UNITED STATES
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 : July 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)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, $.001 par value 34,923,349
Title of Class Number of Shares outstanding at
September 11, 1998
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
July 31 October 31,
1998 1997
------------ ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $760,934 $2,399,491
TRADING SECURITIES - 1,087,890
------------ -----------
TOTAL CURRENT ASSETS 760,934 3,487,381
INVESTMENT IN & ADVANCES TO INTERNATIONAL
THOROUGHBRED BREEDERS INC. - Note 2 3,554,319 3,604,564
INVESTMENT IN AND ADVANCES TO
NORDIC GAMING - Note 3 675,000 1,047,548
OTHER INVESTMENTS & ADVANCES - Note 2 306,959 100,000
PROPERTY AND EQUIPMENT,
net of accumulated depreciation
of $208,538 (1998) and $192,509 (1997) 106,082 141,536
DEPOSITS AND OTHER - Note 4 825,874 1,389,893
------------ -----------
$ 6,229,168 $ 9,770,922
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 545,866 $ 452,137
NOTES PAYABLE 775,000 775,753
ACCRUED INTEREST PAYABLE 214,889 154,354
ACCRUED OFFICER'S SALARY - 482,885
------------ -----------
TOTAL CURRENT LIABILITIES 1,535,755 1,865,129
ACCRUED OFFICER'S BENEFITS 456,000 363,000
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 (40,843,562) (37,538,182)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 4,237,413 7,542,793
------------ -----------
$ 6,229,168 $ 9,770,922
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES $ - $ 75,000 $ - $ 225,000
---------- ---------- ----------- -----------
COSTS AND EXPENSES
Research & Development 290,137 170,638 361,814 850,268
General & Administrative 1,002,023 1,087,589 2,381,401 2,603,281
---------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES 1,292,160 1,258,227 2,743,215 3,453,549
----------- ---------- ----------- -----------
LOSS BEFORE OTHER
INCOME AND (CHARGES) (1,292,160) (1,183,227) (2,743,215) (3,228,549)
OTHER INCOME AND (CHARGES):
Interest Income 31,200 92,206 124,348 327,361
Gain on Trading Securities (13,310) 97,648 105,573 97,648
Other Charges (155,000) (731,799) (432,800)
Interest and Finance Costs (21,512) (19,308) (60,287) (59,702)
------------ ----------- ----------- ------------
TOTAL OTHER INCOME AND
(CHARGES) (158,622) 170,546 (562,165) (67,493)
------------ ----------- ----------- ------------
NET LOSS $(1,450,782) $(1,012,681) $ (3,305,380) $(3,296,042)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 34,898,349 34,898,349 34,898,349 34,898,349
============ ============ ============ ============
LOSS PER SHARE OF COMMON
STOCK $ (0.04) $ (0.03) $ (0.09) $ (0.09)
============ =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
NINE MONTHS ENDED JULY 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 nine months
ended July 31, 1998 (3,305,380) (3,305,380)
--------- ------ ---------- ------- ---------- ---------- ----------- ----------
BALANCE - July 31, 1998 1,000,000 $1,000 34,898,349 $34,895 $47,445,080 $(2,400,000) $(40,843,562) $4,237,413
========= ====== ========= ====== ========= ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
LAS VEGAS ENTERTAINMENT NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31,
---------------------------------
1998 1997
------- ------
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,305,380) (3,296,042)
Gain from Marketable Securities (105,572) (111,098)
Loss on Other Asset 449,000
Loss on Assignment of Advances to
Nordic Gaming 272,548
Depreciation 50,161 52,470
Allowance for valuation accounts 167,800
Adjustments to reconcile net loss to net
cash used in operating activities:
(Increase) in Other Assets (39,185)
Increase (Decrease) in;
Accounts Payable 93,729 191,241
Interest Payable 60,535 32,201
Accrued Officer's Salaries (489,843) 141,272
Accrued Officer's Benefits 93,000 93,000
---------- -----------
CASH USED IN OPERATING ACTIVITIES (2,881,822) (2,768,341)
CASH FLOWS FROM INVESTING ACTIVITIES:
Trading Securities 1,193,462 (1,000,000)
Advances to Nordic Gaming (200,000) (387,670)
Assignment of interest in Nordic Gaming 300,000
Collections from ITB Inc. 50,245
Investments & Advances - Other (200,000) (546,213)
Proceeds from Sale of Other Asset 151,000
Decrease in Deposits and Other (35,981)
Acquisition of Property and Equipment (14,708) (46,203)
---------- -----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,244,018 (1,980,086)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Notes Payable (753) (278,741)
Issuance of Options Payable 165,000
---------- ------------
CASH USED IN FINANCING ACTIVITIES (753) (113,741)
DECREASE IN CASH (1,638,557) (4,862,168)
CASH BALANCE - BEGINNING 2,399,491 10,385,292
---------- ------------
CASH BALANCE - ENDING $ 760,934 $5,523,124
========= ============
CASH PAID FOR
Interest $ - $ 27,500
========= ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<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. The Company is also investigating other potential businesses for
acquisition in the entertainment, gaming, lodging, and communications
industries, some of which may be developed in Brazil.
