SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended : January 31, 1998
{} TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-21278
LAS VEGAS ENTERTAINMENT NETWORK, INC
(Exact name of small business issuer as
specified in its Charter)
Delaware 94-3125854
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1801 Century Park East, Los Angeles, California 90067
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(310) 551-0011
--------------
(Registrant's telephone number, including area code)
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 past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.001 par value 34,898,349
- ----------------------------- ----------
Title of Class Number of Shares outstanding at
March 16, 1998
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
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<S> <C> <C>
January 31, October 31,
1998 1997
---- ----
(UNAUDITED)
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 1,125,224 $2,399,491
TRADING SECURITIES 1,133,647 1,087,890
----------- -----------
TOTAL CURRENT ASSETS 2,258,871 3,487,381
INVESTMENT IN & ADVANCES TO
INTERNATIONAL THOROUGHBRED
BREEDERS INC. - Note 2 3,604,564 3,604,564
INVESTMENT IN AND ADVANCES TO NORDIC
GAMING - Note 3 1,247,548 1,047,548
OTHER INVESTMENTS & ADVANCES 100,000 100,000
PROPERTY AND EQUIPMENT
net of accumulated depreciation
of $208,538 (1998) and
$192,509 (1997) 125,803 141,536
DEPOSITS AND OTHER 1,401,840 1,389,893
---------- ---------
$ 8,738,626 $9,770,922
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $510,372 $452,137
NOTES PAYABLE 775,248 775,753
ACCRUED INTEREST PAYABLE 173,874 154,354
ACCRUED OFFICER'S SALARY 63,041 482,885
--------- ---------
TOTAL CURRENT LIABILITIES 1,522,535 1,865,129
ACCRUED OFFICER'S BENEFITS 394,000 363,000
STOCKHOLDERS' EQUITY
PREFERRED STOCK - SERIES A,
AUTHORIZED 30,000,000
SHARES, $.001 PAR VALUE; ISSUED
AND OUTSTANDING - 1,000,000 SHARES 1,000 1,000
COMMON STOCK - AUTHORIZED 50,000,000
SHARES, $.001 PAR VALUE; ISSUED AND
OUTSTANDING - 34,898,349 SHARES 34,895 34,895
ADDITIONAL PAID-IN CAPITAL 47,445,080 47,445,080
LONG TERM INVESTMENT RESERVE (2,400,000) (2,400,000)
DEFICIT (38,258,884) (37,538,182)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 6,822,091 7,542,793
----------- ----------
$ 8,738,626 $ 9,770,922
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
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<S> <C> <C>
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
----- ----
REVENUES $ - $ 75,000
-------- ---------
COSTS AND EXPENSES
Research & Development 25,000 -
General & Administrative 749,491 667,808
-------- ---------
TOTAL COSTS AND EXPENSES 774,491 667,808
-------- ---------
LOSS BEFORE OTHER
INCOME AND (CHARGES) (774,491) (592,808)
-------- ---------
OTHER INCOME AND (CHARGES):
Interest Income 57,409 123,571
Gain on Trading Securities 25,151 -
Other Charges (9,251) (165,000)
Interest and Finance Costs (19,520) (20,988)
-------- ---------
TOTAL OTHER INCOME AND (CHARGES) 53,789 (62,417)
-------- ---------
NET LOSS $ (720,702) $(655,225)
========== =========
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 34,898,349 34,898,349
=========== ==========
LOSS PER SHARE OF COMMON STOCK $ (0.02) $ (0.02)
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 1998
<TABLE>
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Preferred Stock Common Stock
--------------- ------------ Unrealized
Additional Loss on
Number Number Paid-in Long-Term
of Shares Amount of Shares Amount Capital Investment Deficit Total
--------- ------ --------- ------ ------- ---------- ------- -----
BALANCE - NOVEMBER 1, 1997 1,000,000 $1,000 34,898,349 $34,895 $47,445,080 $(2,400,000) $(37,538,182) $7,542,793
Net Loss for the three months (720,702) (720,702)
--------- -------- ----------- ------- ---------- ---------- ----------- ---------
