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, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9624
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International Thoroughbred Breeders, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2332039
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 1300, 1105 N. Market Street, Wilmington, Delaware 19899-8985
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(Address of principal executive offices) (Zip Code)
(302)427-7599
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(Registrant's telephone number, including area code)
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(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes No X
--- ---
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 November 15, 2004
- ------------------------------ --------------------------------
Common Stock, $ 2.00 par value 10,565,202 Shares
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
for the Three Months ended September 30, 2004
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of September 30, 2004 and June 30, 2004................1-2
Consolidated Statements of Operations
for the Three Months ended
September 30, 2004 and 2003...............................3
Consolidated Statement of Stockholders' Equity
for the Three Months ended September 30, 2004.............4
Consolidated Statements of Cash Flows
for the Three Months ended
September 30, 2004 and 2003...............................5
Notes to Consolidated Financial Statements.............................6-25
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............26-31
Item 3. Quantitative and Qualitative Disclosures About Market Risk.31
Item 4. Controls and Procedures...................................31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................32
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds..................................................32
Item 6. Exhibits ..................................................32
SIGNATURES.............................................................33
CERTIFICATIONS.........................................................34
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND JUNE 30, 2004
ASSETS
September 30,
2004 June 30,
(UNAUDITED) 2004
------------ ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 4,006,769 $ 7,508,632
Accounts Receivable 218,815 223,411
Prepaid Expenses 998,244 738,504
Other Current Assets 167,905 153,625
Assets of Discontinued Operations 401,548 400,835
------------ ------------
TOTAL CURRENT ASSETS 5,793,281 9,025,007
------------ ------------
VESSELS, EQUIPMENT & LIVESTOCK:
Vessel - Palm Beach Princess 17,500,000 0
Leasehold Improvements - Port of Palm Beach 913,394 913,394
Equipment 1,931,502 2,217,322
Livestock 275,971 0
Vessel Not Placed in Service - Empress II 3,407,602 0
Vessel Not Placed in Service - Royal Star 2,092,691 1,321,494
------------ ------------
26,121,160 4,452,210
LESS: Accumulated Depreciation and Amortization 1,167,340 916,186
------------ ------------
TOTAL VESSEL, EQUIPMENT & LIVESTOCK - NET 24,953,820 3,536,024
------------ ------------
OTHER ASSETS:
Notes Receivable 14,578,651 14,778,651
Mortgage Contract Receivable - Related Party 0 13,750,000
Deposits and Other Assets - Related Parties 7,920,975 8,410,940
Deposits and Other Assets - Non-Related Parties 1,293,582 334,975
Spare Parts Inventory 963,543 978,119
------------ ------------
TOTAL OTHER ASSETS 24,756,752 38,252,685
------------ ------------
TOTAL ASSETS $ 55,503,852 $ 50,813,716
============ ============
See Notes to Consolidated Financial Statements.
1
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND JUNE 30, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
2004 June 30,
(UNAUDITED) 2004
------------- -------------
CURRENT LIABILITIES:
Accounts Payable $ 933,179 $ 1,104,721
Accrued Expenses 2,379,607 2,169,197
Short-Term Debt 156,772 4,186,012
Deferred Interest - Short-Term 508,391 514,440
Vessel Lease Payable - Current Portion 879,238 0
Short-Term Debt - Related Parties 183,164 183,164
Liabilities of Discontinued Operations 313,198 310,798
------------- -------------
TOTAL CURRENT LIABILITIES 5,353,549 8,468,332
------------- -------------
LONG-TERM LIABILITIES:
Vessel Lease Payable - Long Term Portion 13,120,762 0
Long-Term Debt - Net of Current Portion 41,396 4,095,827
Deferred Interest - Long-Term 2,082,341 1,957,920
Long-Term Debt - Related Parties 206,026 285,649
------------- -------------
TOTAL LONG-TERM LIABILITIES 15,450,525 6,339,396
------------- -------------
DEFERRED INCOME 1,630,815 5,439,951
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100 Par Value,
Authorized 500,000 Shares, 362,489
Issued and Outstanding 36,248,875 36,248,875
Common Stock, $2 Par Value, Authorized
25,000,000 Shares,Issued, 11,480,279, and
Outstanding,10,565,202 and 7,802,134,
respectively 22,960,557 22,960,557
Capital in Excess of Par 20,191,982 20,191,982
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) (45,869,497) (46,989,638)
------------- -------------
33,531,917 32,411,776
LESS:
Treasury Stock, 915,077 and 3,678,146
Shares, respectively, at Cost (457,538) (1,839,073)
Deferred Compensation, Net (5,416) (6,666)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 33,068,963 30,566,037
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,503,852 $ 50,813,716
============= =============
See Notes to Consolidated Financial Statements.
2
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
September 30,
---------------------------
2004 2003
----------- ------------
OPERATING REVENUES:
Gaming $ 5,329,507 $ 6,494,687
Fare 540,665 655,371
On Board 411,328 425,099
Other 96,822 42,911
------------ ------------
NET OPERATING REVENUES 6,378,322 7,618,068
------------ ------------
OPERATING COSTS AND EXPENSES:
Gaming 2,114,088 2,079,617
Fare 960,198 713,754
On Board 211,113 195,241
Maritime & Legal Expenses 1,467,781 1,749,269
General & Administrative Expenses 1,002,647 877,145
General & Administrative Expenses - Parent 427,583 329,593
Development Costs 524,814 25,355
Depreciation & Amortization 398,879 135,283
ITG Vegas Bankruptcy Costs 1,546 258,562
------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 7,108,649 6,363,819
------------ ------------
OPERATING INCOME (LOSS) (730,327) 1,254,249
------------ ------------
OTHER INCOME (EXPENSE):
Interest and Financing Expenses (1,011,600) (500,452)
Interest and Financing Expenses - Related Party (155,991) 0
(Loss) on Impairment of Note Receivable (200,000) 0
Interest Income 74,343 68,695
Interest Income Related Parties 3,974 3,254
Other Income 241 50,914
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (1,289,033) (377,589)
------------ ------------
INCOME (LOSS) BEFORE TAX PROVISION (2,019,360) 876,660
AND EXTRAORDINARY ITEM
Income Tax (Benefit) Expense (42,000) 17,600
------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,977,360) 859,060
EXTRAORDINARY ITEM - Fees charged to related
parties for Master Settlement Agreement ( Note 12),
less income tax of $440,000. 3,560,000 0
------------ ------------
NET INCOME $ 1,582,640 $ 859,060
============ ============
NET BASIC INCOME PER COMMON SHARE $ 0.16 $ 0.10
============ ============
NET DILUTED INCOME PER COMMON SHARE $ 0.15 $ 0.10
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Basic 9,718,796 8,252,133
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Diluted 10,258,358 8,966,996
============ ============
See Notes to Consolidated Financial Statements.
3
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Preferred Common
------------------------ -------------------------
Number of Number of
Shares Amount Shares Amount
------------ ---------- ------------ -----------
BALANCE - JUNE 30, 2004 362,489 $ 36,248,875 11,480,279 $ 22,960,557
Shares Issued for Options Granted
Options Issued at Less than Treasury
Stock Cost --- --- --- ---
Amortization of Deferred Compensation Costs --- --- --- ---
Net Income for the Three Months Ended
September 30, 2004 --- --- --- ---
------------ ---------- ------------ -----------
BALANCE - SEPTEMBER 30, 2004 362,489 $ 36,248,875 11,480,279 $ 22,960,557
============ ========== ============ ===========
Capital Treasury Deferred
in Excess Stock Compen-
of Par (Deficit) At Cost sation Total
------------ ---------------- ------------ ------------ ----------------
BALANCE - JUNE 30, 2004 $20,191,982 $ (46,989,638) $ (1,839,073) $ (6,666) $ 30,566,037
Shares Issued for Options Granted 919,035 919,035
Options Issued at Less than Treasury
Stock Cost --- (462,500) 462,500 --- 0
Amortization of Deferred Compensation Costs --- --- --- 1,250 1,250
Net Income for the Three Months Ended
September 30, 2004 --- 1,582,641 --- --- 1,582,641
------------ ---------------- ------------ ------------ ----------------
BALANCE - SEPTEMBER 30, 2004 $20,191,982 $ (45,869,497) $ (457,538) $ (5,416) $ 33,068,963
============ ================ ============ ============ ================
See Notes to Consolidated Financial Statements.
4
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
September 30,
--------------------------
2004 2003
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
INCOME BEFORE DISCONTINUED OPERATIONS $ 1,582,640 $ 859,060
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation and Amortization 398,879 135,283
Impairment of Note 200,000 0
Increase in Defferred Income 190,863 0
(Decrease) in Deferred Income - Related Parties (4,000,000) 0
Changes in Operating Assets and Liabilities -
(Increase) in Restricted Cash & Investments 0 (1,294,048)
Decrease (Increase) in Accounts Receivable 4,596 (5,138)
(Increase) in Other Assets (14,278) (26,130)
(Increase) in Prepaid Expenses (259,740) (321,337)
Increase in Accounts Payable and Accrued Expenses 298,865 57,120
------------ -----------
CASH (USED BY) OPERATING ACTIVITIES BEFORE
DISCONTINUED OPERATIONS (1,598,175) (595,190)
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 2,400 2,400
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (1,595,775) (592,790)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and Improvements of Vessels (4,472,494) 0
Loans Paid by Related Parties 3,522,538 0
Capital and Livestock Expenditures (571,284) (179,320)
(Increase) Decrease in Other Investment Activity (64,911) 428,858
------------ -----------
CASH (USED IN) INVESTING ACTIVITIES
BEFORE DISCONTINUED INVESTING ACTIVITIES (1,586,151) 249,538
CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES 0 0
------------ -----------
NET CASH (USED IN) INVESTING ACTIVITIES (1,586,151) 249,538
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments on Short Term Notes (6,029) (141,834)
Principal Payments on Loans to Related Parties (313,195) 0
Decrease in Balances Due to/From Discontinued Subsidiaries 1,687 2,438
------------ -----------
CASH (USED IN) FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES (317,537) (139,396)
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (1,687) (2,438)
------------ -----------
NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES (319,224) (141,834)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,501,150) (485,086)
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS (713) 37
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 7,508,632 6,123,641
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,006,769 $ 5,638,592
============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 654,862 $ 303,415
Income Taxes $ 0 $ 0
See Notes to Consolidated Financial Statements.
