
buyer in the amount of $23,000,000 which will be convertible at the Company's
option into a 33 1/3% equity interest in the buyer, depending upon certain
circumstances.
The note would accrue interest at a 22% per annum rate, which will be
adjusted from time to time since the interest actually payable will be dependent
upon, and payable solely out of, the buyer's net cash flow available for
distribution to its equity owners ("Distributable Cash"). After the equity
investors in the buyer have received total distributions equal to their capital
contributions plus an agreed upon return on their invested capital, the next $23
million of Distributable Cash will be paid to the company. The company will
thereafter receive payments under the note equal to 33 1/3% of all Distributable
Cash until the maturity date, which occurs on the 30th anniversary of the
company's purchase of the note. The company may convert the promissory note, at
its option, into a 33 1/3% equity interest in the buyer at any time after
7
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
the 15th anniversary of the issuance of the note. If not then converted,
the note will convert into a 33 1/3% equity interest in the buyer on the day
before the 30th anniversary of its issuance.
The sale of the El Rancho property to Turnberry/Las Vegas Boulevard LLC or
to any other buyer cannot be assured at this time.
(5) RESERVE ESCROW DEPOSITS
In connection with the restructuring agreement on January 21, 2000 Credit
Suisse released to the Company the $167,476 balance in the escrow deposit
accounts which were used by the Company for working capital purposes.
(6) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
March 31, 2000
-----------------------
Interest % Per Annum Current Long-Term
--------------------- ------------ -----------
International Thoroughbred
Breeders Inc.:
Credit Suisse First Boston (A) LIBOR Rate plus 7% $ 33,022,749 $ -0-
(3/31/00 rate 13.133)
REB Bankruptcy Trustee (B) Prime Rate 3,652,226
(3/31/00 rate 9%)
Other Various 38,225 -0-
Garden State Park:
Service America Corporation (C) 6% 320,800 -0-
Other (D) Various 325,382 -0-
----------- ----
Totals $ 37,359,382 -0-
Less Amounts Reclassified to:
Net Assets of Discontinued
Operations - Current 646,182 -0-
----------- ----
Totals $ 36,713,200 $ -0-
=========== ====
The effective LIBOR Rate and the Prime Rate at March 31, 2000 was 6.133% and 9%,
respectively.
(A) On May 23, 1997, the Company entered into a two-year $55 million credit
facility with Credit Suisse First Boston Mortgage Capital LLC, ("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 existing credit
facility and to provide funds for working capital and other general corporate
purposes, including, but not limited to, preliminary development of the El
Rancho Property. Of the remaining facility borrowings, approximately $16.8
million was placed in escrow accounts, financing and closing fees of $4.3
million were incurred by the Company and $3.9 million was used by the Company
for general corporate purposes and repayment of certain other financial
obligations. Interest under the Credit Suisse Credit Facility is payable monthly
in arrears at 7% over the London interbank offered rate ("LIBOR"). The Credit
Suisse Credit Facility is
8
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
evidenced by a convertible promissory note (the "Credit Suisse Note").
On January 21, 2000 after obtaining the written consent of a majority of
the outstanding shares of stock of the Company entitled to vote thereon, the
Company entered into a restructuring agreement (the "Restructure Agreement")
with Credit Suisse. Prior to this agreement, the Company had been in a maturity
default with Credit Suisse for its loan due on June 1, 1999 (the "CSFB Loan") in
the principal amount of $30,500,000 plus unpaid interest since June 1, 1999. On
November 17, 1999, the Company and Credit Suisse signed a term sheet outlining
the term and conditions of the Restructure Agreement. At that time, accrued
interest in the amount of $1,762,891 was added to the principal balance of the
note.
The Restructure Agreement returns the loan to a good standing position and
extends the maturity date of the CSFB Loan to June 30, 2000. As part of the
Restructure Agreement, the Company agreed that as of January 21, 2000, the
restructured principal balance due on the CSFB Loan was $33,103,189, which
consisted of: (i) the principal amount of $30,500,000 remaining on the CSFB
Loan; (ii) accrued interest advanced by Credit Suisse from June 1, 1999 to
January 21, 2000 in the amount of $2,523,189; and (iii) an advance of a portion
of Credit Suisse's legal fees incurred in connection with the Restructure
Agreement in the amount of $80,000. Credit Suisse has agreed, pursuant to the
Restructure Agreement, to advance the monthly interest payments due by the
Company under the CSFB Loan until the maturity date of June 30, 2000. Such
amounts shall, to the extent not paid when due by the Company, become part of
the outstanding principal balance of the CSFB Loan on the date such interest
becomes due. Commencing April 16, 2000 and until 30 days following the closing
of the sale of the El Rancho property, interest accruing shall be paid by
Turnberry/Las Vegas Boulevard LLC ("Turnberry"), the purchaser of the El Rancho
property.
The Credit Suisse Credit Facility also provides for both affirmative and
negative covenants, including financial covenants such as tangible net worth, as
defined in the Credit Suisse Credit Facility. The Company's non- compliance with
certain non-financial covenants at December 31, 1998 were waived on January 28,
1999 in connection with the Delaware Settlement.