BALANCE - January 31, 1998 1,000,000 $ 1,000 34,898,349 $34,895 $47,445,080 ($2,400,000) $(38,258,884) $6,822,091
========= ======== ========== ======== ========== =========== ============= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS ENDED JANUARY 31,
------------------------------
1998 1997
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (720,702) $(655,225)
Gain from Marketable Securities (25,151)
Depreciation 16,030 17,221
Adjustments to reconcile net loss to net
cash used in operating activities:
Increase (Decrease) in;
Accounts Payable 58,235 36,803
Interest Payable 19,520
Accrued Officer's Salaries (419,843) (17,500)
Accrued Officer's Benefits 31,000 31,000
---------- ---------
CASH USED IN OPERATING ACTIVITIES (1,040,911) (587,701)
CASH FLOWS FROM INVESTING ACTIVITIES:
Trading Securities (20,606)
Advances to Nordic Gaming (200,000)
Investments & Advances - Other (1,199,721)
Increase in Deposits and Other (11,947)
Acquisition of Property and Equipment (298) (2,045)
Advances to NPD Inc. (2,922,933)
---------- ---------
CASH USED IN INVESTING ACTIVITIES (232,851) (4,124,699)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Notes Payable (505) (278,022)
Issuance of Options Payable 165,000
Interest Payable (6,513)
---------- ---------
CASH USED IN FINANCING ACTIVITIES (505) (119,535)
DECREASE IN CASH (1,274,267) (4,831,935)
CASH BALANCE - BEGINNING 2,399,491 10,385,292
---------- ---------
CASH BALANCE - ENDING $1,125,224 $5,553,357
=========== ===========
CASH PAID FOR
Interest $ - $ 27,500
========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Background and Business and Basis of Presentation - Las Vegas Entertainment
Network, Inc. ("LVEN" or "the Company") was incorporated in October 1990, and
is engaged in the business of acquiring, developing and operating media and
gaming facilities and businesses. The Company is also developing technology for
the delivery of television and video programming, Internet access, and
telephony to be owned by the Company's majority owned subsidiary, Electric
Media Company Inc. The Company is also investigating other potential businesses
for acquisition in the entertainment, gaming, lodging, and communications
industries.
The Company's primary project to date was the renovation, expansion and
redevelopment of the El Rancho Hotel & Casino located in Las Vegas, Nevada (the
"El Rancho" or the "Property"), which was acquired on November 24, 1993. On
January 22, 1996, the Company sold the El Rancho to International Thoroughbred
Breeders Inc. ("ITB") for $43,500,000 of cash, notes and assumption of debt. The
Company also received a continuing interest in the cumulative adjusted cash flow
(as defined) from the Property of up to $160,000,000 once the Property has been
developed and certain invested amounts have been recouped. On May 22, 1997, the
Company and ITB (i) exchanged the remaining note receivable from the sale for
2,093,068 shares of restricted common stock of ITB, and, (ii) agreed to explore
a similar exchange for the continuing cash flow interest (see Note 2).
The accompanying unaudited financial statements include the accounts of Las
Vegas Entertainment Network Inc. (LVEN), and its wholly-owned subsidiaries; Las
Vegas Communications Corp. ("LVCC"), Casino-Co Inc. and Pacific DNS, Inc; and
its majority owned subsidiary, Electric Media Company Inc. (EMC). All
significant intercompany transactions and balances have been eliminated.
Basis of Presentation - The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended January 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended October 31, 1998. The unaudited consolidated financial statements should
be read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended October 31,
1997.
2. INVESTMENT IN AND ADVANCES TO INTERNATIONAL THOROUGHBRED BREEDERS
INC.