5
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations - ITG Vegas, Inc. ("ITGV") is currently engaged in
an entertainment cruise and casino ship business under a bareboat charter of the
vessel M/V Palm Beach Princess (the "Palm Beach Princess"). The Palm Beach
Princess performs fourteen cruises weekly, that is, a daytime and an evening
cruise each day. Each cruise is of five to six hours duration. During each
cruise, the Palm Beach Princess offers a range of amenities and services to her
passengers, including a full casino, sit-down buffet dining, live musical shows,
discotheque, bars and lounges, swimming pool and sundecks. The casino occupies
15,000 square feet aboard the ship and is equipped with approximately 425 slot
machines, all major table games (blackjack, dice, roulette and poker), and a
sports wagering book.
During the quarter, we re-entered the equine business for which the Company
was originally established. We currently own several horses of different ages.
Some are currently racing and a few are held as broodmares but the majority are
yearlings and two year olds in training. It is our plan to bring these horses
into racing if we consider them competitive after completion of training.
(B) Principles of Consolidation - The accounts of all subsidiaries are
included in the consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(C) Classifications - Certain prior years' amounts have been reclassified
to conform with the current years' presentation.
(D) Spare Parts Inventory - Spare parts inventory consists of operating
supplies, maintenance materials and spare parts. The inventories are carried at
cost. It is necessary that these parts be readily available so that the daily
cruise operations are not cancelled due to mechanical failures.
(E) Depreciation and Amortization - Depreciation of property and equipment
were computed by the straight-line method at rates adequate to allocate their
cost or adjusted fair value in accordance with U. S. generally accepted
accounting principles over the estimated remaining useful lives of the
respective assets. Amortization expense consists of the write off of major
vessel repairs and maintenance work completed at dry dock period. These expenses
are written off during a two year period following the dry dock period. For the
three months ended September 30, 2004, the amortized expense was $43,373. For
the three months ended September 30, 2003, there were no amortized expenses
associated with a dry dock period.
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
warrant such a review. The carrying value of a long-lived or amortizable
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset. Losses on long-lived assets
to be disposed of are determined in a similar manner, except that fair values
are reduced for the cost of disposition. Effective January 4, 2002, SFAS 142
requires an annual impairment review based on fair value for all intangible
assets with indefinite lives.
(F) Net Assets of Discontinued Operations - At September 30, 2004 and 2003,
the remaining net assets and liabilities of Garden State Park and Freehold
Raceway were classified as "Net Assets of Discontinued Operations." and
"Liabilities of Discontinued Operations."
(G) Recent Accounting Pronouncements - In January 2003, the Financial
Accounting Standards
6
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Board ("FASB") issued Interpretation No. 46 ("FIN") No. 46, "Consolidation of
Variable Interest Entities". In December 2003, the FASB issued FIN No. 46
(Revised) ("FIN 46-R") to address certain FIN 46 implementation issues. This
interpretation requires that the assets, liabilities, and results of operations
of a Variable Interest Entity ("VIE") be consolidated into the financial
statements of the enterprise that has a controlling interest in the VIE. The
provisions of this interpretation were effective immediately for all
arrangements entered into with new VIEs created after January 31, 2003, and
became effective during the period ended March 31, 2004 for any VIE created on
or before January 31, 2003. Based upon our review, we do not believe we have any
such entities or arrangements that would require disclosure or consolidation.
In March, 2003, the Emerging Issues Task Force published Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it performs multiple revenue generating activities and
how to determine whether such an arrangement involving multiple deliverables
contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this Issue is effective for revenue arrangements entered in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 on July
1, 2003 did not have any impact on our financial statements.
(H) Revenue Recognition - Casino revenue consists of gaming winnings net of
losses. Net income is the difference between wagers placed and winning payout to
patrons and is recorded at the time wagers are made. The vast majority of the
wagers are in the form of cash and we do not grant credit to our customers to a
significant extent. Fare revenues consist of admissions to our vessel and are
recognized as earned. On board revenues consist primarily of ancillary
activities aboard the vessel such as the sale of food and beverages, cabin
rental, gift shop, spa facility and skeet shooting. These revenues are
recognized on the date they are earned.
(I) Income Taxes - The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires a company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in its financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
(J) Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
(K) Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and cash
equivalents. The Company places its cash investments with high credit quality
financial institutions and currently invests primarily in U.S. government
obligations that have maturities of less than 3 months. The amount on deposit in
any one institution that exceeds federally insured limits is subject to credit
risk.
(L) Use Of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
(M) Deferred Income - The gain from the sale of our Garden State Park
property on November 28,
7
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2000 in the amount of $1,439,951 has been deferred until such time as the note
receivable on the sale has been collected. In connection with the PDS
Transaction we have deferred the gain on the sale of equipment of $190,863 over
the term of the equipment lease. The deferred income recorded as of June 30,
2004 included fees charged to Leo Equity Group, Inc. in the amount of $3,000,000
and to Palm Beach Maritime Corp. (formerly MJQ Corp.) in the amount of
$1,000,000 in connection with the final settlement with the Brennan Trustee.
These amounts were deferred until the current quarter of Fiscal 2005 when we
received payment for these charges.
(N) Net Income per Common Share -Basic earnings per share is computed as
net income available to common shareholders divided by the weighted average
number of common shares outstanding during the quarter. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable through stock options and warrants utilizing the treasury stock method.
Diluted earnings per share is calculated by using the weighted average number of
common shares outstanding adjusted to include the potentially dilutive effect of
these occurrences.
(O) Capitalized Interest - during the quarter we capitalized interest
payments made under the Empress II sublease in the amount of $280,645. The
interest payments will be capitalized until the vessel is placed in service,
estimated to be during our third fiscal quarter, beginning on January 1, 2005.
(2) PDS TRANSACTION
On July 7, 2004, the Company and its subsidiaries ITG Vegas, Inc. ("ITG
Vegas") and ITG Palm Beach, LLC ("ITGPB") and its affiliates Palm Beach Maritime
Corporation ("PBMC") (formerly MJQ Corp.) and Palm Beach Empress, Inc.("PBE")
closed on a series of related transactions (the "PDS Transactions") pursuant to
which PBMC sold and then leased back the casino cruise ship Palm Beach Princess
("Princess"), PBE leased (as lessee) the casino cruise ship Empress II
("Empress"), ITG Vegas and ITGPB obtained long-term charters to operate, and
options to purchase, the Princess and Empress. By way of these sales/lease
transactions, PBMC, ITG Vegas and the Company were able to extinguish their
joint debts. ITG Vegas's investment in the Ship Mortgage Note, described below,
was converted into an investment in the options to purchase the two vessels.
All of the outstanding capital stock of PBMC is owned by Francis W. Murray,
the Chief Executive Officer of the Corporation. PBMC owns 50% of the outstanding
capital stock of PBE. The remaining 50% of the outstanding capital stock of PBE
is owned by Raymond Parello and has been pledged to the Company to secure
certain debts as described in the Company's Report on Form 8-K filed on July 6,
2004.
The following is a summary of the principal terms of the PDS Transactions.
The summary does not purport to be a complete summary and is qualified in its
entirety by reference to the documents which were filed as exhibits to the Form
8-K filed on July 21, 2004.
Sale-Leaseback of the Princess. Prior to the closing of the PDS
Transactions (the "Closing"), the Princess was owned by PBMC. On May 13, 1999,
PBMC issued to Cambridge Capital Group, Inc. a note in the original principal
amount of $12,000,000 (the "Ship Mortgage Note"), which was subsequently
acquired by Donald F. Conway, as Chapter 11 Trustee of the Bankruptcy Estate of
Robert E. Brennan (the "Brennan Trustee"). The Ship Mortgage Note was secured by
a Second Naval Mortgage over the Princess (which became a first priority
mortgage when obligations secured by the first mortgage were paid) (the "Ship
Mortgage"). Pursuant to a Purchase and Sale agreement dated February 22, 2002,
ITG Vegas agreed to purchase the Ship Mortgage Note and Ship Mortgage from the
Brennan Trustee for a purchase price of $13,750,000 (the "Purchase Obligation").
In addition, the Company was indebted to the Brennan Trustee in
8
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
connection with the Company's repurchase of 3,678,145 shares of its common stock
(the "ITB Obligation"). As of Closing, the aggregate outstanding amount of the
Purchase Obligation and ITB Obligation was $7,916,451.71, for all of which PBMC,
ITG Vegas and the Company were jointly and severally liable. At the Closing,
Cruise Holdings I, LLC ("Cruise I"), a subsidiary of PDS Gaming Corporation
("PDS"), purchased the Princess from PBMC for $14,000,000; $7,916,451.71 of
which was paid by PBMC directly to the Brennan Trustee to satisfy the Purchase
Obligation and ITB Obligation.