On January 28, 1999, a portion of the proceeds from the Greenwood
Transaction and $2,500,000 held in escrow was used to reduce the principal
balance on the Credit Suisse Note to $30.5 million and to pay a 2% prepayment
fee of $500,000, recorded as financing expenses, to Credit Suisse.
(B) On January 28, 1999 in connection with the Delaware Settlement, the
Company ("ITB") executed a note (the "Trustee Note") in the principal amount of
$3,558,032 to the Chapter 11 Bankruptcy Trustee for the estate of Robert E.
Brennan (the "Trustee") in order to purchase 2,904,016 shares of the Company's
Common Stock from NPD. Pursuant to the Trustee Settlement associated with the
Delaware Settlement, the Trustee received: (a) a pay down on the NPD Note from
the original principal balance of $5,808,032 to $3,558,032; (b) a promissory
note from ITB in the amount of $3,558,032 (the "ITB Note"), on substantially the
same terms as the NPD Note, except that the ITB Note becomes due and payable on
the earlier to occur of (i) January 15, 2001, or (ii) the closing of either the
sale of the Company's non- operating El Rancho hotel and casino property in Las
Vegas, Nevada (the "El Rancho Property"), or the sale of Garden State Park (the
"Garden State Property"); (c) a security interest in the NPD Shares; (d) the
payment of the costs and expenses incurred by the Bankruptcy Trustee in
connection with the Delaware Settlement and the Trustee Settlement; (e)
subordinate interests in both the El Rancho Property and the Garden State
Property; and (f) an escrow of the July 15, 1999 interest payment due on the ITB
Note. On July 15, 1999, the escrow interest payment in the amount of $195,000,
together with interest earned from January 28, 1999 to that date, was applied to
the principal balance of the note reducing the principal balance on the note to
$3,361,940.
In connection with the January 21, 2000 Restructure Agreement with Credit
Suisse, the Trustee entered into an agreement with the Company wherein: (i) the
amounts due under the Trustee Note are due at the earlier of (a) June 1, 2000 or
(b) the date on which the latter of the Garden State Park or El Rancho property
is sold, provided that the sale of the latter will satisfy the remaining balance
on the CSFB Loan
9
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
and the Trustee Note; (ii) all interest due under the Trustee Note will be
accrued and deferred until the maturity date of the Note; and (iii) the Company
shall reimburse the Trustee for legal and accounting fees up to $20,000, which
amount will be advanced by the Trustee and added to the outstanding principal
balance of the Trustee Note.
(C) In connection with the January 28, 1999 lease transactions for the
Garden State Park facility, 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 when title is transferred to Pennwood, which
event has not occurred as of May 17, 2000) financed by a five (5) year
promissory note at a 6% interest rate. The Company paid $100,000 on June 1,
1999, $99,200 on December 28, 1999 and is scheduled to make principal payments
of $80,000 plus interest on December 28th for the next three years.
(D) In connection with the January 28, 1999 lease transactions for the
Garden State Park facility, a note associated with certain equipment at the
Garden State Park facility will be paid by Greenwood as part of the lease
agreement.
(7) INCOME TAX EXPENSE
The Company's income tax expense for the three and nine month periods
ending March 31, 1998 relates to New Jersey income taxes for its Freehold
Raceway operations.
(8) COMMITMENTS AND CONTINGENCIES
A state has asserted a tax claim for the period June 30, 1988 to June 30,
1991 (during which the Company maintained an accounting office in the state) for
a Foreign Corporate Franchise Tax in the approximate amount of $400,000, which
amount is accrued, not taking into consideration any interest or penalties that
may be assessed. At this time, the Company cannot predict the final amount which
may be due. It is likely that litigation will have to commence in the courts to
pursue a compromise of the amount due. It is unknown at this time whether the
Company will be successful in abating all or part of the tax due.
During the third quarter of Fiscal 1999, the Company and certain of its
officers and directors and former officers and directors received subpoenas from
the Securities and Exchange Commission (the "SEC") relating to certain
transactions and reports. The Company has fully cooperated with the SEC's
investigation.
Effective December 3, 1999, the Board of Directors accepted the resignation
of Christopher C. Castens, the Company's Secretary and General Counsel. During
the second quarter of Fiscal 2000, the Company paid $79,846 in severance
payments in association with his employment contract.
The Company is responsible for remediation costs associated with an
environmental site on the Freehold Raceway property. The Company has accrued
what it believes to be the total cost of remediation. At June 30, 1999 and 1998,
the Company had accrued $300,000 and $100,000, respectively, for remediation
costs.
In connection with the January 28, 1999 lease transactions for the Garden
State Park facility, a note associated with certain equipment at the Garden
State Park facility will be paid by Greenwood as part of the lease agreement. In
the event that the Company or Greenwood terminates its lease agreement prior to
July 2001 when the note is fully paid, the Company will be responsible for the
monthly note payments of approximately $17,000.