Investments in and advances to International Thoroughbred Breeders
Inc.("ITB") consist of the following as of January 31, 1998 and
October 31, 1997;
(A) Investment in ITB Stock $5,900,000
Less Valuation to Market (2,400,000)
-----------
3,500,000
(B) Advances to ITB 104,564
-----------
$3,604,564
===========
6
<PAGE>
(A) On January 22, 1996, the Company sold the assets and liabilities of the El
Rancho Hotel and Casino (the "El Rancho" or the "Property") to
International Thoroughbred Breeders Inc. ("ITB") for consideration of
$43,500,000, consisting of (i) $12,500,000 paid at closing in cash; (ii)
the issuance of an 8% unsecured promissory note in the principal amount of
$6,500,000 the ("A-Note") which A-Note was paid in full on March 15, 1996;
(iii) the issuance of an 8% promissory note in the principal amount of
$10,500,000 (the "B-Note") and (iv) assumption of existing mortgage
indebtedness and accrued interest of $14,000,000. In addition, once the
Property was developed, the Company was entitled to share in a percentage
of the ongoing adjusted cumulative cash flow from the operation of the
Property up to $160,000,000, as provided in the ITB Sale Agreement (the "El
Rancho Cash Flow Interest").
On May 22, 1997, LVEN converted the $10.5 Million receivable evidenced
by the B-Note, together with accrued interest thereon of $1.1 Million, into
2,093,868 restricted shares of ITB common stock (the "Conversion Shares").
On May 22, 1997, LVEN and ITB also agreed, subject to approval of their
respective Boards of Directors, that as soon as practicable, ITB would
acquire LVEN's El Rancho Cash Flow Interest. In order to effect such
transaction, ITB is required to issue to LVEN that number of shares of ITB
common stock (the "Acquisition Shares") equal to (i) the fair market value
of the El Rancho Cash Flow Interest, as determined in a fairness opinion to
be obtained from a nationally recognized investment banking firm, divided
by (ii) the average bid price for ITB Stock during the 20 trading days
prior to the closing. Both the Conversion shares and the Acquisition shares
are subject to certain restrictions as described below. Management in the
future may consider distributing all or a portion of these shares to the
shareholders of the Company as a dividend. In accordance with certain
regulatory and gaming commissions, no person may hold or acquire, directly
or indirectly, beneficial ownership of more than 5% of the voting
securities of ITB without the approval of the New Jersey Racing Commission.
LVEN is in the process of obtaining this approval.
On or about October 10, 1997, certain former or current directors of
ITB filed an action against ITB and its other directors, the Company, the
Company's Chairman and certain other individuals in the Delaware Court of
Chancery, alleging, among other things, that the Company acted improperly
in connection with various transactions with ITB. The plaintiffs are
seeking, among other things, the recision of the issuance of the 2,093,068
shares of ITB common stock to LVEN on May 22, 1997, and further seek to
block the issuance to LVEN of additional shares of ITB stock in exchange
for LVEN's El Rancho Cash Flow Interest.
The Company has executed an irrevocable proxy in respect of the
Conversion Shares, and has agreed to execute such an instrument in respect
of the Acquisition Shares, in each case in favor of Mr. Nunzio P. DeSantis,
Chairman of the Board of ITB, which proxies shall be irrevocable until the
earlier of (i) the date on which all obligations of ITB owing to Credit
Suisse First Boston under a $55,000,000 loan have been repaid in full, (ii)
the date on which LVEN distributes the Acquisition Shares to its
shareholders generally, (iii) the date on which LVEN sells the Conversion
Shares or Acquisition Shares to, or LVEN is acquired by, or merged with or
into, a person or entity that is not affiliated with LVEN or Mr. Joseph A.
Corazzi, Chairman of the Board of LVEN, and (iv) the date on which Mr.
DeSantis dies or becomes mentally incompetent. LVEN and ITB have agreed to
enter into a registration rights agreement respecting the Conversion Shares
and the Acquisition Shares and providing for demand rights, unlimited
piggyback rights, and other customary provisions.
(B) Advances to ITB Inc. represent amounts currently due LVEN for monthly
property management fees, and for the reimbursement for certain operational
and financing advances made for the El Rancho Property.