The accompanying unaudited financial statements include the accounts of LVEN,
and its wholly-owned subsidiaries: Las Vegas Communications Corp. ("LVCC"),
Casino-Co Corporation. 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 and nine-month periods ended
July 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;
July 31, 1998 October 31, 1997
-------------- ----------------
(A) Investment in ITB Stock $5,900,000 $5,900,000
Less Valuation to Market (2,400,000) (2,400,000)
---------- -----------
3,500,000 3,500,000
Advances to ITB 54,319 104,564
------------ -----------
$3,554,319 $3,604,564
========== ==========
6
<PAGE>
(A) On January 22, 1996, the Company sold the assets and liabilities of
the El Rancho Hotel and Casino in Las Vegas, Nevada (the "El Rancho"
or "the Property") to 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) the assumption by ITB 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 the El Rancho Cash Flow Interest. In
order to effect such transaction, ITB was 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.
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 sought, 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 sought to block the issuance to LVEN of additional shares of
ITB stock in exchange for LVEN's El Rancho Cash Flow Interest.
On July 2, 1998, the Company entered into a Stipulation and Agreement
of Compromise with all such parties (see Part II, Item I, Legal
Proceedings). Upon effectiveness of the Settlement as it relates to
LVEN, the Company will obtain the right (exclusive for a period of 120
days (subject to extension in certain circumstances) (the "Exclusive
Period") and nonexclusive with ITB for an additional 150 days (the
"Non-Exclusive Period" and together with the Exclusive Period, the
"Escrow Period"), in each case following the date of mailing of the
Notice of the Settlement to ITB's shareholders) to effect a sale the
El Rancho Property, and to retain all sale proceeds in excess of
amounts required under the Stipulation and Agreement to be paid to
ITB's primary lender or any substituted lender ($44.2 million) and
certain amounts which may be required to be paid to certain other
parties. In the event that the Company does not effect a sale of the
El Rancho property during the Exclusive Period, then ITB will have the
right, in the absence of a qualifying sale by LVEN, to effect a sale
of the Property during the Non-Exclusive Period for consideration of
not less than $56.1 million, out of which amount $12 million ($10
million net of the payment of $2 million to NPD) will be paid over to
the Company. If no sale of the El Rancho property has then occurred,
LVEN will have the option, exercisable during the last 30 days of the
Escrow Period, to arrange for a refinancing of the El Rancho property
and thereby to extend for a period of time up to one year the period
of time during which LVEN may effect a qualifying sale of Property,
computed as provided in the Stipulation and Agreement. Upon the
effectiveness of the Settlement as to LVEN, all prior agreements
between or among LVEN and
7
<PAGE>
ITB, including without limitation, that certain Bi-Lateral Agreement,
and that certain Tri-Party Agreement pursuant to which ITB issued to
LVEN 2,093,868 shares of ITB Common Stock, will be terminated and the
Company will return such shares to ITB for cancellation.