10
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
The Chapter 11 Bankruptcy Trustee (the "Trustee") for the estate of Robert
E. Brennan has asserted certain claims challenging the ownership of
approximately 2,300,000 shares of the Company's Common Stock (the "Shares") held
by certain individuals. In order to preserve the Company's net operating loss
carryforwards from being lost due to the shares being transferred, the Company
and the Trustee have entered into an agreement whereby the Trustee has agreed to
accept a letter of credit for $1,150,000, which will be secured by an amount of
$1,150,000 held in escrow, for his interest in the Shares in the event that he
is awarded a judgement granting him an ownership interest in the Shares.
The Company's debt with CSFB is due on June 30, 2000. Unless the sale of
the El Rancho property and Garden State Park property is consummated prior to
that date, the Company will be in default in connection with the CSFB loan
agreement. Additionally, the cash proceeds from the sales must be in an amount
sufficient to satisfy the loan due on the trustee note together with accrued
interest. The total amount due on June 30, 2000 to satisfy the CSFB loan
together with accrued interest and fees and the trustee note together with
accrued interest is approximately $39,500,000. The proceeds from the sale of the
El Rancho and Garden State Park properties are expected to be sufficient to meet
this obligation.
LEGAL PROCEEDINGS
Harris v. DeSantis, et al.
The first New Jersey Action, filed on February 24, 1998 in the New Jersey
District Court, captioned Myron Harris, derivatively on behalf of International
Thoroughbred Breeders, Inc. v. Nunzio P. DeSantis, Anthony Coelho, Kenneth W.
Scholl, Michael Abraham, Joseph Zappala, Frank A. Leo, Robert J. Quigley,
Charles R. Dees, Jr. and Francis W. Murray ("Harris-Federal"), C.A. No.
98-CV-517(JBS), is a derivative suit brought by a stockholder of the Company.
The factual allegations and claims asserted in the Harris- Federal complaint are
virtually identical to the claims asserted in the Quigley complaint and in the
Counterclaim asserted by the Company in the Quigley action.
On May 4, 1998, all defendants filed a motion to dismiss or, in the
alternative, a motion to stay the 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."
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 Harris-Federal complaint alleges that various individual defendants acted in
contravention of ITB's by-laws and their fiduciary duties by (i) causing the
Company to undertake various actions, including the issuance of a significant
amount of the Company's common stock, in violation of the Supermajority By-law;
(ii) usurping certain corporate opportunities allegedly belonging to ITB; and
(iii) causing the Company to fail to file current, audited financial statements.
On May 4, 1998, all defendants filed a motion to dismiss or stay the
Harris-Federal action, pending resolution of the Quigley action. On May 4, 1998,
the plaintiff filed an amended complaint to, among other things, add Howard J.
Kaufman, a stockholder of the Company, as an additional plaintiff.
11
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
As described more fully below, pursuant to the New Jersey Memorandum and
the satisfaction of certain conditions set forth therein, the Harris-Federal
action is to be fully and finally dismissed with prejudice, and the parties are
to provide mutual releases of all claims related to the action. See "New Jersey
Settlement."
Harris v. DeSantis, et al.
A second 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" and,
collectively with the Harris-Federal action, the "New Jersey Actions"),
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 complaint, ITB
and the defendants in the New Jersey Actions entered into a memorandum of
understanding dated August 18, 1998 (the "New Jersey Memorandum") pursuant to
which upon satisfaction of multiple conditions (including the parties' approval
of definitive settlement documents, notice of the settlement to ITB's past and
current stockholders, and the approval of the New Jersey Superior Court and the
New Jersey District Court), the New Jersey Actions are to be fully and finally
dismissed with prejudice, and ITB and all defendants are to receive a release
from all holders of ITB common and preferred stock of any claims arising out of
the facts and transactions set forth in the complaints in the New Jersey Actions
(the "Proposed New Jersey Settlement"). The New Jersey Memorandum provides that
the Proposed New Jersey Settlement would be submitted for approval to the New
Jersey Superior Court, that a fee petition would be submitted by plaintiffs'
attorneys in the New Jersey Actions for approval by the New Jersey District
Court, and that the Harris-Federal action would be dismissed on the grounds that
the plaintiffs' claims are barred and released as a result of the settlement and
dismissal of the Quigley Action by the Delaware Court of Chancery on October 6,
1998.
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 New
Jersey District Court, the Company will pay, on behalf and for the benefit of
the individual defendants in the New Jersey Actions, the aggregate sum of
$175,000 for plaintiffs' counsel fees and expenses in the New Jersey Actions.
Any incentive award to plaintiffs Harris and Kaufman would be paid out of this
$175,000 sum. Pursuant to the Proposed New Jersey Settlement, following the
implementation of the Delaware Settlement, the Board will restructure its Audit
Committee of the Company so as to facilitate the procurement and timely filing
of audited financial statements in the future. Further, the ITB Board will
establish a Relisting Committee for the purpose of attempting to secure the
relisting of the Company's common stock on a public market.
Pursuant to the Proposed New Jersey Settlement, the plaintiffs agreed not
to file objections to the Delaware Settlement. In addition, pursuant to the
Proposed 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 final order is entered to dismiss the
Harris-State action.