7
<PAGE>
3. INVESTMENTS AND ADVANCES TO NORDIC GAMING CORPORATION
Investments and advances to Nordic Gaming Corporation consist of the
following as of;
January 31, October 31,
1998 1997
(A) Purchase Option and related Costs $ 1,000 $ 1,000
(B) Advances under line
of credit Agreement 1,246,548 1,046,548
----------- ---------
$1,247,548 $1,047,548
========== ==========
(A) During 1997, the Company was granted an option to acquire from Mr. Nunzio
P. DeSantis, the Chief Operating Officer of ITB, his eighty percent (80%)
of the voting equity of Nordic Gaming Corporation, a Canadian corporation
("Nordic"). The Company's Chairman of the Board, Mr. Joseph A. Corazzi, as
a bonus for services rendered in negotiating the potential acquisition of
the operations of Nordic, may be allocated a portion of the ownership as
agreed to by Mr. DeSantis and LVEN's Board of Directors. The remaining 20%
of Nordic is owned by Canadian citizens not affiliated with the Company. On
August 23, 1997, Nordic acquired certain real property and assets known as
the "Fort Erie Racetrack" which is situated on 143 acres in Fort Erie,
Ontario, Canada. Fort Eric Racetrack currently offers live, as well as
simulcast, thoroughbred horse racing. Additionally, the racetrack has been
notified by the Ontario Lottery Corporation that it is eligible to receive
621 video lottery terminals ("VLTs") and may receive an additional 130 VLTs
or more based upon performance. However, before any of these VLTs are
received, the racetrack and the Provincial Government of Ontario, Canada
have to come to an agreement as to the percentage of the net revenues from
the VLTs that can be kept by the race track. Furthermore, the Company and
Nordic would have to obtain the necessary gaming licenses.
The exercise price of the option, subject to further evaluation and
appraisal is payable (i) $1,000,000 cash at closing, (ii) $2,600,000
payable in equal monthly installments of $100,000 commencing on the last
date of the month on which the closing occurs, and (iii) upon exercise, the
entire issuance of the Series A Preferred Stock shall be converted into
that number of restricted shares of LVEN common stock equal to the positive
difference between (a) eighty percent (80%) of the fair value of the Fort
Erie Racetrack as set forth in a fairness opinion prepared by an investment
banking firm and (b) $3,600,000 divided by (c) the average closing price of
LVEN Common Stock for the twenty trading days proceeding the giving of the
notice of exercise. However, it is the intention of LVEN to only exercise
its option based upon its due diligence, a valuation of the ongoing
operations of the property, the valuation of potential revenue from the
addition of video lottery terminals, and the availability of financing. If
the Company does exercise its option to acquire the 80% interest in Nordic,
of which there can be no assurance, and if it decides to maintain full
racing operations, it would be responsible for maintaining operations at
the track through the end of the 1998 racing season which is currently
projected at a cash flow deficit of approximately $2,000,000 for a seventy
five day racing schedule, excluding any additional revenues that may be
generated by the introduction of the VLTs.
(B) The Company has advanced $1,246,548 to Nordic pursuant to a Line of Credit
Agreement dated as of August 27, 1997, providing for advances of up to
$1,300,000. Such advances, which are due and payable on August 27, 1998,
bear interest at a rate of 10% per annum, and are secured by a first
mortgage lien on and a security interest in the real and personal property
assets comprising the Fort Erie Racetrack. The Company has notified Nordic
that it will not fund any additional advances.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Important Factors Relating to Forward Looking Statements. - In
connection with certain forward-looking statements contained in this Form 10-QSB
and those that may be made in the future by or on behalf of the Company which
are identified as forward-looking, the Company notes that there are various
factors that could cause actual results to differ materially from those set
forth in any such forward-looking statements. The forward-looking statements
contained in this Form 10-QSB were prepared by management and are qualified by,
and subject to, significant business, economic, competitive, regulatory and
other uncertainties and contingencies, all of which are difficult or impossible
to predict and many of which are beyond the control of the Company. Accordingly,
there can be no assurance that the forward-looking statements contained in this
Form 10-QSB will be realized or the actual results will not be significantly
higher or lower. These forward looking statements have not been audited by,
examined by, compiled by or subjected to agreed-upon procedures by independent
accountants, and no third-party has independently verified or reviewed such
statements. Readers of this Form 10-QSB should consider these facts in
evaluating the information contained herein. In addition, the business and
operations of the Company are subject to substantial risks which increase the
uncertainty inherent in the forward-looking statements contained in this Form
10-QSB. The inclusion for the forward-looking statements contained in this Form
10-QSB should not be regarded as a representation by the Company or any other
person that the forward-looking statements contained in this Form 10-QSB will be
achieved. In light of the foregoing, readers of this Form 10-QSB are cautioned
not to place undue reliance on the forward-looking statements contained herein.