In contemplation of such a settlement, the Company, in conjunction
with ITB, arranged for the potential sale of the El Rancho Property to
a third party, which sale, if completed, would result in approximately
$10.5 million of proceeds in exchange for LVEN returning all its
shares, and claims to future shares, of ITB common stock. However,
such agreement is subject to final negotiations with ITB, its lenders,
the buyer, and the settlement of all outstanding litigation as
discussed above including the receipt of all necessary court
approvals. In contemplation of such settlement and potential sale, the
Company made an advance of $200,000 to the principal of the buying
group as a prepaid commission. Such advance is included in Other
Investments and Advances as July 31, 1998.
3. INVESTMENTS AND ADVANCES TO NORDIC GAMING CORPORATION
During 1997, the Company was granted an option to acquire from Mr.
Nunzio P. DeSantis, the then Chief Operating Officer of ITB, eighty
percent (80%) of the voting equity of Nordic Gaming Corporation, a
Canadian corporation ("Nordic"). Nordic owns certain real property and
assets known as the "Fort Erie Racetrack" which is situated on 143
acres in Fort Erie, Ontario, Canada. The Company also advanced
$1,300,000 through April 30, 1998 to Nordic pursuant to a Line of
Credit Agreement dated as of August 27, 1997. Such advances, which were
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 assigned its debt, mortgage and all other security in
the Fort Erie Racetrack to an Ontario, Canada Limited Corporation. The
Company also waived its option to acquire the 80% interest in Nordic
Gaming. The consideration for the assignment and waiver was $975,000,
of which (i) $300,000 was paid May 5, 1998, (ii) $675,000 was
subsequently paid in August 1998. The Company has reserved $272,000 on
the assignment of this debt which is reflected in other charges during
the nine month period ended July 31, 1998.
8
<PAGE>
4. DEPOSITS AND OTHER
Deposits and other consist of the following as of;
July 31, 1998 October 31,1997
------------- ---------------
(A) Deposit on Nordic Gaming Aircraft Lease $ - $ 600,000
(B) Deposit on Stan Irwin Enterprises
Aircraft Purchase 825,874 789,893
-------- ----------
$825,874 $1,389,893
========= ==========
(A) The Company provided to Nordic Gaming Corporation ( see Note 3) 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 was to be returned to the Company upon the
earlier of (i) receipt of any permanent financing relating to the Fort
Erie Race Track, (ii) any other capital infusion of $1,000,000 or
more, or (iii) at the expiration of the aircraft leasing agreement in
September 2004. However, Nordic Gaming became delinquent in its lease
payments, and the aircraft leasing company exercised its rights under
the lease arrangement and repossessed and sold the plane because of
such default. On April 28, 1998, the Company received $151,000 of the
proceeds of such sale after all costs and expenses of the repossession
and sale (including the payment of delinquent loan payments) had been
deducted. Due to the above, the Company reflected a reserve of
$450,000 which is included in other charges during the nine-months
ended July 31, 1998,
(B) The Company provided a certificate of deposit of $778,000 as security
to a bank for a term loan of $778,000 that was obtained by 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 at cost of approximately $1,200 hour.
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 has
the option of returning the aircraft to the seller and receive the
fair market value price. The certificate of deposit and all accrued
interest will be returned to the Company at that time.
5. OTHER MATTERS
Nasdaq Listing
On May 29, 1998, the Company was notified by the Nasdaq Stock Market
("Nasdaq") that its shares were scheduled for delisting due to the new
minimum bid price requirement of $1 per share, which became effective
February 23, 1998. The Company requested a hearing to the delisting
procedures before the Nasdaq Listing Qualifications Panel to obtain a
temporary extension to the new requirements. The Company was notified on
July 29, 1998 by Nadsaq that such request was not granted. Pursuant to
this notification, the Company requested that this
9
<PAGE>
decision be reviewed by a new Nasdaq listing qualifications panel. The
Company has been notified by Nasdaq of a new hearing date scheduled for
September 18, 1998. There is no assurance that the Company will be
successful in its attempt to remain listed. The Company distributed to
shareholders a proxy statement for the purpose of voting on a stock split
that outlines the procedure for a reverse stock split in the amount of
one-for-twenty that may enable the Company to retain its Nasdaq listing,
or not effectuating a reverse stock split and thereby transferring all
trading activity to the bulletin board system until such time, if any,
that the Company is able to relist with Nasdaq. As of July 31, 1998, the
Company had not yet received sufficient votes to ratify such stock split.