On June 17, 1999, the New Jersey Superior Court acted unilaterally to
dismiss the complaint in the Harris-State action filed under docket number
Cam-L-5534-98. On July 30, 1999, the plaintiffs in the
12
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
Harris-State action filed in the New Jersey Superior Court a second complaint,
identical to the original action and naming as defendants the same parties as
the original complaint in the Harris-State action, under docket number
Cam-L-5620-99 (the "Second Harris-State Complaint"). Subsequent to the filing of
the Second Harris-State Complaint, the terms of the Proposed New Jersey
Settlement were amended to expressly include the claims asserted by plaintiffs
in the Second Harris-State Complaint. Beginning in October 1999, plaintiffs in
the Harris-State Action began serving process of the Second Harris-State
Complaint on certain of the defendants.
The parties in the New Jersey Actions have resolved nearly all issues
necessary to execute the definitive settlement stipulation required to solicit
the requisite approval of the Proposed New Jersey Settlement by the New Jersey
Superior Court and the requisite approval by the New Jersey District Court of
the fee petition by plaintiffs' attorneys. Because of ITB's distressed financial
condition, the Company cannot agree to pay any amount approved by the New Jersey
District Court pursuant to the contemplated fee petition unless and until the
carrier of the Company's directors and officers liability insurance policy (the
"D&O Carrier") agrees to cover entirely the fee award and settlement
implementation costs. The Company is continuing to negotiate such issues with
the D&O Carrier.
On December 3, 1999, plaintiffs in the Harris-Federal action filed with the
New Jersey District Court a motion for an order enforcing the Proposed New
Jersey Settlement. On December 3, 1999, the New Jersey District Court entered an
order dismissing the Harris-Federal action without costs and without prejudice
to the plaintiffs' right to reopen the action within 60 days if the Proposed New
Jersey Settlement is not consummated. In light of the entry of this order, on
December 7, 1999, the New Jersey District Court dismissed as moot plaintiffs'
motion for an order enforcing the Proposed New Jersey Settlement. On January 6,
2000, plaintiffs in the Harris-Federal action moved to vacate the New Jersey
District Court's dismissal order and to pursue the original motion to enforce
the Proposed New Jersey Settlement.
In January 2000, the plaintiffs in the Harris-State action filed Requests
to Enter Default against those defendants who had not answered or otherwise
responded to the Second Harris-State Complaint. Counsel for the defendants in
the Harris-State action are currently engaged in negotiations with counsel for
the plaintiffs in an effort to reach an agreement that plaintiffs will take no
further action in prosecution of the Harris-State action while the parties are
finalizing the Proposed New Jersey Settlement.
ITB is hopeful that the Company and the D&O Carrier will reach an agreement
in the near future to allow the parties to the New Jersey Actions to proceed
with the Proposed New Jersey Settlement. There is no assurance that any such
agreement will be reached or that the Proposed New Jersey Settlement will be
approved by the New Jersey Superior Court and the contemplated fee petition will
be approved by the New Jersey District Court. No prediction can be made at this
time as to the outcome of the New Jersey Actions.
Other Litigation
The Company is a defendant in two wrongful death actions arising out of
motor vehicle/pedestrian accidents at Freehold Raceway. The cases are in the
initial stages of discovery. The Company believes that it may have adequate
insurance coverage for the claims, however, because of the uncertainties, the
Company is unable to determine at this time the potential liability, if any. Any
claim for punitive damages would not be covered by insurance.
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,
13
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
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.
For additional information regarding legal proceedings see Footnote13 in
the consolidated financial statements included in the Company's Form 10-K for
the fiscal year ended June 30, 1999.
(9) DEFERRED FINANCING COSTS
Deferred financing costs at March 31, 1999 include those amounts associated
with its May 23, 1997 financing agreement with Credit Suisse. These costs of
$6,238,731 were being expensed over the original two year life of the loan.
Amortization expense for the three and nine months ended March 31, 1999 were
$1,044,839 and $2,574,441, respectively.
(10) STOCK OPTIONS AND WARRANTS
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
At March 31, 2000, total employee options outstanding were 1,055,000 and
total non-employee options outstanding were 300,000.
(B) WARRANTS
At March 31, 2000, total warrants outstanding were 2,604,000 and have been
accounted for as financing costs and costs associated with the acquisition of
the El Rancho property. The fair value of the warrants issued in connection with
the acquisition of the El Rancho property had been capitalized and were to be
amortized when the facility became operational; however, the Company has
determined to dispose of the El Rancho Property.
(11) RELATED PARTY TRANSACTIONS
Kenneth Scholl, a director of the Company until July 23, 1998, provides
consulting services to LVEN and certain of its subsidiaries through the Stanford
Company of which he is the president. Until December 31, 1997, LVEN paid
Stanford Company $10,000 per month for consulting services, including Mr.
Scholl's services as project manager for the El Rancho Property. LVEN was
reimbursed by the Company for the payments to Stanford Company. Effective
January 1, 1998, the Company began paying Mr. Scholl $10,000 per month for
ongoing consulting services as project manager for the El Rancho Property.
During the nine months ended March 31, 2000 and 1999, the Company paid Mr.