General
Background. Las Vegas Entertainment Network, Inc. ("LVEN" or the
"Company") was incorporated in October 1990, and is engaged in the business of
acquiring, developing and operating media and gaming facilities and businesses.
The Company is also developing technology for the delivery of television and
video programming, Internet access, and telephony to be owned by the Company's
majority owned subsidiary, Electric Media Company Inc. The Company is also
investigating other potential businesses for acquisition in the entertainment,
gaming, lodging, and communications industries.
The Company initially developed, produced and distributed television
programming featuring entertainment in Las Vegas, Nevada. The Company changed
its focus to the gaming industry in 1993 with the acquisition of the El Rancho
Hotel and Casino in Las Vegas, Nevada (the "El Rancho" or the "Property") for
$36,500,000. On January 22, 1996, the Company sold the El Rancho to
International Thoroughbred Breeders, Inc. ("ITB") for $43,500,000, consisting of
cash, notes and assumption of debt. As part of the January 22, 1996 sale
agreement with ITB (the "ITB Sales Agreement"), as subsequently amended, once
the Property is opened and invested amounts have been recouped by ITB and the
Company, which the Company can provide no assurance can be achieved, the Company
will receive as additional consideration for entering into the ITB Sale
Agreement a fifty percent (50%) interest in the adjusted cumulative cash flow
(as defined) from the operation of the Property as so developed for a period of
six (6) years following the opening of the Property and the commencement of
operations, and thereafter a twenty-five percent (25%) interest in adjusted cash
flow from operations until such time as it has received an aggregate of One
Hundred Sixty Million Dollars ($160,000,000), but only after ITB and the Company
first receive 100% of the adjusted cash flow until all invested amounts have
been recouped.
On May 22, 1997, LVEN converted the $10.5 Million receivable
remaining from the sale of the El Rancho together with accrued interest thereon
of $1.1 Million into 2,093,868 shares of restricted ITB common Stock. On May 22,
1997, LVEN and ITB also agreed, subject to approval of the Boards of Directors
of both companies, that as soon as practicable, ITB would acquire LVEN's
continuing interest in the adjusted cumulative cash flow (as defined) of the El
Rancho (the "El Rancho Cash Flow Interest"), in consideration of which ITB would
issue to LVEN that number of shares of ITB common stock equal to (i) the fair
market value of the El Rancho Cash Flow Interest, as determined in a fairness
opinion to be obtained from a nationally recognized investment banking
9
<PAGE>
firm, divided by (ii) the average bid price for ITB Stock during the 20 trading
days prior to the closing date. The shares are subject to certain restrictions
as described below (see "Casino Operations, Investment in ITB"). On or about
September 10, 1997, certain former or current directors of ITB filed an action
against ITB and its other directors, the Company, the Company's Chairman and
certain other individuals in the Delaware Court of Chancery, alleging, among
other things, that the Company acted improperly in connection with various
transactions with ITB. The plaintiffs are seeking, among other things, the
recision of the issuance of the 2,093,068 shares of ITB common stock to LVEN on
May 22, 1997, and further seek to block the issuance to LVEN of additional
shares of ITB stock in exchange for LVEN's El Rancho Cash Flow Interest (See
Legal Proceedings).
Results of Operations
- ---------------------
Three Months Year Ended January 31, 1998 Compared to Three Months Ended January
31, 1997 -
Revenues for the three months ended January 31, 1997 consisted
of $75,000 of fees earned under an interim entertainment management agreement
with ITB. There were no such fees earned during the corresponding period in
1998.
