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 September 30, 1999
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------------------------------
Commission file number 0-9624
----------------------
International Thoroughbred Breeders, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2332039
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 1232, Cherry Hill, New Jersey 08034
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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 Three Months ended September 30, 1999
(Unaudited)
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND JUNE 30, 1999
ASSETS
September 30,
1999 June 30,
(UNAUDITED) 1999
---------------- ----------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 291,887 $ 1,358,200
Reserve Escrow Deposits 407,407 182,154
Accounts Receivable 46,885 234,774
Prepaid Expenses 244,421 349,182
Other Current Assets 53,174 53,771
Net Assets of Discontinued
Operations - Current 522,747 494,699
---------------- ----------------
TOTAL CURRENT ASSETS 1,566,521 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 684,638 683,428
---------------- ----------------
898,735 897,525
LESS: Accumulated Depreciation
and Amortization 344,321 329,667
---------------- ----------------
TOTAL LAND, BUILDINGS
AND EQUIPMENT, NET 554,414 567,858
---------------- ----------------
OTHER ASSETS:
Note Receivable, Deposits
and Other Assets 1,003,172 1,198,172
---------------- ----------------
TOTAL OTHER ASSETS 1,003,172 1,198,172
---------------- ----------------
TOTAL ASSETS $ 75,273,862 $ 76,588,565
================ ================
See Notes to Consolidated Financial Statements.
1
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND JUNE 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
1999 June 30,
(UNAUDITED) 1999
---------------- ----------------
CURRENT LIABILITIES:
Accounts Payable $ 53,845 $ 267,941
Accrued Expenses 2,270,478 1,176,796
Current Maturities
of Long-Term Debt 34,021,148 34,297,145
---------------- ----------------
TOTAL CURRENT LIABILITIES 36,345,471 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 36,248,175 36,248,175
Common Stock, $2.00 Par Value,
Authorized 25,000,000 Shares,
Issued, 11,884,252 and
11,884,249 Shares,
and Outstanding, 8,980,236 and
8,980,233 Shares Respectively 23,768,505 23,768,497
Capital in Excess of Par 26,144,774 26,144,782
(Deficit) (subsequent to
June 30, 1993,
date of quasi-reorganization) (39,942,606) (38,023,064)
---------------- ----------------
TOTAL 46,218,848 48,138,390
LESS:
Treasury Stock, 2,904,016
Shares, at Cost (7,260,040) (7,260,040)
Deferred Compensation, Net (30,417) (31,667)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 38,928,391 40,846,683
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 75,273,862 $ 76,588,565
================ ================
See Notes to Consolidated Financial Statements.
2
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<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 0 0 4 8
Amortization of Deferred
Compensation Costs --- --- --- ---
Net (Loss) for the Three Months
Ended September 30, 1999 --- --- --- ---
--------- ---------- ------------ ----------
BALANCE - SEPTEMBER 30, 1999 362,482 $ 36,248,175 11,884,253 $ 23,768,505
========= ========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<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 (8) --- --- --- ---
Amortization of Deferred
Compensation Costs --- --- --- 1,250 1,250
Net (Loss) for the Three Months
Ended September 30, 1999 --- (1,919,542) --- --- (1,919,542)
----------- ------------ ------------ --------- --------------
BALANCE - SEPTEMBER 30, 1999 $ 26,144,774 $ (39,942,606) $ (7,260,040) $ (30,417) $ 38,928,391
=========== ============ ============ ========= ==============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Three Months Ended
September 30,
--------------------------
1999 1998
------------- -----------
REVENUE:
Rental Income $ 77,749 $ 0
Interest Income 17,242 132,461
------------- ------------
TOTAL REVENUES 94,991 132,461
------------- ------------
EXPENSES:
General & Administrative Expenses 482,205 1,312,576
Interest and Financing Expenses 1,155,679 1,782,270
Amortization of Financing Costs 0 763,789
El Rancho Property Carrying Costs 376,649 415,982
------------- -----------
TOTAL EXPENSES 2,014,533 4,274,617
------------- -----------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE DISCONTINUED OPERATIONS (1,919,542) (4,142,156)
INCOME FROM DISCONTINUED OPERATIONS:
Income from operations of
discontinued racetrack
operations (less applicable
state income taxes
of $62,000 for the three months
ended September 30, 1998) 0 2,142,704
------------- ------------
NET (LOSS) $ (1,919,542) $ (1,999,452)
============= ============
BASIC PER SHARE DATA:
(LOSS) BEFORE DISCONTINUED OPERATIONS $ (0.21) $ (0.30)
INCOME FROM DISCONTINUED OPERATIONS 0.00 0.15
------------- ------------
NET (LOSS) $ (0.21) $ (0.15)
============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,980,235 13,978,100
============= ============
See Notes to Consolidated Financial Statements.