Scholl $90,000 for these services. Additionally, Mr. Scholl was paid director
fees of $10,000 in Fiscal 1998. Mr. Scholl was elected president and director of
Casino-Co in March 1996, he resigned as a board member on March 14, 1997 and
resigned as president on May 19, 1997. Mr. Scholl also held the position of
Secretary and resigned the position on March 1, 1998.
For additional information regarding related party transactions see
Footnote18 in the consolidated financial statements included in the Company's
Form 10-K for the fiscal year ended June 30, 1999.
(12) 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.
14
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL
(Unaudited)
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. The stock is listed for quotation on the
NQB Pink Sheets.
15
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's working capital, as of March 31, 2000, was a deficit of
($38,942,557) which represents an increase in the deficit of approximately
$11,526,754 from the March 31, 1999 working capital deficit of ($27,416,103).
The increase in the deficit was primarily caused by: (i) a decrease in cash of
$2,066,576 and a decrease in Reserve Escrow Deposits of $1,149,456 which
together were used primarily to fund the Company's corporate operating costs;
(ii) a $854,152 decrease in net assets of Discontinued Racetrack Operations
primarily the result of cash used by the Company to fund corporate activities:
(iii) the increase in the Credit Suisse debt associated with the accrued
interest in the amount of $1,762,891 being added to the principal balance of the
note on November 17, 1999 and an additional $840,298 in accrued interest and
fees being added on January 28, 2000; (iv) the increase of approximately
$1,000,000 in accounts payable and accrued expenses primarily associated with
the Company delaying payments due until the scheduled sale of the El Rancho and
Garden State Park properties; and (v) a non-refundable deposit of $500,000 on
the sale of the El Rancho property classified as deferred income at March 31,
2000.
On May 23, 1997, the Company obtained a credit facility from Credit Suisse.
This two-year $55 million facility was secured by a pledge of certain of the
personal and real property of the Company and its subsidiaries. Proceeds of this
facility were used to repay in full the Company's $30 million existing credit
facility and were used to provide funds for working capital and other general
corporate purposes, including, but not limited to, preliminary development of
the El Rancho property. Interest under the Credit Suisse Credit Facility is
payable monthly in arrears at 7% over the LIBOR rate. Of the remaining facility
borrowings, approximately $16.8 million was placed in escrow accounts (
including $10 million in an interest reserve account). Financing and closing
fees of $4.3 million were paid and $3.9 million was used by the Company for
general corporate purposes and repayment of certain financial obligations. On
January 28, 1999, the credit facility was reduced to $30.5 million in connection
with the sale of certain assets of Freehold Raceway and the sale of a ten-acre
parcel land at the Garden State Park facility. At June 30, 1999, the interest
rate on the Credit Suisse Credit Facility was 12.24%. On January 21, 2000 after
obtaining the written consent of the holders of a majority of the outstanding
shares of stock of the Company entitled to vote thereon, the Company entered
into a restructuring agreement (the "Restructure Agreement") with Credit Suisse.
Prior to this agreement, the Company had been in a maturity default with Credit
Suisse for its loan due on June 1, 1999 (the "CSFB Loan") in the principal
amount of $30,500,000 plus unpaid interest since June 1, 1999. The Restructure
Agreement returns the loan to a good standing position and extends the maturity
date of the CSFB Loan to June 30, 2000. As part of the Restructure Agreement,
the Company agreed that as of January 21, 2000, the restructured principal
balance due on the CSFB Loan was $33,103,189, which consisted of: (i) the
principal amount of $30,500,000 remaining on the CSFB Loan; (ii) accrued
interest advanced by Credit Suisse from June 30, 1999 to January 21, 2000 in the
amount of $2,523,189; and (iii) an advance of a portion of Credit Suisse's legal
fees incurred in connection with the Restructure Agreement in the amount of
$80,000. Credit Suisse has agreed, pursuant to the Restructure Agreement, to
advance the monthly interest payments due by the Company under the CSFB Loan
until the maturity date of June 30, 2000. Such interest amounts shall, to the
extent not paid when due by the Company, become part of the outstanding
principal balance of the CSFB Loan on the date such interest becomes due.
Commencing April 16, 2000 and until 30 days following the closing of the sale of
the El Rancho property, interest accruing shall be paid by Turnberry/Las Vegas
Boulevard LLC ("Turnberry"), the purchaser of the El Rancho property. (See Notes
6-A and 13-A)
16
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000
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).
The net loss for the nine months ended March 31, 2000 was ($6,113,140).
Cash flows used in operating activities amounted to $5,224,928.
Cash provided by investing activities was $367,542 during the nine months
ended March 31, 2000, primarily the result of the non-refundable deposit toward
the sale of the El Rancho property and cash used by discontinued operations.
Cash provided by financing activities was $2,889,022 during the nine months
ended March 31, 2000, consisting principally of decreases in amounts due from
Discontinued Operations.