Also at Closing, Cruise I entered into a Bareboat Charter and Option to
Purchase (the "Princess Charter") and a Master Lease Agreement (together with
Lease Schedule No. 1 thereto, the "Princess Master Lease") to charter and lease
the Princess to PBMC and PBE for a period of five years. The charter hire/rent
payable by PBMC and PBE is $178,500 per month for the first 12 months
(equivalent to interest only on a capital lease obligation of $14,000,000) and
$391,762.80 for the remaining term (amortizing the capital lease obligation over
the next four years) of the Princess Charter. In addition, PBMC and PBE are
required to make annual cash flow sweep payments (equivalent to mandatory
principal prepayments) (the "Cash Flow Sweep") if the EBITDAR (earnings before
interest, taxes, depreciation, amortization and rents) from the operation of the
Princess and the Empress ("EBITDAR") is less than $10,000,000 per year. Any Cash
Flow Sweep payments to be made under the Princess Charter will ultimately be
made by ITG Vegas and ITGPB (as the operators of the Princess), as described
below.
The Princess Charter includes an option for PBMC to purchase the Princess
at the end of the term and is structured such that the monthly charter hire
payments under the Princess Charter will reduce the purchase price for the
Princess to zero in five years (assuming there are no payment defaults) and
title will automatically pass to PBMC at (or, if Cash Flow Sweep payments are
made, before) the end of the term of the Princess Charter.
PBMC and PBE entered into a Sub-Bareboat Charter (the "Princess
Sub-Charter") at Closing to charter the Princess to ITG Vegas and ITGPB for the
same five year period. ITG Vegas will operate the Princess, with ITGPB having
joined in the Sub-Bareboat Charter in order to be jointly and severally liable
with ITG Vegas for charter hire thereunder. The charter hire payable by ITG
Vegas and ITGPB to PBMC and PBE under the Princess Sub-Charter is $50,000 per
month ($600,000 per year) plus one percent (1%) of the gross operating revenues
of the Princess. Under the Princess Sub-Charter, PBMC granted to ITG Vegas and
ITGPB an option to purchase PBMC's right to acquire the Princess at the end of
the term, for an exercise price equal to the appraised value of the Princess,
$17,500,000, to which certain amounts are to be credited as described below (the
"Princess Purchase Option"). As consideration for the Princess Purchase Option,
ITG Vegas will make Cash Flow Sweep payments on the same terms as PBMC and PBE
are required to make such payments under the Princess Charter (and effectively
will make such payments directly to Cruise I on behalf of PBMC and PBE to the
extent any such payments are due). As further consideration for the Princess
Purchase Option, ITG Vegas and ITGPB are to make payments of $178,500 per month
for the first 12 months and $391,762.80 for the remaining four-year term of the
Princess Sub-Charter (i.e., the same amounts as the charter hire payable by PBMC
and PBE under the Princess Charter) (the "Princess Additional Payments"). If ITG
Vegas and ITGPB fail to make any Cash Flow Sweep payment or Princess Additional
Payment when due, PBMC may terminate the Princess Purchase Option. Upon exercise
of the Princess Purchase Option, ITG Vegas and ITGPB will be entitled to credits
against the exercise price of the Princess Purchase Option for (i) ITG Vegas's
investment of $7,244,000 in the Ship Mortgage Note (except to the extent
credited toward payment of the exercise price for the purchase option on the
Empress under the Empress Sub-Charter, described below), plus (ii) the aggregate
amount of all Cash Flow Sweep payments made under the Princess Sub-Charter, plus
(iii) the portion of the Princess Additional Payments made for the 13th month
through the 60th month of the term of the Princess Sub-Charter which would be
considered principal payments if such Additional Payments were payments of
principal and interest on a loan of
9
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$14,000,000 amortized over 48 months at an interest rate of 15.3%. In addition,
the exercise price for the assignment option may be offset by any debts owing by
PBMC to ITG Vegas and/or ITGPB.
Acquisition of the Empress. On March 1, 2004, PBE entered into an agreement
to purchase the vessel known as the M/V Empress II (the "Empress Sale
Agreement") from Empress Joliet Corporation at a purchase price of $3,800,000.
The Empress requires approximately $8,500,000 of alterations, retrofits and
improvements to prepare it for use as a casino cruise ship, a portion of which
in the amount of $2,880,652 will be paid for by ITG Vegas. At Closing, PBE
assigned to Cruise Holdings II, LLC ("Cruise II"), a subsidiary of PDS and
affiliate of Cruise I, all of its rights, title and interest in and to the
Empress Sale Agreement, and the sum of $6,000,000 was deposited in a blocked
account to be used to pay costs of the alterations, retrofit and improvements of
the Empress. Such deposit was funded to the extent of $2,880,652 by ITG Vegas.
Also at Closing, Cruise II entered into a Bareboat Charter and Option to
Purchase (the "Empress Charter") and a Master Lease Agreement (together with
Lease Schedule No. 1 thereto, the "Empress Master Lease") to charter and lease
the Empress to PBMC and PBE for a period of five years. The charter hire is
$82,695 for the first 12 months (equivalent to interest only on a $6 million
capital lease obligation) and $171,702.54 for the remaining term (amortizing the
capital lease obligation over the next four years) of the Empress Charter. In
addition, PBMC and PBE are required to make annual Cash Flow Sweep payments
(equivalent to mandatory prepayments of principal) based on the EBITDAR from
operation of the Princess and Empress as described in respect of the Princess
Charter above.
The Empress Charter includes an option for PBE to purchase the Empress at
the end of the term and is structured the same as the Princess Charter in that
the monthly payments of charter hire under the Empress Charter will reduce the
purchase price for the Empress to zero (assuming there are no payment defaults)
and title will automatically pass to PBE at (or, if Cash Flow Sweep payments are
made, before) the end of the term of the Empress Charter.
PBMC and PBE also entered into a Sub-Bareboat Charter (the "Empress
Sub-Charter") at Closing to charter the Empress to ITG Vegas and ITGPB for a
five year period. ITGPB plans to operate the Empress as a casino cruise business
from the Port of Palm Beach, with ITG Vegas having joined in the Sub-Bareboat
Charter in order to be jointly and severally liable with ITGPB for charter hire
thereunder. The charter hire payable by ITG Vegas and ITGPB under the Empress
Sub-Charter is $100,000 per month ($1.2 million per year) plus one percent (1%)
of the gross operating revenues of the Empress. Under the Empress Sub-Charter,
PBE granted to ITG Vegas and ITGPB an option to purchase PBE's right to acquire
the Empress at the end of the term, for an exercise price equal to the appraised
value of the Empress, to be determined upon the retrofitting and refurbishment
of the Empress, to which certain amounts are to be credited as described below
(The "Empress Purchase Option"). As consideration for the Empress Purchase
Option, ITG Vegas will make Cash Flow Sweep payments on the same terms as PBMC
and PBE are required to make such payments under the Empress Charter (and
effectively will make such payments directly to Cruise II on behalf of PBMC and
PBE to the extent any such payments are due). As further consideration for the
Empress Purchase Option, ITG Vegas and ITGPB are to make payments of $82,695 per
month for the first 12 months and $171,702.54 for the remaining term of the
Empress Sub-Charter (i.e., the same amounts as the charter hire payable by PBMC
and PBE under the Empress Charter) (the "Empress Additional Payments"). If ITG
Vegas and ITGPB fail to make any Empress Additional Payments when due, PBE may
terminate the Empress Purchase Option. Upon exercise of the Empress Purchase
Option, ITG Vegas and ITGPB will be entitled to credits against the exercise
price of the Empress Purchase Option for (i) ITG Vegas's investment in the Ship
Mortgage Note (except to the extent credited toward payment of the exercise
price for the purchase option on the Princess under the Princess Sub-Charter,
described above), plus (ii) the amounts of costs for the retrofit and
10
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
improvements to the Empress which are paid by ITG Vegas or ITGPB plus (iii) the
aggregate amount of all Cash Flow Sweep payments made under the Empress
Sub-Charter, plus (iv) the portion of the Empress Additional Payments made for
the 13th month through the 60th month of the term of the Empress Sub- Charter
which would be considered principal payments if such Additional Payments were
payments of principal and interest on a loan of $6,000,000 amortized over 48
months at an interest rate of 16.54%. In addition, the exercise price for the
assignment option may be offset by any debts owing by PBMC to ITG Vegas and/or
ITGPB.
Lease of Gaming Equipment. At Closing, ITG Vegas and ITGPB entered into a
Master Lease, together with three Lease Schedules (the "Gaming Equipment
Lease"), to lease certain new and used gaming equipment from PDS for use on the
two vessels. A portion of the equipment was previously owned and used by ITG
Vegas on the Princess and was sold to PDS at Closing, for $500,000, pursuant to
a Warranty Bill of Sale and Transfer Agreement and then leased back pursuant to
the Gaming Master Lease. Each Schedule of the Gaming Equipment Lease has a term
of three years from the time the equipment under that Schedule is delivered to
and accepted by ITG Vegas and ITGPB. Aggregate rent for all gaming equipment
will be approximately $1.4 million per year. ITG Vegas and ITGPB have an option
to purchase the leased equipment at the end of the term for a purchase price
equal to the fair market value of the equipment at such time (less, to the
extent any items of equipment were replaced during the previous 12-month period,
the excess of the then-current book value of the replacement equipment over the
book value of the old equipment at the time of replacement).
Guaranty Agreements. As a condition to entering into the PDS Transaction,
PDS required the Corporation, ITG Vegas, ITGPB, PBMC and PBE to guaranty
performance of certain of the PDS Transactions. The Corporation, ITG Vegas and
ITGPB entered into Guaranty Agreements guarantying the obligations of PBMC and
PBE under the Princess Charter, Princess Master Lease, Empress Charter and
Empress Master Lease. The Corporation, PBMC and PBE entered into a Guaranty
Agreement guarantying the obligations of ITG Vegas and ITGPB under the Gaming
Equipment Lease.