Agreement with MG Entertainment
On May 25, 1998, the Company entered into an agreement with MG
Entertainment, a Brazilian Company ("MG"), to sell and deliver to MG
10,000 electronic bingo machines to be delivered at approximately 1,000
machines per month over a twelve month period. The agreement provides
that the Company will be the exclusive provider to MG of the machines, or
any other gaming machines, through 2008. The total expected cash payment
for each machine will be $141,317 which shall be made by MG in 120
monthly installments as follows; four consecutive monthly installments of
$1,307 starting 30 days after each machine is delivered, and thereafter,
116 monthly installments as follows; 25 monthly installments of $932,
then 25 monthly installments of $1,065; and the remainder in monthly
installments $1,331. For financial statement purposes, if the contract
and business plan goes forward, the Company will reflect a sales price of
approximately $81,000 for each machine (based upon an imputed interest
rate of 10%) with $64,317 to be reflected as interest income over the
life of the contract.
The Company does not have a formal agreement for the purchase and
financing of the Bingo machines, but has entered into discussions with a
company for the purchase of up to 10,000 of these machines. The Company
anticipates that the cost to the Company for each machine will
approximate $12,000, which cost may vary depending on the style and
accessories provided. The Company is currently seeking financing for the
purchase of the machines, however the Company can give no assurance that
any funding will ultimately be obtained, that the Company can ultimately
enter into an acquisition agreement for the machines, that the machines
will ultimately be installed, or that any revenue will be received from
MG. Furthermore, the Company has not had the opportunity to fully review
the currency, economic or political risks attendant on doing business
outside the United States.
10
<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.
Results of Operations
LVEN 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. The Company is also
investigating other potential businesses for acquisition in the entertainment,
gaming, lodging, and communications industries, some of which may be developed
in Brazil.
Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1997
- -----------------------------------------------------------------------------
Revenues for the three months ended July 31, 1997 consisted of
$75,000 of fees earned under an interim entertainment management agreement with
ITB. There were no such fees earned under the agreement for the corresponding
period in 1998.
General and Administrative expenses decreased $85,566 to
$1,002,023 during the three months ended July 31, 1998 as compared to $1,087,589
in the corresponding period in 1997. The majority of the decrease related to
travel and entertainment costs which decreased $148,000 to $190,000 for the
three months ended July 31, 1998 as compared to $338,000 for the corresponding
period in 1997. This decrease was offset by an increase in legal and
professional costs of $178,000 to $371,000 for the three months ended July 31,
1998 as compared to $193,000 in the comparable period in 1997. The increase
related mostly to costs incurred in connection with the actions filed by certain
former and current directors of ITB, as well as legal and professional costs
incurred in developing certain of the Company's projects in Brazil.
Interest Income and Expense. Interest income earned on cash balances and
marketable securities decreased $61,006 to $31,200 for the three months ended
July 31, 1998 as compared to $92,206 for the corresponding period in 1997. The
decrease is consistent with the decrease
11
<PAGE>
in the average cash and marketable securities outstanding during three months
ended July 31, 1998 as compared to the corresponding period in 1997. The Company
realized gains from the sale of marketable securities of $105,573 during the
three months ended July 31, 1998 ($118,883 of such gains were previously
reflected as unrealized, resulting in an unrealized loss of $13,310 for the
three months ended July 31, 1998). Unrealized gains from marketable securities
were $97,648 in the comparable period in 1997. Interest Expense for the for the
three months ended July 31, 1998 remained consistent with the corresponding
period in 1997 as the average indebtedness outstanding during the three months
ended July 31, 1998 was consistent with the corresponding period in 1997.
Research and Development expenses which relate to the
development of voice, video and data communication technology increased $119,499
to $290,137 during the three months ended July 31, 1998 as compared to $170,638
for the corresponding period in 1997. The majority of the increase related to
the payment of consulting fees paid to individuals developing technology to be
used in the Company's intended telephony operations in Brazil.