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.("Greenwood"),
which owns Philadelphia Park racetrack, the Turf Clubs and Phonebet (the
"Greenwood Transaction"). The purchase price was $46 million ($1 million of
which will be held in escrow to cover certain indemnification and other
obligations of the Company), with an additional $10 million in contingent
promissory notes (the "Contingent Notes") which become effective upon, among
other things, the New Jersey Legislature's approval of off-track betting
facilities or telephone account pari-mutuel wagering on horse racing. Further
adjustments could be made to increase the purchase price if certain additional
regulatory gaming changes are approved by the New Jersey Legislature in the
future. The Greenwood Transaction was subsequently amended to include 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 as a 50% joint venture between Greenwood and Penn
National ( "Pennwood"). Greenwood and Pennwood have guaranteed the performance
by the purchaser of all obligations under 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. In addition, Credit Suisse also released to the Company
approximately $4.475 million from its escrow reserves of which $1.475 million
was used for working capital purposes and $3 million was used to reduce debt and
pay fees.
In connection with the Restructure Agreement, the Chapter 11 Bankruptcy
Trustee (the "Trustee") for the estate of Robert E. Brennan, to whom the Company
and its subsidiaries Garden State Race Track, Inc. and Orion Casino Corporation
are indebted to in the remaining principal amount of $3,363,032, as evidenced by
a note dated January 28, 1999 (the "Trustee Note"), entered into an agreement
with the Company wherein: (i) the amounts due under the Trustee Note are due at
the earlier of (a) June 1, 2000 or (b) the date on which the latter of the
Garden State Park or El Rancho property is sold, provided that the sale of the
latter will satisfy the remaining balance on the CSFB Loan and the Trustee Note;
(ii) all interest due under the Trustee Note will be accrued and deferred until
the maturity date of the Note; and (iii) the Company shall reimburse the Trustee
for legal and accounting fees up to $20,000, which amount will be advanced by
the Trustee and added to the outstanding principal balance of the Trustee Note.
17
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000
The Trustee has asserted certain claims challenging the ownership of
approximately 2,300,000 shares of the Company's Common Stock (the "Shares") held
by certain individuals. In order to preserve the Company's net operating loss
carryforwards from being lost due to the shares being transferred, the Company
and the Trustee have entered into an agreement whereby the Trustee has agreed to
accept a letter of credit for $1,150,000, which will be secured by an amount of
$1,150,000 held in escrow, for his interest in the Shares in the event that he
is awarded a judgement granting him an ownership interest in the Shares.
Pursuant to the Restructure Agreement, Garden State Race Track, Inc.
transferred title to the Garden State Race Track to GSRT, LLC , a wholly owned
subsidiary of the Company ("GSRT"), a Delaware limited liability company in
which Garden State Race Track, Inc. is the sole member the result of which
effects no change in real ownership. Pursuant to the limited liability company
agreement of GSRT entered into in connection with the Restructure Agreement,
Garden State Race Track, Inc. may cause GSRT to enter into an arm's-length sale
or joint venture of the Garden State Property under certain enumerated
circumstances and conditions, including that the purchase price for such sale or
joint venture be at least equal to fifty-percent of the combined outstanding
principal balance of the CSFB Loan and the Trustee Note, which amount must be
paid to Credit Suisse, and the contract for such sale or joint venture be
entered into on or prior to January 25, 2000 (the "GSRT Option").
On January 25, 2000, the Company and Garden State Race Track, Inc., the
owner of Garden State Park, entered into an agreement for the sale of all of the
Garden State Park property, excluding a ten-acre parcel of land previously
committed to GS Park Racing, L.P., to Turnberry/Cherry Hill, LLC. The terms of
the sale meet all the conditions required by Credit Suisse to be a valid GSRT
Option, according to a letter received from Credit Suisse.
On January 25, 2000, the Company entered into an agreement of sale with
Turnberry/Cherry Hill LLC, for the sale of the Garden State Park real estate.
While the Company received from escrow a $500,000 deposit made by the buyer
under the terms of the sale, possible changes to the agreement are currently
being negotiated by the parties. Upon execution of a modification of the
definitive agreement the Company expects to announce the final terms of the
transaction.
The sale of the Garden State Race Track property to Turnberry/Cherry Hill,
LLC or any other buyer cannot be assured at this time and if for any reason the
potential buyer of the property is not able to close this transaction by June
30, 2000, the property may be marketed and possibly sold by the Company's
lender, Credit Suisse First Boston Mortgage, LLC.
The Restructure Agreement further provides that (i) if the proceeds from
the sale of the Garden State Park property are insufficient to pay the
outstanding amounts due to Credit Suisse under the CSFB Loan, or (ii) after the
sale or joint venture of the Garden State property, the total amount outstanding
under the CSFB Loan is equal to or greater than $5,000,000 and the Company shall
not have received a binding commitment for a loan or purchase of the El Rancho
Property, then, Orion Casino Corporation must convey the El Rancho property to a
new Delaware limited liability company ("New LLC") having substantially same
ownership structure and limited liability company agreement as GSRT. Once the El
Rancho property is conveyed to New LLC in accordance with and upon the happening
of the circumstances and conditions provided in the Restructure Agreement, Orion
Casino Corporation, as the sole member of New LLC, will have the right to cause
New LLC to sell or refinance the El Rancho property so long as the outstanding
obligations due under the CSFB Loan are paid in full by such sale or refinancing
and such sale or refinancing closes on or before June 30, 2000.