Additional Security. As security for the performance by ITG Vegas under the
Guaranty Agreements described above and the Princess and Empress Sub-Charters,
ITG Vegas entered into a Collateral Assignment of the Maritime Office Complex
Lease and Operating Agreement and Other Lease as well as a Leasehold Mortgage
pursuant to which it assigned as collateral to Cruise I and Cruise II its rights
under its lease for space, and its operating rights, at the Port of Palm Beach.
Limitation on Upstream Payments to the Corporation. Upstream payments by
ITG Vegas to the Company are limited under the Princess Sub-Charter and Empress
Sub-Charter. If the "YTD Result" (defined as 10/12ths of annualized EBITDAR from
operation of the two vessels) is greater than $8,000,000 at the end of any of
the first three fiscal quarters or EBITDAR from operation of the two vessels is
greater than $8,000,000 at the end of any fiscal year, and if ITG Vegas and
ITGPB have made all payments due under the Princess Sub-Charter and Empress
Sub-Charter, ITG Vegas may make (i) tax sharing payments to the Company
(payments equal to the federal income tax savings to ITG Vegas resulting from
its inclusion in the Company's consolidated group for federal income tax
purposes) including any tax sharing payments previously deferred as a result of
the limitation under the Princess Sub-Charter or Empress Sub-Charter, and (ii)
other payments to the Company in an amount which, together with charter hire
payments in excess of $100,000 per month to PBMC and PBE for the two vessels,
shall not exceed $200,000 per month (a "Restricted Payment"). If ITG Vegas is
prohibited from making any Restricted Payment for any month, once such payments
are again allowed, such Restricted Payment may be made to the Company, provided
that the total amount of Restricted Payments paid by ITG Vegas to the Company,
PBMC and PBE in any twelve- month period may not exceed $2,400,000.
11
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) DESCRIPTION OF LEASING ARRANGEMENTS
As described in the footnote above, on July 7, 2004 the Company and several
of its subsidiaries entered into sub charter transactions for two vessels and
lease transactions for equipment to be placed on the vessels. The sub charter
for the Palm Beach Princess, which is currently in service, will be accounted
for as a capital lease and the lease for the gaming equipment currently aboard
the vessel and the lease for new gaming equipment will be accounted for as an
operating lease.
Principal payments made will reduce the capital lease purchase liability
and the interest portion of each monthly payment will be expensed. Depreciation
expense will be recorded for the Palm Beach Princess using an estimated useful
life of 20 years. Sub charter fees of $50,000 per month plus 1% of gross
revenues of the Palm Beach Princess will be expensed as incurred.
The transaction also included the sub charter of the Empress II and a lease
for gaming equipment aboard the vessel. PDS has placed $6 million in a reserve
account which included $2,880,652 of our funds for the improvements to be made
to the Empress II. When such improvements are completed the vessel will be
appraised and the accounting treatment for the transactions will be determined
at that time. Sub charter fees of $100,000 per month plus 1% of gross revenues
of the Empress II will be expensed as incurred. The gaming equipment lease will
be accounted for as an operating lease. Interest payments made on the Empress II
sub- lease and payments made for the charter hire fees will be capitalized until
the vessel is placed in service.
Vessels, plant and equipment at September 30, 2004 include the following
amounts for capitalized leases:
Vessel, Palm Beach Princess $ 17,500,000
Less: allowance for depreciation (201,923)
------------
Capital Leases $ 17,298,077
============
12
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of September 30, 2004:
Period ending September 30,
2005 $ 3,528,526
2006 5,661,154
2007 5,661,154
2008 5,661,154
2009 4,717,628
-------------
Total minimum lease payments $ 25,229,616
Less: amount representing interest (11,229,616)
-------------
Present value of net minimum lease payment $ 14,000,000
=============
Operating Leases
The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of September 30, 2004:
Period ending September 30,
2005 $ 1,038,098
2006 1,362,147
2007 1,135,122
-------------
Total minimum lease payments $ 3,535,367
=============
(4) ITG VEGAS, INC. CHAPTER 11 PLAN OF REORGANIZATION
On January 3, 2003, ITG Vegas, Inc. ("ITG Vegas"), our subsidiary operating
the Palm Beach Princess, and Palm Beach Maritime Corp.("PBMC") (formerly MJQ
Corp.), which owned the Palm Beach Princess vessel, an entity owned by Francis
W. Murray, filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the Southern District of Florida, Palm Beach Division (the "Bankruptcy
Court"), In re: ITG Vegas, Inc., Case No. 03-30038. The petition did not cover
the Parent company, ITB, nor any other of ITB's subsidiaries. The Palm Beach
Princess continued to operate as "debtor-in-possession" under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. We had previously entered
into a Master Settlement Agreement to purchase from the Chapter 11 Trustee for
the Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee") the
promissory note of Palm Beach Maritime Corp. for $13.75 million. We did not have
funds necessary to complete that purchase by January 6, 2003, the date required
for payment of the balance of such purchase price. Therefore, on January 3,
2003, in order to protect our invested deposits and operation of the vessel, ITG
Vegas (together with Palm Beach Maritime Corp) filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code.
13
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On September 12, 2003, the Bankruptcy Court issued an order confirming the
Amended Joint Chapter 11 Plan of Reorganization in the Chapter 11 cases of ITG
Vegas, Inc. and Palm Beach Maritime Corp. (ITG Vegas, Inc. and Palm Beach
Maritime Corp. being hereinafter called the "Debtors"). The Plan was a plan of
reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code which was
jointly proposed by the Debtors. As of October 15, 2003, the effective date of
the Plan, all claims, debts, liens, security interests and encumbrances of and
against the Debtors and against all property of their respective bankruptcy
estates, which arose before confirmation, were discharged, except as otherwise
provided in the Plan or confirmation order. Post-confirmation, each of the
Debtors continued as reorganized debtors.
With the consummation of the PDS Transactions described above in Note 2,
all of our and the Debtors' indebtedness to the Brennan Trustee was paid in
full.
On July 17, 2004, the Bankruptcy Court issued a final decree closing the
Debtors' Chapter 11 cases.
(5) NOTES RECEIVABLE
(A) Second Cherry Hill Note
A portion of the proceeds from the sale of the non-operating former El
Rancho Hotel and Casino in Las Vegas to Turnberry/Las Vegas Boulevard, LLC
("Turnberry") on May 22, 2000 was used by us to purchase a promissory note in
the face amount of $23,000,000 (the "Las Vegas Note"). The interest rate under
such note was to be adjusted from time to time since the interest actually
payable would have been 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 had received total distributions
equal to their capital contributions plus an agreed upon return on their
invested capital, the next $23 million of Distributable Cash would have been
paid to us. We were to have received payments under the note equal to 33 1/3% of
all Distributable Cash until the maturity date, which was to have occurred on
the 30th anniversary of our purchase of the note. We had the option to convert
the promissory note 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 was to be converted into a 33 1/3% equity interest
in the buyer at the 30th anniversary of its issuance. Fair value and the
collectability of this note was determined by a real estate appraisal completed
in July, 2003 for a bank in anticipation of financing for Turnberry.
On June 16, 2004, the Company consummated the sale of the Las Vegas Note.
The purchaser of the Las Vegas Note was Cherry Hill at El Rancho LP (the
"Buyer"), a limited partnership which is affiliated with the maker of the Las
Vegas Note.
In exchange for the Las Vegas Note, the Company received cash payments from
the Buyer of $2.8 million, a non-recourse loan from Turnberry Development, LLC,
an affiliate of the Buyer, in the amount of $5 million and a promissory note
issued by Soffer/Cherry Hill Partners, L.P. ("Cherry Hill Partners"), another
affiliate of the Buyer, in the principal amount of $35,842,027 (the "Second
Cherry Hill Note"). The principal amount of the Second Cherry Hill Note equals
the difference between the unpaid principal plus all accrued and unpaid interest
(at 22%) under the Las Vegas Note, less the $2.8 million in purchase price
payments and $5 million non-recourse loan paid to the Company. As further
consideration, the Company received the right to use aircraft owned or leased by
the Buyer or its affiliates, for up to 64 hours in total, which the Company
valued at approximately $224,000.
The Company is not liable for repayment of the principal of the $5 million
loan included in the foregoing consideration. However, the Company is obligated
to pay interest and fees on such loan aggregating
14
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$600,000 per year ($50,000 per month) for five (5) years.