Other Income and Charges for the three months ended July 31,
1998 consisted of an additional $155,000 charge that resulted from assignment of
the Company's debt from Nordic Gaming to a third party in addition to the
amounts previously provided.
Nine Months Ended July 31, 1998 Compared to Nine Months Ended July 31, 1997
- ---- ----------------------------------------------------------------------
Revenues for the nine months ended July 31, 1997 consisted of
$225,000 of fees earned under an interim entertainment management agreement with
ITB. There were no such fees earned under the agreement for the corresponding
period in 1998.
General and Administrative expenses decreased $221,880 to
$2,381,401 during the nine months ended July 31, 1998 as compared to $2,603,281
in the corresponding period in 1997. The majority of the decrease related to
travel and entertainment costs which decreased $367,000 to $379,000 for the nine
months ended July 31, 1998 as compared to $746,000 for the corresponding period
in 1997. This decrease was offset by an increase in legal and professional costs
of $245,000 to $640,000 for the nine months ended July 31, 1998 as compared to
$394,000 in the comparable 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") as well as legal and professional costs
incurred in developing certain of the Company's projects in Brazil. 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 $203,013 to $124,348 for the nine
months ended July 31, 1998 as compared to $327,361 for the corresponding period
in 1997. The decrease is consistent with the decrease in the average cash and
marketable securities outstanding during the nine months ended July 31, 1998 as
compared to the corresponding period in 1997. The Company realized gains from
the sale of marketable securities of $105,573 during the nine months ended July
31, 1998. Unrealized gains from marketable securities were $97,648 in the
comparable period in 1997. Interest Expense for the for the nine months ended
July 31, 1998 remained consistent with the corresponding period in 1997 as the
average indebtedness outstanding during the nine months ended July 31, 1998 was
consistent with the corresponding period in 1997.
12
<PAGE>
Other Income and Charges for the nine months ended July 31,
1998 consists of a $445,000 charge related to the forfeiture of an airplane
deposit made on behalf of Nordic Gaming Inc, and a charge of $275,000 that
resulted from the assignment of the Company's debt from Nordic Gaming to a third
party. Other Income and Charges for the nine months ended July 31, 1997 included
charges of (i) $100,000 from the settlement of certain litigation, (ii) $167,800
to reflect the carrying value of a certain note receivable, and (iii) $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), and reflected as an
expense.
Liquidity and Capital Resources
- -------------------------------
The Company has experienced operating losses since its inception. For the
nine month period ended July 31, 1998 and the fiscal year ended October 31,
1997, the Company experienced net losses (including reserves) of $3,305,380 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.
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, marketing and
travel costs. In addition to the above, the Company may be required to fund, or
obtain financing for, the acquisition of up to 1,000 electronic bingo machines
per month (up to 10,000 machines in total) that cost approximately $12,000 each
to meet delivery requirements to MG entertainment under the Company's agreement
with them.
As of July 31, 1998, the Company had approximately $761,000 in cash and
marketable securities and believes that its current cash and receivables,
including the collection of $675,000 in August 1998 from the assignment of the
advance made to Nordic Gaming 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
July 31, 1998. 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 develop a telecommunications company in Brazil or
acquire the bingo machines necessary to fulfill the sale to MG Enterprises.
There can be no assurance that additional financing will be available to the
Company on acceptable terms, or at all. In addition, the Company was notified by
the Nasdaq Stock Market that its shares were scheduled for delisting due to the
new minimum bid price requirement of $1 per share, which became effective
February 23, 1998. The Company requested a hearing to the delisting procedures
before the Nasdaq Listing Qualifications Panel to obtain a temporary extension
to the new requirements. The Company was notified on July 29, 1998 by Nadsaq
that such request was not granted. Persuant to this notification, the Company
requested that this decision be reviewed by a new Nasdaq listing qualifications
panel. The Company has been notified by Nasdaq of a new hearing date scheduled
for September 18, 1998. There is no assurance that the Company will be
successful in its attempt to remain listed. If the Company is de- listed from
the Nasdaq SmallCap Market, this might result in the Company having difficulty
in placing its securities with prospective investors.