4
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Three Months Ended
September 30,
-----------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(LOSS) FROM CONTINUING OPERATIONS $ (1,919,542) $ (4,142,156)
------------- -------------
Adjustments to reconcile (loss) to net
cash (used in) operating activities:
Depreciation and Amortization 15,904 781,018
Changes in Operating Assets and Liabilities -
Decrease (Increase) in
Accounts Receivable 187,889 (153)
Decrease in Other Assets 598 64,024
Decrease in Prepaid Expenses 104,761 88,505
Increase (Decrease) in Accounts
Payable and Accrued Expenses 879,587 (97,564)
------------- -------------
CASH (USED IN) CONTINUING OPERATING
ACTIVITIES (730,803) (3,306,326)
CASH (USED IN) PROVIDED BY DISCONTINUED
OPERATING ACTIVITIES (25,935) 2,824,044
------------- -------------
NET CASH (USED IN) OPERATING ACTIVITIES (756,738) (482,282)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (1,210) (741)
------------- -------------
CASH (USED IN) CONTINUING INVESTING
ACTIVITIES (1,210) (741)
CASH (USED IN) DISCONTINUED INVESTING
ACTIVITIES (130,000) (18,762)
------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES (131,210) (19,503)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Escrow Deposits Utilized 94,747 1,987,585
Deposit to Escrow Funds (320,000) 0
(Increase) Decrease in Balances Due
From Discontinued Subsidiaries (28,051) 1,779,273
Principal Payments on Short Term Notes (80,997) (69,475)
------------- -------------
CASH (USED IN) PROVIDED BY CONTINUING
FINANCING ACTIVITIES (334,301) 3,697,383
CASH (USED IN) DISCONTINUED
FINANCING ACTIVITIES 286,652 (1,956,840)
------------- -------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (47,649) 1,740,543
------------- -------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (935,597) 1,238,758
LESS CASH AND CASH EQUIVALENTS
AT END OF PERIOD FROM
DISCONTINUED OPERATIONS (130,716) (848,442)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD FROM
CONTINUING OPERATIONS 1,358,200 213,795
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 291,887 $ 604,111
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 0 $ 1,824,856
Income Taxes $ 0 $ 0
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the three months ended September 30, 1998, the Company recorded an
unrealized gain of $10,840 on trading securities.
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.
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 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 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 April 30,
2000, or the further extended date of 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 $1.9 million for the three months ended September 30, 1999. 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>
The net assets of the operations to be disposed of included in the accompanying
consolidated balance sheets as of September 30, 1999 consist of the following:
Classified As:
Current Assets $ 2,136,347
Current Liabilities 1,613,600
-----------------------
Net Assets of Discontinued
Operations - Current 522,747
Property Assets of Garden State Park 30,000,000
-----------------------
Net Assets of Discontinued Operations $ 30,522,747
=======================
(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 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 13-C)
7
<PAGE>
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
At September 30, 1999, $407,407 was held in various reserve cash escrow
deposit accounts that were established in connection with the Company's two-year
$55 million credit facility with Credit Suisse. The terms of such credit
facility provided that such reserve accounts be held by LaSalle National Bank.