On March 1, 2000, International Thoroughbred Breeders, Inc. signed an
agreement for the sale of the
18
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000
El Rancho property in Las Vegas, Nevada to Turnberry/Las Vegas Boulevard, LLC on
basically the same terms previously reported in the Company's Form 8-k dated
January 21,2000. The purchase price is $45,000,000. The purchase price will be
paid by: (i) a $100,000 deposit into escrow at the signing of the Purchase and
Sale Agreement; (ii) a $400,000 additional deposit into escrow due on March 15,
2000, and (iii) the balance of the purchase price due at the closing, payable in
cash.
The closing, originally scheduled to occur by March 31, 2000, had been
extended to April 30, 2000 after the buyer: (i) agreed to pay the approximate
$100,000 carrying costs of the El Rancho property for the month of April 2000;
(ii) agreed to pay the interest due to Credit Suisse First Boston Mortgage
Capital, LLC on a principal amount of $20,000,000 at 12% for the month of April
2000; and (iii) released $1,600,000, which included the above $100,000 and
$400,000 deposits, as a non-refundable deposit to the Company. The closing date
was further extended to June 1, 2000 provided the buyer: (i) agreed to pay the
approximate $100,000 carrying costs of the El Rancho property for the month of
May 2000; (ii) pays the interest due to Credit Suisse First Boston Mortgage
Capital, LLC on a principal amount of $19,000,000 at 12% for the month of May
2000; (iii) pays an additional deposit of $900,000 to the Company by April 30,
2000, of which 400,000 has been received; and (iv) demonstrates it has the
financial ability to close.
The Company has separately agreed to purchase a promissory note of the
buyer in the amount of $23,000,000 which will be convertible at the Company's
option into a 33 1/3% equity interest in the buyer, depending upon certain
circumstances.
The note would accrue interest at a 22% per annum rate, which will be
adjusted from time to time since the interest actually payable will be dependent
upon, and payable solely out of the buyer's net cash flow available for
distribution to its equity owners ("Distributable Cash"). After the equity
investors in the buyer have received total distributions equal to their capital
contributions plus an agreed upon return on their invested capital, the next $23
million of Distributable Cash will be paid to the Company. The Company will
thereafter receive payments under the note equal to 33 1/3% of all Distributable
Cash until the maturity date, which occurs on the 30th anniversary of the
company's purchase of the note. The Company may convert the promissory note, at
its option, into a 33 1/3% equity interest in the buyer at any time after the
15th anniversary of the issuance of the note. If not then converted, the note
will convert into a 33 1/3% equity interest in the buyer on the day before the
30th anniversary of its issuance. (See Note 4)
The sale of the El Rancho property to Turnberry/Las Vegas Boulevard LLC or
to any other buyer cannot be assured at this time.
The Company currently estimates that the escrow funds made available on
January 21, 2000 associated with the Credit Suisse Restructure Agreement,
together with the $500,000 deposit made available March 2, 2000 and the deposits
of $2,000,000 received from the extensions of the El Rancho closing and 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 30, 2000.
The Company currently estimates that approximately $200,000 per month is needed
to cover operating expenses of International Thoroughbred Breeders and $100,000
per month is needed to cover the carrying costs of the El Rancho Property.
The Company's debt with CSFB is due on June 30, 2000. Unless the sale of
the El Rancho property and Garden State Park property is consummated prior to
that date, the Company will be in default in connection with the CSFB loan
agreement. Additionally the cash proceeds from the sales must be in an amount
sufficient to satisfy the loan due on the trustee note together with accrued
interest. The total amount due on June 30, 2000
19
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000
to satisfy the CSFB loan together with accrued interest and fees and the trustee
note together with accrued interest is approximately $39,500,000. The proceeds
from the sale of the El Rancho and Garden State Park properties are expected to
be sufficient to meet this obligation.
The Company's Board is continuing to consider all of the Company's
strategic options to maximize stockholder value and alternatives for the
Company's future.
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's debt with its major lender is
due June 30, 2000 and has sustained a loss of approximately $6.1 million for the
nine months ended March 31, 2000, which raises 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.
Results of Operations for the Three Months Ended March 31, 2000 and 1999
On January 28, 1999, the Company completed the sale of Freehold Raceway,
the sale of a ten-acre parcel at Garden State Park, and the lease of the Garden
State Park facilities, accordingly, the operating results of the racetrack
subsidiaries have been segregated and reported as discontinued operations for
each of the periods presented.
Revenue from continuing operations for the three months ended March 31,
2000 decreased $62,781 primarily as a result of a decrease interest income
partially offset by a one month increase in rental income generated by the
Garden State Park lease in Fiscal 2000 as compared to Fiscal 1999. Expenses from
continuing operations for the three month periods decreased $3,260,253 or 59%
for the quarter of Fiscal 2000 as compared to the same quarter in Fiscal 1999.
This decrease in expenses was primarily the result of a decrease in: (i) general
and administrative expenses of $88,585 or 10% from $895,880 in Fiscal 1999 to
$807,295 in Fiscal 2000; (ii) a decrease in interest and financing expense of
$2,131,090 primarily as a result reduced debt and a finance cost of $1,242,883
associated with the Delaware Settlement in the third quarter of fiscal 1999; and
(iii) the costs associated with the debt no longer being amortized.