13
<PAGE>
Notes Receivable. As of July 31, 1998, the Company has the following
outstanding notes receivable:
As of July 31, 1998, the Company had advances outstanding of $675,000
under a credit facility made to Nordic Gaming for which the Company has reached
an agreement to assign its debt, mortgage and all other security in the Fort
Erie Racetrack to an Ontario, Canada Limited Corporation. The $675,000 was
subsequently paid to the Company in August 1998.
As of July 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 ($47,874 at July 31, 1998) will be returned to
the Company at that time.
As of July 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 July 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 July 31,
1998.
14
<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.
15
<PAGE>
On July 2, 1998, Las Vegas Entertainment Network, Inc., certain of its
subsidiaries, CountryLand Properties, Inc., Casino-Co Corporation, and LVCC and
the Company's Chairman and CEO, entered into a Stipulation and Agreement of
Compromise, Settlement and Release (the "Stipulation and Agreement") by and
among the Company and such affiliates, on the one hand, and Frank A. Leo, Robert
J. Quigley, Francis W. Murray, Charles R. Dees, Jr., The Family Investment Trust
(Henry Brennan, Trustee), NPD, Inc. ("NPD"), Nunzio P. DeSantis, Anthony Coelho,
Michael Abraham, Joseph Zappala, Joseph A. Corazzi, Kenneth S. Scholl,
International Thoroughbred Breeders, Inc. ("ITB"), D&C Gaming Corporation, James
J. Murray, John Mariucci, Frank Koenemund, Robert W. Green, Robert E. Brennan
and Orion Casino Corporation, on the other hand, to resolve the pending
stockholder derivative litigation brought in the name of ITB in the Delaware
Court of Chancery. The effectiveness of the settlement described in the
Stipulation and Agreement (the "Settlement"), as it relates to the Company and
its affiliates, is subject, among other things, to Delaware Chancery Court
approval of all of the terms and conditions of the Settlement following notice
to ITB's stockholders, the consent of ITB's primary lender (the "ITB Lender
Approval"), and LVEN's approval of the terms and conditions of the ITB Lender
Approval.
Upon effectiveness of the Settlement as it relates to LVEN,
the Company will obtain the right (exclusive for a period of 120 days (subject
to extension in certain circumstances) (the "Exclusive Period") and nonexclusive
with ITB for an additional 150 days (the "Non-Exclusive Period" and together
with the Exclusive Period, the "Escrow Period"), in each case following the date
of mailing of the Notice of the Settlement to ITB's shareholders) to effect a
sale of ITB's non-operating El Rancho Hotel and Casino property in Las Vegas,
Nevada (the "Property"), and to retain all sale proceeds in excess of amounts
required under the Stipulation and Agreement to be paid to ITB's primary lender
or any substituted lender ($44.2 million) and certain amounts which may be
required to be paid to certain other parties. In the event that the Company does
not effect a sale of the El Rancho property during the Exclusive Period, then
ITB will have the right, in the absence of a qualifying sale by LVEN, to effect
a sale of the Property during the Non-Exclusive Period for consideration of not
less than $56.1 million, out of which amount $12 million ($10 million net of the
payment of $2 million to NPD) will be paid over to the Company. If no sale of
the El Rancho property has then occurred, LVEN will have the option, exercisable
during the last 30 days of the Escrow Period, to arrange for a refinancing of
the El Rancho property and thereby to extend for a period of time up to one year
the period of time during which LVEN may effect a qualifying sale of Property,
computed as provided in the Stipulation and Agreement. Upon the effectiveness of
the Settlement as to LVEN, all prior agreements between or among LVEN and ITB,
including without limitation, that certain Bi-Lateral Agreement, and that
certain Tri-Party Agreement pursuant to which ITB issued to LVEN 2,093,868
shares of ITB Common Stock, will be terminated and the Company will return such
shares to ITB for cancellation.
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.
16
<PAGE>
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
17
<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: September 14, 1998
------------------
By: /s/ Carl Sambus
---------------
Carl Sambus Executive Vice
President and Chief
Financial Officer (chief
financial officer and
accounting officer and
duly authorized officer)
18
<PAGE>
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