The Second Cherry Hill Note received by the Company matures in 2015 and is
similar to the Las Vegas Note which was sold, in that both generally are payable
prior to maturity only from distributable cash of the maker. The Las Vegas Note
was payable prior to maturity from distributable cash of the entity which had
purchased, in May of 2000, the real property (the "El Rancho Property")
previously owned by our Orion Casino Corporation subsidiary in Las Vegas,
Nevada, which had been the site of the former El Rancho Hotel and Casino. Since
the maker of the Las Vegas Note has not yet finalized plans for development of
that property, the time at which the Company might have received payments under
the Las Vegas Note (had it not been sold) remained uncertain. The obligor under
the Second Cherry Hill Note is one of the principal partners in the entity which
purchased the Garden State Park real property from a Company subsidiary in
November of 2000, and such obligor will only have funds with which to pay the
Second Cherry Hill Note out of its profits from the development of Garden State
Park. The development of Garden State Park, located in Cherry Hill, New Jersey,
was delayed as a result of community opposition to certain elements of the
development plan, and, while the Company believes that the development plan is
now moving forward, the timing and amount of profits there also remain
uncertain. The Company already holds a promissory note in the face amount of $10
million, received from the purchaser of Garden State Park in connection with the
sale of such real property, which the Company expects will be fully paid in
time. While the Company expects that note to be fully paid, it is not optimistic
that this Second Cherry Hill Note will be fully paid, and accordingly, the
Company has written down the Second Cherry Hill Note (defined above) on its
books. The interest portion of the Las Vegas Note amounting to approximately
$20,866,000 has never been included as income on the Company's books, therefore
the interest capitalized under the Second Cherry Hill Note is not subject to a
write down. The remaining portion of the Second Cherry Hill Note has been
written down to $4,578,651 which resulted in an impairment charge of the new
note of $12,786,589, recorded in the 4th quarter of the Company's June 30, 2004
fiscal year and an additional impairment charge of $200,000 recorded during the
quarter ended September 30, 2004. The Company had previously recorded deferred
income of $2,786,589 on the original sale of the El Rancho property in May,
2000, which amount was used to reduce the impairment charge to $10,000,000 at
June 30, 2004. In its assessment of the fair value of the Second Cherry Hill
Note, the Company estimated that its share of proceeds from the sale of the El
Rancho property prior to July 31, 2005 would generate approximately $500,000. If
a sale does not occur prior to July 31, 2005 it is anticipated that the Company
will take an additional impairment write down against the Cherry Hill Note of
approximately $300,000 in this fiscal year ending June 30, 2005.
The Second Cherry Hill Note is secured by a pledge of stock owned by
Raymond Parello, an affiliate of the Buyer, in the Palm Beach Empress, Inc.,
representing fifty percent (50%) of the stock in that company. Palm Beach
Empress, Inc. is an entity formed to acquire a second vessel which will be
chartered to a subsidiary of the Company, and the Company expects to operate
that second vessel as a casino cruise ship, similar to the operation of the
casino "cruise to nowhere" business conducted by a subsidiary of the Company
since April of 2001. The other fifty percent (50%) of the stock in Palm Beach
Empress, Inc. is owned by PBMC, a corporation owned by Francis W. Murray, the
Company's Chief Executive Officer. PBMC presently owns and charters to a
subsidiary of the Company the Palm Beach Princess vessel, the operation of which
is the Company's primary operating business.
Mr. Parello will have the right to acquire the Second Cherry Hill Note from
the Company in exchange for his stock in Palm Beach Empress, Inc. Such "put"
option held by Mr. Parello (giving him the right to put his stock in Palm Beach
Empress, Inc. to the Company in exchange for the Cherry Hill Note) will
effectively limit the value to the Company of the Second Cherry Hill Note to the
value of Mr. Parello's one-half interest in Palm Beach Empress, Inc. Mr.
Parello's put right will be exercisable upon the later to occur of (1) payment
by or for the account of Cherry Hill Partners of $483,205.48 under the Second
Cherry Hill Note, and (2)
15
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
payment of the entire principal balance of the non-recourse loan received by our
Orion subsidiary in the principal amount of $5 million, referred to above (upon
which repayment the Company's obligation to pay interest and fees of $600,000
per year on such loan would end). Such put option is set forth in the
Shareholders' Agreement among Palm Beach Empress, Inc., Raymond Parello and
PBMC, to which our Orion subsidiary has joined solely for the purpose of
confirming its agreement to the put option.
In the event Mr. Parello receives any dividends or other distributions on,
or proceeds from, any sale of his shares in Palm Beach Empress, Inc., the same
will be applied as a mandatory prepayment of the Second Cherry Hill Note.
In addition, if, before July 31, 2005, there is a sale or other disposition
of the El Rancho Property, or a sale or other disposition of the entire direct
or indirect interest of the owner of such property, then fifty percent (50%) of
any profit in excess of $10 million realized on such sale also shall be paid to
us as a mandatory prepayment of the Second Cherry Hill Note. The July 31, 2005
deadline by which a sale of the El Rancho Property would have to occur in order
to trigger a possible prepayment to the Company will be extended to January 31,
2006 if a portion, but less than all, of the El Rancho Property or of the
Owner's direct or indirect ownership interest is sold before July 31, 2005.
(B) Original Cherry Hill Note
A portion of the proceeds from the sale on November 30, 2000 of our Garden
State Park property in Cherry Hill, New Jersey, to Realen-Turnberry/Cherry Hill,
LLC ("Realen") was paid in the form of a promissory note in the face amount of
$10 million (the "Note.") Under the Note, the interest rate 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 buyer's equity investors
have received aggregate distributions equal to their capital contributions plus
an agreed upon return on their invested capital, the next $10 million of
Distributable Cash will be paid to us. We will thereafter receive payments under
the Note equal to 33 1/3% of all Distributable Cash until the maturity date,
which occurs on the 15th anniversary of the issuance of the Note. We may convert
the promissory note, at our option, into a 33 1/3% equity interest in Realen
during the six month period prior to the 15th anniversary of the issuance of the
Note. If not then converted, the Note will be payable at maturity on said 15th
anniversary in an amount equal to (i) the difference, if any, between $10
million and total payments previously made to us under the Note and (ii) 33 1/3%
of any excess of the fair market value of Realen's assets over the sum of its
liabilities (other than the Note) and any unreturned equity investment of its
owners. Fair value and the collectability of this note was determined by a real
estate appraisal completed in March, 2002 for a bank in anticipation of
financing for Turnberry.
16
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets -
non-related parties:
September 30, 2004 June 30, 2004
------------------ --------------
Long-Term Lease Deposits $ 293,695 $ 0
Long-Term Prepaid Loan Costs 664,912 0
Port Lease Rights 250,000 250,000
Other Misc. Assets 84,975 84,975
------------------ --------------
Total $ 1,293,582 $ 334,975
================== ==============
(7) DEPOSITS AND OTHER ASSETS - RELATED PARTIES - NET
The following items are classified as Deposits and Other Assets - Related
Party Transactions (See Note 22):
September 30, 2004 June 30, 2004
------------------ ------------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,034,405 $ 2,034,405
Loan Transferred from Golf Course Project to
OC Realty, LLC 735,584 735,584
Accrued Interest on Loans to the Ft. Lauderdale Project
(OC Realty, LLC) 1,270,624 911,350
Purchase Option Deposits on Vessels 3,686,416 0
Advances to PBMC 0 616,534
Goodwill on Purchase of GMO Travel 193,946 193,946
Note Receivable from Francis W. Murray 0 2,600,749
Deposits on new lease for M/V Palm Beach Princess and the
Empress II Palm Beach Maritime Corp.("PBMC") (formerly
MJQ Corp.) 0 880,783
Accounts Receivable from Francis W. Murray 0 32,751
Loans to Francis W. Murray 0 93,000
Accrued Interest Transferred from Golf Course Project to
OC Realty, LLC 0 287,327
Accounts Receivable from Frank Leo 0 24,512
-------------- -------------
Total Deposits and Other Assets - Related Parties $ 7,920,975 $ 8,410,941
============== =============
17
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
September 30, 2004 June 30, 2004
Interest % ----------------------------------- -----------------------------------
Per Annum Current Long-Term Current Long-Term
---------- -------------- ----------------- -------------- -----------------
International Thoroughbred Breeders,
Inc.:
- -----------------------------------
Chapter 11 Trustee (the "Brennan
Trustee") for the Bankruptcy Estate of
Robert E. Brennan (A) 12% $ -0- $ -0- $ 4,038,838 $ 4,024,142
Francis X. Murray (B) 8% 159,164 -0- 159,164 -0-
William H. Warner (B) 12% 24,000 -0- 24,000 -0-
Other Various 34,617 -0- 25,000 -0-
ITG Vegas, Inc.:
- ----------------
International Game Technology (C) 8% 122,155 41,396 122,174 71,685
Garden State Park:
- ------------------
Service America Corporation (D) 6% 160,000 -0- 160,000 -0-
-------------- ----------------- -------------- -----------------
Totals $ 499,936 $ 41,396 $ 4,529,176 $ 4,095,827
Net Liabilities of Discontinued
Operations - Long Term (160,000) -0- (160,000) -0-
Related Party Notes (183,164) -0- (183,164) -0-
-------------- ----------------- -------------- -----------------
Totals $ 156,772 $ 41,396 $ 4,186,012 $ 4,095,827
============== ================= ============== =================
The effective Prime Rate at June 30, 2004 was 4%.
(A) Balance as of June 30, 2004: In connection with the Plan of
Reorganization we became liable for the purchase of the Ship Mortgage Obligation
in the amount of $9.75 million and that obligation was combined with the unpaid
balance of the Stock Purchase Note, and an additional obligation to purchase
450,000 shares for $225,000, plus accrued interest, for a total amount due the
Brennan Trustee of $11,623,414 ("The Payment Obligation"). In connection with
the PDS transactions, on July 7, 2004 the outstanding principal balance of
$7,744,936 was paid by PBMC directly to the Brennan Trustee to satisfy the
Payment Obligation. (See Note 2)
(B) On March 1, 2003, we issued a promissory note for a line of credit up
to $225,000 bearing interest at 8% to Francis X. Murray. The outstanding balance
on the line of credit note at September 30, 2004 was $159,164 and accrued
interest was $19,396. In fiscal 2003, we issued promissory notes for $24,000
bearing interest at 12% to William H. Warner, Secretary of the Company. Interest
is paid monthly on the note to Mr. Warner. The proceeds from Mr. Murray's and
Mr. Warner's notes were used as working capital.
18
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(C) On December 22, 2003, ITG Vegas, Inc. issued a twenty-four month
promissory note in the amount of $231,716 bearing interest at 8.5% to
International Game Technology for the purchase of gaming equipment. A payment of
$30,000 was paid on delivery of the equipment and 24 consecutive monthly
installments of $10,532.85 are to be paid on the balance. At September 30, 2004,
the principal balance on the International Game Technology note was $163,551.