The decrease in general and administrative expenses of $88,585 was
principally attributable to: (i) a decrease in officer and corporate
administrative salaries and benefits of approximately $263,172 associated with
the termination of certain agreements upon consummation of the Delaware
Settlement; (ii) a decrease in consulting fees and director fees of
approximately $30,000 associated with the termination of certain agreements upon
consummation of the Delaware Settlement; (iii) a decrease of approximately
$30,000 in travel expenses and the administrative costs of operating an office
in New Mexico; partially offset by (iv) corporate expenses of approximately
$175,000 associated with discontinuing the racetrack subsidiaries; and (v) an
increase in legal fees of approximately $45,000 during the quarter in connection
with various corporate activies.
During the third quarter of Fiscal 2000, the Company incurred a net loss
from continuing operations of ($2,172,216) as compared to a net loss from
continuing operations of ($5,369,687) for the comparable quarter in Fiscal 1999.
Income from discontinued racetrack operations was $247,640 for the third quarter
of Fiscal 1999. Also during the third quarter of Fiscal 1999, the Company
recognized a net gain of $3,621,507, following the write down to fair value of
the remaining assets of Garden State Park, on the sale of Freehold Raceway and
the sale of a ten-acre parcel at the Garden State Park facility. The increase in
net loss of $671,676
20
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000
for the three month period was the result of those differences described above.
Results of Operations for the Nine Months Ended March 31, 2000 and 1999
As a result of the sale and lease of racetrack assets described above, 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.
Revenue from continuing operations for the nine months ended March 31, 2000
decreased $92,420 from $357,323 in Fiscal 1999 to $264,903 in Fiscal 2000
primarily as a result of decreased interest income partially offset by rental
income generated by the Garden State Park lease. Expenses from continuing
operations decreased $7,544,316 or 54%, from $13,922,359 in Fiscal 1999 to
$6,378,043 in Fiscal 2000. This decrease in expenses was primarily the result
of: (i) a decrease in general and administrative expenses of $1,499,170 or 41%
from $3,631,202 in Fiscal 1999 to $2,132,032 in Fiscal 2000; (ii) a decrease in
interest and financing expense of $3,508,637 primarily as a result reduced debt
and a finance cost of $$1,242,883 associated with the Delaware Settlement in the
third quarter of fiscal 1999; and (iii) the costs associated with the debt no
longer being amortized.
The decrease of $1,499,170 in general and administrative expenses was
principally attributable to: (i) a decrease of approximately $441,000 in legal
expenses associated with the various director and stockholder lawsuits in the
prior fiscal year partially offset by an increase in legal fees of approximately
$136,000 during the second and third quarters in connection with various
corporate activies ; (ii) a decrease in officer and corporate administrative
salaries and benefits of approximately $573,000 primarily associated with the
termination of certain agreements upon consummation of the Delaware Settlement;
(iii) a decrease in consulting and director fees of $222,000 associated with the
termination of certain agreements upon consummation of the Delaware Settlement;
(iv) a decrease of approximately $150,000 in travel expenses and the
administrative costs of operating an office in New Mexico; (v) a decrease in
professional fees of $141,320 associated with the change of accountants for
Fiscal 1999 and 2000; (vi) a costs of $60,000 in penalties assessed by the New
Jersey Racing Commission associated with the Casino-Co Stock issuance in Fiscal
1999; and (vii) a decrease in political contributions of $50,000 associated with
New Jersey legislation affecting racetrack operations.
During the nine months ended March 31, 2000, the Company incurred a net
loss from continuing operations of ($6,113,140) as compared to a net loss from
continuing operations of ($13,565,036) for the comparable period in Fiscal 1999.
Income from discontinued racetrack operations was $4,504,184 for the nine months
ended March 31, 1999. Also during the third quarter of Fiscal 1999, the Company
recognized a net gain of $3,621,507, following the write down to fair value of
the remaining assets of Garden State Park, on the sale of Freehold Raceway and
the sale of a ten-acre parcel at the Garden State Park facility. The increase in
net loss of $673,795 for the nine month period was the result of those
differences described above.
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 was the result of computer programs being written using
two digits rather than four to define the applicable year, which may have
resulted in systems failures and disruptions to operations at
21
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000
January 1, 2000. Management determined where appropriate action was necessary
and at a cost of approximately $5,000 brought the Company's accounting and
operational systems into year 2000 compliance. The Company has not experienced
any problems with its vendors associated with a Year 2000 issue.
22
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended March 31, 1999, the registrant filed the following
Current Reports on Form 8-K:
Date Subject Matter
- -------------------- ---------------------------------------------------
January 28, 1999 Sale and lease of racetrack assets
23
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
May 18, 2000 /s/Robert J. Quigley
Robert J. Quigley, President, and
Chairman of the Board
May 18, 2000 /s/William H. Warner
William H. Warner
Treasurer
(Principal Financial
and Accounting Officer)
24
<PAGE>
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