General and Administrative expenses increased $81,683 to
$749,491 during the three months ended January 31, 1998 as compared to $667,808
in the corresponding period in 1997. The majority of the increase related to an
increase in legal and accounting costs which increased $66,000 to $130,000 for
the three months ended January 31, 1998 as compared to $64,000 for the
corresponding period in 1997. The increase related mostly to costs incurred in
connection with the actions filed by certain former and current directors of ITB
(see "Litigation"). Significant general and administrative expenses are expected
to continue while the Company seeks new acquisitions and projects.
Interest Income and Expense. Interest income earned on cash
balances and marketable securities decreased $66,163 to $57,408 for the three
months ended January 31, 1998 as compared to $123,571 for the corresponding
period in 1997. The decrease is consistent with the decrease in the average cash
and marketable securities outstanding during three months ended January 31, 1998
as compared to the corresponding period in 1997. Interest Expense for the three
months ended January 31, 1998 remained consistent with the corresponding period
in 1997 as the average indebtedness outstanding during the periods remained
consistent.
Other Income and Charges for the three months ended January
31, 1997 included a charge of $165,000 relating to the issuance to Mr. Nunzio
DeSantis, now the Chief Operating Officer of ITB, of 1,500,000 options to
acquire shares of the Company's Common Stock at an exercise price of $1 per
share. These options were issued as part of consideration for providing a
$6,000,000 standby funding commitment, and in accordance with Statement of
Financial Standards No. 123, were valued per the Black Scholes Valuation Model
at $165,000 ($.11 per share). There were no such transactions for the three
months ended January 31, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company has experienced operating losses since its inception. For the
three month period ended January 31, 1998 and the fiscal year ended October 31,
1997, the Company experienced net losses of $720,702 and $6,752,405,
respectively. The Company anticipates that it will continue to experience losses
as it continues working on its development plans, including the development of a
technology for the delivery of television and video programming, Internet
access, and telephony. Even after the Company's development plans are completed,
there can be no assurance that the Company will be profitable. The Company's
cash requirements to date have been funded from proceeds received in connection
with the sale of shares of its common stock, warrants and short-term borrowings.
10
<PAGE>
Cash Requirements The Company's current monthly operating cash
requirements are approximately $250,000, composed of general and administrative
expenses, salary and consulting fees, legal and professional fees, and travel
costs. The Company is also responsible for managing and paying the operating
costs of the Property, but is reimbursed by ITB on a monthly basis for these
costs in amounts sufficient to cover the company's cash outlay, which currently
approximates $30,000 per month but may increase to a greater amount if
renovation of this property begins. In addition to the above, (i) the Company is
evaluating funding $500,000 of general start up costs for its EMC projects, and
may be required to fund additional amounts if the field tests prove successful,
and (ii) if the Company elects to exercise its option to acquire Nordic Gaming
and elects to maintain current track operations the at Fort Erie Racetrack, the
track would operate at a projected annual cash flow deficit of approximately
$2,000,000, excluding any cost saving measures that maybe implemented by the
Company. As of January 31, 1998, the Company had advanced $1,246,548 to Nordic
pursuant to a Line of Credit Agreement dated as of August 27, 1997, providing
for advances of up to $1,300,000. Such advances, which are due and payable on
August 27, 1998, bear interest at a rate of 10% per annum, are secured by a
first mortgage lien on and a security interest in the real and personal property
assets comprising the Fort Erie Racetrack. If the Company exercises its option,
the Company will use its best efforts to engage an investment banking firm to
raise up to $35 Million (which the Company can give no assurance will be
achieved) in order to develop the Fort Erie Racetrack property over a
twenty-four month period into an entertainment destination that would supplement
any introduction of video lottery or other gaming activities.
As of January 31, 1998, the Company had approximately $2,258,000 in cash
and marketable securities and believes that its current cash and receivables,
including the expected repayment of all advances made to Nordic Gaming by August
1998, will be sufficient to meet its cash requirements for the next 12 months,
as well as the repayment of existing debt of $775,000 at January 31, 1998.