(D) In connection with the January 28, 1999 lease transactions for the
Garden State Park facility, the Company purchased a liquor license located at
Garden State Park owned by an unaffiliated third party, Service America
Corporation (the "Holder"), for $500,000 financed by a five (5) year promissory
note at a 6% interest rate. Yearly principal payments of $80,000 plus interest
were due on December 28, 2002 and December 28, 2003. The payments due on
December 28, 2002 and 2003 have not been made as of September 30, 2004. We are
attempting to negotiate new terms for payment of this obligation, but the
creditor may bring an action to collect this debt.
(9) COMMITMENTS AND CONTINGENCIES
See Note 2 for additional commitments and contingencies with respect to the
PDS Transaction.
See Note 14 for additional commitments and contingencies of the Company and
transactions with related parties.
Effective December 1, 2000, we entered into a five-year employment contract
with Francis W. Murray, our Chief Executive Officer. The contract provides for
annual compensation of $395,000, a $1,500 monthly automobile expense allowance,
a country club annual dues allowance and travel and entertainment reimbursements
for business expenses reasonably incurred by him in addition to participation in
various other benefits provided to our employees. As part of his employment
contract, Mr. Murray was awarded an option to purchase 2,000,000 shares of our
Common Stock. On January 4, 2003, we began deferring payments of compensation
due to Mr. Murray due to a lack of funds resulting from the institution of
proceedings by our subsidiary ITG Vegas, under Chapter 11 of the bankruptcy
code. In November, 2003 the Company's Board of Directors approved issuance of
the Company's Common Stock, valued at $0.50 per share, in exchange for the
deferred salary of Mr. Murray. In July, 2004, Mr. Murray elected to receive his
salary of $344,865 accrued from January 3, 2003 until November 18, 2003, which
had been deferred, in the form of 689,730 shares of the Company's Common Stock.
On July 28, 2004 Mr. Francis W. Murray exercised his 2 million options at an
exercise price of $0.26875 per share. The Company issued 2 million shares of
Treasury stock it held in exchange for proceeds of $537,500. Also on July 28,
2004 the Company issued 689,730 Treasury shares to Mr. Murray in exchange for
the deferred salary of $344,865 which occurred from January 3, 2003 until
November 18, 2003.
With the sale of our Freehold Raceway property on January 28, 1999 we
assumed full responsibility for the costs associated with the clean up of
petroleum and related contamination caused by the leakage of an underground
storage tank which was removed in 1990, prior to our purchase of Freehold
Raceway. In February 2000 the N.J. Department of Environmental Protection
approved our remedial investigation workplan ("RIW"). Under the RIW numerous
test wells were drilled and the soil tested and monitored to determine the
extent and direction of the flow of underground hazardous material and reports
and conclusions of the tests were prepared for the State of New Jersey. However,
prior to obtaining a remedial action workplan from the State of New Jersey, the
work was stopped due to a lack of funds resulting from the institution of
proceedings by our subsidiary, ITG Vegas, under Chapter 11 of the bankruptcy
code. At this time we are unable to predict the effects that such delay may
cause, but it is likely that some retesting of the wells may be necessary. Prior
to the delays it was estimated that the cost to remediate the site would be
19
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
approximately $750,000. As of June 30, 1999 we had accrued $362,000 and we
accrued an additional amount of approximately $388,000 during fiscal 2001 as the
scope of the project was further defined. Such accruals were made with the help
of the environmental consulting firm engaged by the Company. These costs include
drilling of test wells and monitoring, lab testing, engineering and
administrative reports, equipment and remediation of the site through a "pump
and treat" plan. The Company has made payments of approximately $93,600,
$200,000, and $323,000 during fiscal years 2000, 2001, 2002 respectively which
were charged against the accrued balances. As of September 30, 2004 the accrued
balance was $130,398. It is estimated that completion of the site clean up will
take approximately 18 months from the time the work is reinstated. It is
unlikely that the Company will receive any insurance reimbursement for our costs
of this remediation project.
In connection with the January 28, 1999 sale and lease transactions for the
Garden State Park facility, we purchased a liquor license owned by an
unaffiliated third party, Service America Corporation, for $500,000 financed by
a five (5) year promissory note at a 6% interest rate. At December 31, 2002, the
unpaid principal balance was $160,000. Yearly principal payments of $80,000 plus
interest were due on December 28, 2002 and December 28, 2003 and have not been
paid. The Company entered into a sale and lease agreement for the lease of our
premises from Jan. 28, 1999 to May 29, 2001 and the sale of a 10 acre portion to
be used as an OTB facility. Under the terms of our sale and lease agreement the
lessee/buyer purchased the liquor license for $100,000 and was obligated to
return it to us in exchange for a refund of the $100,000 payment if, at the
expiration of the lease, June 27, 2002, it did not have a use for the liquor
license at the OTB facility. During the three year period Jan. 28, 1999 to Jan.
28, 2002 no OTB facility was built and the lessee/buyer did not have a use for
the liquor license at that property. By the terms of the contract the Company
has the right to re-acquire the liquor license for $100,000 and has exercised
such right, however the lessee/buyer has refused to perform. The Company
believes it will need to take legal action to enforce its right to the liquor
license.
Through ITG Vegas, we have negotiated with the Port of Palm Beach District
a new operating agreement and lease of space in a new office complex constructed
at the Port of Palm Beach adjacent to a new cruise terminal effective, as
modified, May 5, 2003. The term of the initial lease is five years at $183,200
per year payable monthly. We are also required to make tenant improvements to
the new space in a minimum amount of $333,000, however that the actual cost to
make the improvements was approximately $950,000. We will have the right to a
credit of up to the minimum amount of improvements required of $333,000 of
construction costs against the initial term of our five year lease.
Through our subsidiary, Royal Star Entertainment LLC, we have negotiated
with the Port of Palm Beach District a second Operating Agreement dated December
18, 2003, as subsequently amended. This Operating Agreement will permit us to
operate the Empress II in passenger service from the Cruise Terminal at the
Port, with certain berthing and scheduling priorities. The initial term of this
Operating Agreement is five years from the date of commencement of sailings by
the Empress II from the Port, with subsequent renewal options of four and three
years.
On August 6, 2004 we amended the Lease and Operating Agreement with the
Port of Palm Beach in order to permit our construction of a passenger gangway
system and destination signage on Port property and our refurbishment and
upgrading of the passenger cruise terminal facilities, which measures, we
believe, will enhance our ability to promote and market our cruise services. We
will receive a wharfage credit from the Port of Palm Beach in the amount of
$75,000 with respect to our construction of the gangway. In addition, we agreed
to pay the Port of Palm Beach $.50 per vehicle parked in the passenger parking
lot at the Port, for a minimum period of six months beyond the commencement of
cruise services at the Port of Palm Beach by the Empress II.
20
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 1, 2004 we entered into a Dockage Space Agreement between the
Company and the City of Riviera Beach for approximately 160 feet of concrete
dock space at the City Marina. The term is for one year for a fee of $11,000 per
month. The lease is renewable subject to the approval of the City. This
Agreement is intended only for the purpose of making available the assigned
space for vessels other than a day-cruise gaming ship. Further, the Company
understands that in the event it wishes to dock a day-cruise gaming ship that it
will be required to enter into a new agreement with the City.
The PDS Transaction involved, among other things, our chartering a second
vessel, the Empress II. We have committed $3,407,602 towards costs of
refurbishing and retrofitting the Empress II vessel to date. Start up costs
associated with refurbishing and retrofitting the Empress II vessel and placing
it in service (including marketing expenses and other soft costs), are expected
to amount to approximately $10 million, $6 million of which has been provided
for by means of an escrow of our $2,880,652 payment and proceeds of the PDS
Transactions. Additional amounts necessary to begin operation of the Empress II
vessel are expected to be provided from working capital of our ITG Vegas
subsidiary. ITG Vegas' ability to generate sufficient working capital with which
to pay such costs may be adversely affected by delays or cost overruns in
connection with refurbishing and refitting the Empress II and by weather related
and other uncertainties affecting its operations. As indicated by the table
below, our debt service requirements have increased significantly with the PDS
financing due to the increase in amounts of debt and rates involved. The
increase in the amount is attributed in part to the arrangement for procurement
and refurbishment for a second vessel, the Empress II. We are dependent upon the
expected additional revenue from the operations of the second vessel to cover
the increased financing costs.