In connection with the January 28, 1999 sale of Freehold Raceway, the sale of a
ten-acre parcel at Garden State Park and the lease of the Garden State Park
facility, Credit Suisse released to the Company approximately $4,475,000 from
its escrow reserves to pay down debt and for working capital purposes. On August
2, 1999, the Company made a payment of $320,000 to Credit Suisse for interest
due which was credited to the escrow accounts. 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 will be used
by the Company for working capital purposes. (See Note 13-B)
(6) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
September 30, 1999
-----------------------
Interest % Per Annum Current Long-Term
-------------------- ------------- ---------
International Thoroughbred
Breeders Inc.:
Credit Suisse First Boston (A) LIBOR Rate plus 7%
(9/30/99 rate 12.37%) $ 30,500,000 $ -0-
REB Bankruptcy Trustee (B) Prime Rate
(9/30/99 rate 8.25%) 3,361,940 -0-
Other Various 159,208 -0-
Garden State Park:
Service America Corporation (C) 6% 400,000 -0-
Other (D) Various 303,560 -0-
---------- ----
Totals $ 34,724,708 $ -0-
Less Amounts Reclassified to:
Net Assets of Discontinued
Operations - Current 703,560 -0-
Totals $ 34,021,148 $ -0-
========== ====
The effective LIBOR Rate and the Prime Rate at September 30, 1999 was 5.37% and
8.25%, 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
8
<PAGE>
$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 evidenced by a convertible promissory note (the
"Credit Suisse Note").
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. 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.
9
<PAGE>
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 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 month period ending
September 30, 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.
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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 1, 2000 to satisfy both the CSFB loan and
the Trustee Note together with accrued interest on each 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 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.
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
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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 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
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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, 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 see Footnote 13 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 September 30, 1998 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 months ended September 30, 1998 was
$763,789.
(10) STOCK OPTIONS AND WARRANTS
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
At September 30, 1999, total employee options outstanding were 1,255,000
and total non-employee options outstanding were 300,000.
(B) WARRANTS
At September 30, 1999, 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.
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(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 three months ended September 30, 1999 and 1998, the Company paid Mr.
Scholl $30,000 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
Footnote 18 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. 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.
(13) SUBSEQUENT EVENTS
(A) Effective December 3, 1999, the Board of Directors accepted the
resignation of Christopher C. Castens, the Company's Secretary and General
Counsel.
(B) RESTRUCTURING AGREEMENT WITH CREDIT SUISSE
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 its primary lender, Credit Suisse First Boston Mortgage Capital
LLC, ("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 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,
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2000. Such amounts shall, to the extent not paid when due by the Company, became
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.
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.
Pursuant to the Restructure Agreement, the Company paid at closing: (i)
legal fees in the amount of $146,000 which were incurred by Credit Suisse in
connection with the Restructure Agreement; (ii) real estate transfer taxes in
the amount of $56,275 on behalf of Garden State Race Track, Inc. in connection
with the transfer discussed below; and (iii) loan servicing fees in the amount
of $7,174. Credit Suisse released to the Company $167,476 of funds held in
various escrow accounts in connection with the CSFB Loan which will be used by
the Company for working capital purposes.
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 Turnbury/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 (see Agreement of Sale
of Garden State Race Track). 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
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Loan are paid in full by such sale or refinancing and such sale or refinancing
closes on or before June 30, 2000. (See Notes 5 and 6-A)
(C) AGREEMENT OF SALE OF EL RANCHO
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) agrees 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 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.
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 during a six month
period beginning at 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 at 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.
(D) AGREEMENT OF SALE OF GARDEN STATE RACE TRACK
On January 25, 2000, the Company entered into an agreement of sale with
Turnbury/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 Turnbury/Cherry Hill,
LLC or any other buyer
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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.
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INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's working capital, as of September 30, 1999, was a deficit of
($34,778,950) which represents a decrease in the deficit of approximately
$2,970,680 from the September 30, 1998 working capital deficit of ($37,749,630).