However, Nordic currently does not have the current source of cash to repay its
obligations to LVEN, and any repayment of this advance would have to come from
future operations, or from additional financing Nordic may obtain. The Company
may, if necessary to meet its cash requirements over the next 12 months,
liquidate certain of its investments, including its current and potential future
holdings of shares of ITB common stock. The Company may require additional
capital to acquire the 80% interest in Nordic Gaming Corporation and to develop
the technology to be owned by the Company's majority owned subsidiary, Electric
Media Company Inc. There can be no assurance that additional financing will be
available to the Company on acceptable terms, or at all. In addition, the
Company does not currently meet the new listing standards for maintenance of the
Company's securities on Nasdaq's SmallCap Market, which new standards became
effective in February 1998. Although the Company intends to seek to comply with
the new maintenance criteria for continued listing, if the Company should be
unable to meet these criteria, it is possible that its securities could be
de-listed from the Nasdaq SmallCap Market, which might result in the Company
having difficulty in placing its securities with prospective investors.
Notes Receivable.
- ----------------
As of January 31, 1998, the Company has the following
outstanding notes receivable;
As of January 31, 1998, the Company had advanced $1,246,548 to Nordic
Gaming Corporation pursuant to a Line of Credit Agreement dated as of August 27,
1997, providing for advances of up to $1,300,000. Such advances, which are due
and payable on August 27, 1998, bear interest at a rate of 10% per annum, are
secured by a first mortgage lien on and a security interest in the real and
personal property assets comprising the Fort Erie Racetrack. The Company has
notified Nordic that it will not fund any additional advances.
As of January 31, 1998, the Company has provided to Nordic Gaming
Corporation a $600,000 certificate of deposit as collateral for an irrevocable
letter of credit in favor of an aircraft leasing company. The certificate of
deposit shall be returned to the Company upon the earlier of; (i) receipt of any
permanent financing relating to the Fort Erie Racetrack, (ii) any other capital
infusion of $1,000,000 or more, or (iii) at the expiration of the aircraft
leasing agreement which expires in September 2004. In the event of default or
other foreclosure, the entire amount of the cash collateral shall be deemed to
have been loaned to Nordic Gaming upon the terms and conditions of the existing
credit facility with them, and secured by the assets of the Fort Erie Racetrack.
11
<PAGE>
As of January 31, 1998, the Company provided a certificate of deposit of
$778,000 as security for a letter of credit issued on behalf of Stan Irwin
Enterprises, Inc. that was used to acquire a 12 1/2% undivided interest in an
aircraft. The Company provided the certificate of deposit on behalf of Stan
Irwin Enterprises to enable Mr. Joseph Corazzi, the Company's Chairman of the
Board, the personal use of up to fifty hours of private air travel service at a
cost to Mr. Corazzi of approximately $1,200 per hour. The Company may also use
the plane up to twenty five hours per year. The certificate of deposit at all
times remains the property of the Company and will earn interest to the benefit
of the Company. At the end of two years from the date of purchase, Stan Irwin
Enterprises, Inc. has the obligation of returning the aircraft to the seller and
receive the fair market value price. It is anticipated that the certificate of
deposit and all accrued interest ($23,840 at January 31, 1998) will be returned
to the Company at that time.
As of January 31, 1998, the Company has made accumulated advances to
Malbec, Inc., an unaffiliated company, of $912,606 for the purpose of developing
and operating a hotel project in Miami Beach, Florida. As of January 31, 1998,
$46,678 of such advances have been returned to the Company The advances accrued
interest at the rate of 8% per annum, and were due July 31, 1997. Due to
difficulties in finalizing a purchase agreement, and on going litigation
involving the hotel property, the Company and Malbec Inc. have discontinued any
attempt at further development of this property. The Company has previously
provided a $812,606 allowance against this advance, for a net investment of
$100,000 as of January 31, 1998.