The following summarizes commitments on non-cancelable contracts and leases as
of September 30, 2004:
Twelve Months Ended September 30,
-------------------------------------------------------------------- There-
2005 2006 2007 2008 2009 after Total
---------- ----------- ----------- ----------- ----------- --------- -------------
Capital Leases - PBP $ 3,528,526 $ 5,661,154 $ 5,661,154 $ 5,661,154 $ 4,717,628 $ -0- $ 25,229,616
Leases - Empress II 1,981,755 3,410,430 3,410,430 3,410,430 3,072,930 -0- 15,285,975
Notes and Mortgages:
Principal 684,912 -0- -0- -0- -0- -0- 684,912
Interest 22,475 -0- -0- -0- -0- -0- 22,475
Deferred Interest Payments 450,000 600,000 600,000 600,000 450,000 -0- 2,700,000
Employee Contracts 722,884 146,314 -0- -0- -0- -0- 869,198
Operating Leases:
Casino Equipment 1,038,098 1,362,147 1,135,122 -0- -0- -0- 3,535,367
Administrative & Office 517,317 265,032 122,787 68,018 -0- -0- 973,154
Purchase Obligations 204,374 61,120 61,006 61,006 61,006 254,190 702,702
Other Long-Term Debt -0- 285,649 -0- -0- -0- -0- 285,649
---------- ----------- ----------- ----------- ----------- --------- -------------
Total $ 9,150,341 $ 11,791,846 $ 10,990,499 $ 9,800,608 $ 8,301,564 $ 254,190 $ 50,289,048
========== =========== =========== =========== =========== ========== =============
21
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) LEGAL PROCEEDINGS
We are a defendant in various 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 a material adverse effect on our financial position, results of
operations, or cash flows.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of September 30, 2004, in assessing the fair value of financial
instruments, the Company has used a variety of methods and assumptions, which
were based on estimates of market conditions and loan risks existing at that
time. For certain instruments, including cash and cash equivalents, investments,
non- trade accounts receivable and loans, and short-term debt, it was estimated
that the carrying amount approximated fair value for the majority of these
instruments because of their short-term maturity. The carrying amounts of long
term debt approximate fair value since the Company's interest rates approximate
current interest rates. On our original Cherry Hill note receivable in the
amount of $10 million, we have elected to defer the gain on the sale and the
interest to be accrued until such time that collectability can be determined. On
our second Cherry Hill note receivable we have recorded a $200,000 impairment
loss during this current quarter to reflect the estimated current market value
of this note. In its assessment of the fair value of the Second Cherry Hill
Note, the Company estimated that its share of proceeds from the sale of the El
Rancho property prior to July 31, 2005 would generate approximately $500,000. If
a sale does not occur prior to July 31, 2005 it is anticipated that the Company
will take an additional impairment write down against the Cherry Hill Note of
approximately $300,000 in this fiscal year ending June 30, 2005. (See Note 5)
(12) EXTRAORDINARY ITEM
The Master Settlement Agreement with the Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee") included a final
settlement by the Brennan Trustee with numerous parties. Among those parties
were Leo Equity Group, Inc., Michael J. Quigley, III and Palm Beach Maritime
Corp. ("PBMC") (formerly MJQ Corp.). During the quarter ended March 31, 2002 the
Company charged Leo Equity Group $3 million and PBMC $1 million for their
portion of expenses incurred by us and a success fee for the efforts of
International Thoroughbred Breeders, Inc. in connection with the final
settlement with the Brennan Trustee. Prior to our acquisition of Leo Equity
Group, Inc., Leo Equity Group, Inc. assigned to us certain receivables in the
approximate amount of $3 million, including the receivables of approximately
$2.6 million due it from Michael J. Quigley III, in payment of this obligation.
We had deferred all income from these transactions until such time as payment
was received. During the first quarter of Fiscal 2005 we received payment for
the previously deferred income.
(13) TREASURY SHARES
On December 13, 2002, the Company issued a promissory note in the amount of
$1,648,403 to purchase 3,228,146 shares of its Common Stock under the control of
the Chapter 11 Trustee for the bankruptcy estate of Robert E. Brennan. In
connection with our Chapter 11 Plan of Reorganization, effective October 15,
2003, we purchased an additional 450,000 shares for $225,000, and the total
amount of our debt for the purchases of stock as of October 15, 2003 was
$1,873,413 which also includes accrued interest.
22
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Such indebtedness was combined with the obligations to purchase the Ship
Mortgage Obligation, and was payable over the next three years together with
interest at 12% per annum. On July 7, 2004 the Company paid in full the amount
due under the Stock Purchase Agreement. (See Note 2).
On July 28, 2004 Mr. Francis W. Murray exercised his option to purchase 2
million shares of our Common Stock at an exercise price of $0.26875 per share.
The Company issued 2 million shares of Treasury stock it held in exchange for
proceeds of $537,500. Also on July 28, 2004 the Company issued 689,730 Treasury
shares to Mr. Murray in payment of the deferred salary of $344,865 we owed to
him for the period from January 3, 2003 until November 18, 2003. The issuance of
shares for deferred salary was approved by the Board of Directors at a time when
the market value was $.50 per share.
On August 31, 2004 the Company issued 73,339 Treasury shares to Robert
Quigley in payment of the deferred salary of $36,670 we owed to him for the
period from January 3, 2003 until November 18, 2003. The issuance of shares for
deferred salary was approved by the Board of Directors at a time when the market
value was $.50 per share.
(14) RELATED PARTY TRANSACTIONS
See Footnote 2 for related party transactions regarding the PDS
Transaction.
During the third quarter of Fiscal 2001, we invested in two projects in
which our Chairman, President and Chief Executive Officer, Francis W. Murray,
also has a pecuniary interest. In connection with one such project, the Board of
Directors approved advances, as loans, of up to $1.5 million to a limited
partnership in which Francis W. Murray owned, at that time, an 80% equity
interest and owned the general partner, the proceeds of which were to be used to
pay costs and expenses for development of a golf course in Southern California.
Mr. Murray's equity interest in the limited partnership, indirectly through his
ownership of the general partner, as of December 26, 2002, was 64%. At December
26, 2002, loans of $735,584 were outstanding on such project and we had accrued
$155,945 of interest due on the loans. On December 26, 2002, the limited
partnership's indebtedness to us was assumed by OC Realty, LLC, a Florida
limited liability company which is owned by Francis W. Murray and which owns the
second real estate project described below. Such indebtedness is due December
31, 2004 and bears an interest rate of 6%.
In the second project, Mr. Murray is participating in the development of an
oceanfront parcel of land, located in Fort Lauderdale, Florida, which has
received all governmental entitlements from the City of Fort Lauderdale and the
state of Florida to develop a 14-story building to include a 5-story parking
garage, approximately 6,000 square feet of commercial space and a residential
9-story tower. The property had been owned by MJQ Development, LLC, which was
owned by Michael J. Quigley, III until December 26, 2002 when the property was
acquired by OC Realty, LLC, the entity owned by Mr. Murray. Mr. Quigley has no
relationship to Robert J. Quigley, one of our directors. OC Realty is developing
a condominium hotel resort on the property as discussed above. As of September
30, 2004, we had lent $2,034,405 in total to MJQ Development and we have accrued
interest in the amount of $911,350 on the loan. Upon the acquisition of the
property, OC Realty assumed MJQ Development's indebtedness to us. These loans
bear interest at 12% and will be repayable out of the first proceeds, after
payment of bank debts, generated by the sale of the condominiums. We will also
have the right to receive, as participation interest, from available cash flow
of OC Realty if the project is successful, a priority return of our investment
and a priority profits interest for up to three times our investment. Repayment
of these loans and our participation interest will be subject to repayment of,
first, bank debt of approximately $5.5 million (at present) incurred in the
purchase of the real property and, second, construction financing expected to
23
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
amount to $25 to $30 million and third, capital invested by a joint venture
partner (which had been expected to be up to $6.5 million) plus a 15% per annum
return thereon. At the time the loans to MJQ Development were approved, Mr.
Murray stood to receive a substantial contingent benefit from MJQ Development
for his participation in the project. Fair value and collectability of the
original investment of $2,034,405 and accrued interest was determined by the
joint venture through projections evidencing our collection upon build out and
sale of the project.
In order to raise the capital with which to proceed in the development of
the Ft. Lauderdale property, OC Realty has placed the Ft. Lauderdale property in
a joint venture in connection with which the other joint venture partner was to
fund up to $6.5 million for development and receive a 50% equity interest. Our
loan and participation interest will be payable out of OC Realty's 50% share of
distributions after repayment of debt and the new investor's capital investment
and 15% annual return thereon. However, the joint venture partner has
discontinued its funding for the project. OC Realty has loaned funds to the
joint venture to meet its current requirements at a 20% annual interest rate. In
addition, OC Realty is in discussions with third parties to replace its joint
venture partner and is considering entering into a development agreement with a
recognized developer to aid the marketability of the project, however, such
arrangements will vary from the arrangements cited above with its prior 50%
joint venture. The Company has assessed the collectability of the advances made
to OC Reality based on comparable sales of like units in the marketplace which
suggest demand is strong and prospective sales of the project's inventory or
units will be more than adequate to meet its obligations including our
outstanding notes payable.
At a meeting of the Board of Directors of the Company held on June 29, 2004
the board authorized reimbursement to Francis W. Murray for tax consequences he
would incur as a result of the PDS Transaction. The amount and form of such
reimbursement will be determined by the full board of directors when data as to
such tax consequences becomes available.
On July 7, 2004, the Company entered into a five-year charter of two
vessels, the Palm Beach Princess and the Empress II, under the terms described
in footnote 2 above. The vessels are chartered to us by PBMC and Palm Beach
Empress, Inc. Mr. Murray is sole owner of PBMC and a 50% owner of Palm Beach
Empress, Inc. (See Note 2.)
During the quarter, the Company re-entered the equine business for which
the Company was originally established and purchased several horses of different
ages. The Company has committed to purchasing several horses, the majority being
one and two year olds, from Francis W. Murray at prices to be determined by a
current appraisal of their values. Payment for such horses will only be made out
of profits realized from the horses purchased from Mr. Murray, if any. Effective
September 1, 2004, the Company has taken over the stabling and training costs
for these horses previously owned by Mr. Murray. It is our plan to bring these
horses into racing if we consider them competitive following the training
period.
24
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Forward-Looking Statements
We have made forward-looking statements in this Form 10-Q, including the
information concerning possible or assumed future results of our operations and
those preceded by, followed by or that include words such as "anticipates,"
"believes," "expects," "intends," or similar expressions. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You should
understand that the following important factors, in addition to those discussed
under "Risk Factors" in the Company's Annual Report on Form 10-K, filed for the
year ended June 30, 2004, could affect our future results and could cause those
results to differ materially from those expressed in our forward-looking
statements:
o general economic and business conditions affecting the tourism
business in Florida;
o competition;
o execution of our new business strategy;
o changes in laws regulating the gaming industry;
o fluctuations in quarterly operating results as a result of
seasonal and weather considerations;
o events directly or indirectly relating to our business causing
our stock price to be volatile; and
o delays or cost-overruns in connection with refurbishing and
refitting a second vessel which we plan to place in service.