The decrease in the deficit was primarily caused by: (i) the retirement of $24.5
million of the debt to the Company's primary lender, Credit Suisse First Boston
Mortgage Capital LLC, ("Credit Suisse"); (ii) the decrease in accrued expenses
primarily associated with the Delaware Settlement; partially offset by (iii) the
sale of the Freehold net operating assets which were classified as current
assets in the prior fiscal year; (iv) the decrease in reserve escrow deposits
primarily associated with the interest on debt; and (v) the promissory note in
the amount of $3,358,032 associated with the Company's purchase of its common
stock from NPD.
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 September 30, 1999, the
interest rate on the Credit Suisse Credit Facility was 12.37%. 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 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 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-B)
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
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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 three months ended September 30, 1999 was
($1,919,542). Cash flows used in operating activities amounted to $756,738.
Cash used in investing activities was $131,210 during the three months
ended September 30, 1999, primarily the result of cash used by discontinued
operations.
Cash used in financing activities was $47,649 during the three months ended
September 30, 1999, consisting principally of amounts drawn from the Credit
Suisse interest escrow account and cash provided by 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.
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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.
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 closing is scheduled to be held on or before June 30, 2000.
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 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
estimated to be approximately $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
20
<PAGE>
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 deposit
of $1,600,000 received from the extension 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'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.
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 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 the Company has sustained a loss of approximately $1.9
million for the three months ended September 30, 1999, 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 September 30, 1999 and 1998
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 period presented.
Revenue from continuing operations for the three months ended September 30,
1999 decreased $37,470 from $132,461 in Fiscal 1999 to $94,991 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 $2,260,084 or 53%, from $4,274,617 in Fiscal 1999 to
$2,014,533 in Fiscal 2000. This decrease in expenses was primarily the result
of: (i) a decrease in general and administrative expenses of $830,371 or 63%
from $1,312,576 in Fiscal 1999 to $482,205 in Fiscal 2000; (ii) a decrease in
interest expense of $626,591 primarily as a result reduced debt; and (iii) the
costs associated with the debt no longer being amortized.
The decrease in general and administrative expenses of $830,371 was
principally attributable to: (i) a decrease in legal expenses of approximately
$442,000 primarily as the result of legal expenses associated with the various
director and stockholder lawsuits in the prior fiscal year; (ii) a decrease in
officer and corporate administrative salaries and benefits of approximately
$166,000 associated with the termination of certain agreements upon consummation
of the Delaware Settlement; (iii) a decrease in consulting fees of $78,000
associated with the termination of certain agreements upon consummation of the
Delaware Settlement; (iv) a decrease of approximately $65,000 in travel expenses
and the administrative costs of operating an office in New Mexico; and (v) a
decrease in political contributions of $50,000 associated with New Jersey
legislation affecting racetrack operations.
For the first quarter of Fiscal 2000, the Company's loss from continuing
operations was ($1,919,542) as compared to a loss from continuing operations for
the comparable period in prior fiscal year of ($4,142,156), a decrease in the
loss of $2,222,614 or 54%. Income from discontinued operations was $2,142,704
for the first quarter of Fiscal 1999. The decrease in net loss was the result of
those differences described above.
Inflation
To date, inflation has not had a material effect on the Company's
operations.
22
<PAGE>
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 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.
23
<PAGE>
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
Part II
OTHER INFORMATION
Item 6.
During the quarter ended September 30, 1999, the registrant filed the
following Current Reports on Form 8-K:
Date Subject Matter
- -------------------- ----------------------
September 28, 1999 Change of Accountants
24
<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 16, 2000 /s/Robert J. Quigley
--------------------
Robert J. Quigleys,
President and
Chairman of the Board
May 16, 2000 /s/William H. Warner
--------------------
William H. Warner
Treasurer
(Principal Financial and
Accounting Officer)
25
<PAGE>
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