12
<PAGE>
PART 11. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 10, 1997, two actions were filed in the
Delaware Court of Chancery, each of which named the Company and its Chairman as
a defendant. The first such action, captioned Robert J. Quigley, Frank A. Leo
and The Family Investment Trust (Henry Brennan as Trustee) v. Nunzio P.
DeSantis, Michael Abraham, Anthony Coelho, Kenneth W. Scholl, Joseph Zapalla,
Joseph A. Corazzi, Las Vegas Entertainment Network, Inc. and International
thoroughbred Breeders, Inc., C.A. No. 15919-NC, ("Quigley") is a derivative suit
brought by two former directors of ITB and an investment trust which alleges,
among other things, that certain ITB directors have breached their fiduciary
duties to ITB. The Quigley complaint seeks: (i) a declaratory judgment that (a)
the share of ITB's common stock held by NPD may not be voted at any
stockholders' meeting; (b) all actions taken by the current board of ITB are
null and void; and (c) certain purported "super-majority" voting provisions in
ITB's By-laws remain in full force and effect, and (ii) rescission of certain
actions taken by ITB's Board, including but not limited to certain contractual
rights or entitlements that involve the Company.
Specifically, with respect to the Company, the Quigley
Complaint alleges that the Company and its Chairman were part of a concerted
effort to divert the stock and assets of ITB to the Company, its Chairman and
Messrs. DeSantis and Coelho, and seeks to (i) rescind the issuance of 2,093,868
shares of ITB stock to the Company, (ii) invalidate certain rights presently
existing in favor of the Company relative to the El Rancho Cash Flow Interest,
and (iii) rescind certain agreements entered into between or among the Company,
ITB and/or CSFB in connection with CSFB's refinancing of the El Rancho project.
On November 7, 1997, the Company filed an Answer to the
Quigley Complaint, in which the Company denied the substantive claims asserted
against or with respect to the Company. Discovery in the Quigley action is
ongoing. The Company believes that the claims against it are without merit and
is vigorously defending itself in this action.
The second action, captioned James Rekulak v. Nunzio P. DeSantis, Michael
Abraham, Anthony Coelho, Kenneth W. Scholl, Joseph Zappala, Las Vegas
Entertainment Network, Inc., Joseph A. Corazzi and International Thoroughbred
Breeders, Inc., C.A. No. 15920-NC ("Rekulak") is a derivative suit which repeats
the allegations in the Quigley Complaint verbatim and seeks the identical
relief. The Company is taking the same positions with regards to the Rekulak
action as it is taking with respect to the Quigley action.
The Company and its Chairman are named as defendants in an
action filed on November 30, 1997 by Robert William Green ("Green"), a
stockholder of ITB, captioned Robert William Green v. Nunzio DeSantis, Joseph
Corazzi, Anthony Coelho, Las Vegas Entertainment Network, Inc. and NPD, Inc.,
C.A. 97- 5359(JHR) ("Green"), in the United States District Court for the
District of New Jersey. The Green complaint alleges, among other things, that
the defendants have usurped certain corporate opportunities at the expense of
ITB, have diluted Green's interest in ITB through the issuance of shares of
stock and have conspired to deprive him of certain rights under an option
granted to him by NPD, which, subject to regulatory approval, grants Green the
right to purchase approximately 50% of the shares of ITB's common stock held by
NPD. The Company believes that the claims against it are without merit and
intends to vigorously defend itself.
On or about February 24, 1998, the Company, together with all of the
other parties thereto, agreed to a standstill in the foregoing litigation, and
since that time have been engaged in substantive settlement negotiations and the
preparation of definitive settlement documentation.
13
<PAGE>
The Company is not involved in, or a party to, any other
material legal proceedings at this time. At various times, the Company and its
subsidiaries are involved in various matters of litigation, including matters
involving settlement of fees and outstanding invoices, and consider these legal
proceedings not to be material and in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused the report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: March 17, 1998
By: /s/ Carl Sambus
----------------------------
Carl Sambus Executive Vice
President and Chief
Financial Officer (chief
accounting officer and
duly authorized officer)
15
<PAGE>
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