Background
The Company, through its wholly owned subsidiary, operates an offshore
gaming vessel, the M/V Palm Beach Princess which we sub charter. This vessel
sails twice daily from the Port of Palm Beach, Florida and, once beyond the
state territorial water's limits, engages in a casino gaming business. The
business of operating the cruise vessel includes a variety of shipboard
activities, including dining, music and other entertainment as well as casino
gaming. We are expanding that line of business, for which on July 7, 2004 we
entered into a sub bareboat charter for a second vessel, the Empress II. After
refurbishing and retrofitting that vessel, we expect to place the Empress II in
service, during our 3rd fiscal quarter which begins in January, 2005. The
Empress II will be berthed and operated from the Port of Palm Beach.
On July 7, 2004 the Company and several of our subsidiaries entered into a
sub bareboat charter and equipment lease transaction for the purpose of
operating and acquiring the vessels Palm Beach Princess and the Empress II. The
Palm Beach Princess sub charter is being accounted for as a capital lease. The
accounting treatment for the Empress II sub charter will be determined after
completion of improvements and appriasal of the vessel. Through these
transactions payments were made on our behalf to prepay in full all indebtedness
to the Brennan Trustee. (This transaction is more fully disclosed in footnote 2
of the financial statements). We intend to continue to expand our gaming
operations by placing the Empress II in operations during our third fiscal
quarter and we continue to explore other gaming opportunities both domestically
and internationally. During our last fiscal year we purchased a third vessel,
M/V Royal Star, however, this ship will need extensive improvements and
outfitting before being placed in service. We are currently exploring possible
locations from which to operate the vessel and possible financing sources to
permit us to make the necessary improvements.
During the quarter, we re-entered into the equine business for which the
Company was originally established. We currently own several horses of different
ages. Some are currently racing and a few are held as broodmares but the
majority are yearlings and two year olds in training. It is our plan to bring
these horses into racing if we consider them competitive after completion of
training. We are stabling and training the majority of these horses in New
Jersey and in Brazil.
25
On January 6, 2003 our subsidiary which operates the Palm Beach Princess
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code
because it did not have the funds to complete the purchase of the Ship Mortgage
on the Palm Beach Princess. On October 15, 2003 a Plan of Reorganization under
Chapter 11 was approved and on July 17, 2004 the court issued a final decree
closing the Chapter 11 case.
Liquidity and Capital Resources
The Company's cash flow from operations is primarily dependent upon the
cash flows from our wholly owned subsidiary ITG Vegas ("ITGV")which operates the
vessel, M/V Palm Beach Princess.
ITGV's cash flow from operations of the vessel is seasonal. The period July
1 to December 31 is a seasonably slow period for vessel operations. The period
from January 1 to June 30 has been a period of increased activity and profits
for the Palm Beach Casino Line operation. Certain of ITGV's operating costs,
including leasing and charter fees, fuel costs and wages, are fixed and cannot
be reduced when passage loads decrease.
During the first quarter of Fiscal 2005 our operating business was
adversely affected by four hurricanes passing over or near Florida. We suffered
materially from the direct effects of hurricanes "Frances" and "Jeanne" that
left the area without power, resulting in curfews and limited food, water and
life resources. These two storms caused the evacuation of the population in our
area, and the four storms further affected tourism in the area, severely
reducing our pool of potential passengers, both local residents and tourists.
Twenty-nine (29) of our daily cruises were cancelled during the period of time
that the hurricanes threatened the area and for short periods thereafter. As a
result of the seasonably slow period and the hurricanes our revenues and cash
flows from operations were materially impacted. Our operating revenue was
sufficient to cover operating expenses of the vessel, however, the operating
revenues were not sufficient to cover expenses of the Parent Company, other
subsidiaries and the interest portion of the lease payments on the Empress II
which were capitalized to the cost of the vessel.
We were able to utilize a portion of the cash received from the sale of the
Las Vegas Note which transaction closed in June, 2004, to meet the remainder of
our cash needs during the first quarter of fiscal 2005.
On July 7, 2004 we closed on new financing with PDS Corporation, Palm Beach
Maritime Corporation and Palm Beach Empress, Inc., as more fully described in
footnote 2 of this Report, and payments were made on our behalf to pay in full
all indebtedness to the Brennan Trustee.
The PDS Transaction involved, among other things, our chartering a second
vessel, the Empress II. We have committed $3,407,602 to date towards costs of
refurbishing and retrofitting the Empress II vessel. Start up costs associated
with refurbishing and retrofitting the Empress II vessel and placing it in
service (including marketing expenses and other soft costs) are expected to
amount to approximately $10 million, $6 million of which has been provided for
by means of an escrow of our $2,880,652 payment and proceeds of the PDS
Transactions. Additional amounts necessary to begin operations of the Empress II
vessel are expected to be provided from working capital of our ITGV subsidiary.
ITGV's ability to generate sufficient working capital with which to pay such
costs may be adversely affected by delays or cost overruns in connection with
refurbishing and refitting the Empress II and by weather related and other
uncertainties affecting its operations. Any delays in commencing the Empress II
operations will adversely affect our cash flow because of the continuing costs
of carrying the vessel. As indicated by the table below, our debt service
requirements have increased significantly with the PDS financing due to the
increase in amounts of debt and rates involved. The increase in the amount is
attributable in part to the arrangement for procurement and refurbishment for a
second vessel, the Empress II. We are dependent upon the expected additional
revenue from the operations of the second vessel to cover the increased
financing costs.
26
In our last fiscal year, the Company purchased the vessel Royal Star. We
anticipate that the vessel will need extensive improvements and outfitting
costing between $5 and $6 million before being placed in service as a gaming
vessel. Until the amounts due to the Brennan Trustee were paid in full on July
7, 2004, expenditures for improvements were restricted by the Brennan Trustee
and we were required to make simultaneous dollar pre-payments to the Brennan
Trustee for each dollar spent on improvements. We are currently negotiating with
a financial institution to obtain the balance of the funds necessary to make the
required improvements and lease or otherwise acquire the gaming equipment to
place the ship in service. No assurances can be given that we will be successful
in obtaining the necessary additional funds. Delays in commencing the Royal Star
operations have and will continue to adversely affect our cash flows because of
the continuing costs of carrying the vessel.
The following summarizes commitments on non-cancelable contracts and leases as
of September 30, 2004:
Twelve Months Ended September 30,
---------------------------------------------------------------- There-
2005 2006 2007 2008 2009 after Total
---------- ----------- ----------- ---------- ---------- -------- ----------
Capital Leases - PBP $ 3,528,526 $ 5,661,154 $ 5,661,154 $ 5,661,154 $ 4,717,628 $ -0- $ 25,229,616
Leases - Empress II 1,981,755 3,410,430 3,410,430 3,410,430 3,072,930 -0- 15,285,975
Notes and Mortgages:
Principal 684,912 -0- -0- -0- -0- -0- 684,912
Interest 22,475 -0- -0- -0- -0- -0- 22,475
Deferred Interest Payments 450,000 600,000 600,000 600,000 450,000 -0- 2,700,000
Employee Contracts 722,884 146,314 -0- -0- -0- -0- 869,198
Operating Leases:
Casino Equipment 1,038,098 1,362,147 1,135,122 -0- -0- -0- 3,535,367
Administrative & Office 517,317 265,032 122,787 68,018 -0- -0- 973,154
Purchase Obligations 204,374 61,120 61,006 61,006 61,006 254,190 702,702
Other Long-Term Debt -0- 285,649 -0- -0- -0- -0- 285,649
---------- ----------- ----------- ---------- ---------- -------- ----------
Total $ 9,150,341 $ 11,791,846 $ 10,990,499 $ 9,800,608 $ 8,301,564 $ 254,190 $ 50,289,048
========== =========== =========== ========== ========== ======== ==========
Upstream payments by ITGV to the Company are limited under the Princess
Sub-Charter and Empress Sub-Charter. If the "YTD Result" (defined as 10/12's of
annualized EBITDAR from operation of the two vessels) is greater than $8 million
at the end of any of the first three fiscal quarters or EBITDAR from operations
of the two vessels is greater than $8 million at the end of any fiscal year, and
if ITG Vegas and ITG Palm Beach have made all payments due under the Princess
Sub-Charter and Empress Sub-Charter, ITG Vegas may make (i) tax sharing payments
to the Company (payments equal to the federal income tax savings to ITG Vegas
resulting from its inclusion in the Company's consolidated group for federal
income tax purposes) including any tax sharing payments previously deferred as a
result of limitation under the Princess Sub-Charter or Empress Sub-Charter, and
(ii) other payments to the Company in an amount which, together with charter
hire payments in excess of $100,000 per month to PBMC and PBE for the two
vessels, shall not exceed $200,000 per month (a "Restricted Payment"). If ITG
Vegas is prohibited from making any Restricted Payment for any month, once such
payments are again allowed, such Restricted Payment may be made to the Company;
provided that the total amount of Restricted Payments (i.e. payments other than
the tax sharing payments and $100,000 per month in bareboat charter fees) paid
by ITG Vegas to the Company, PBMC and PBE in any twelve-month period may not
exceed $2,400,000.
27
The Company anticipates $2.5 million of capital expenditures for Port
improvements the timing of which is subject to financing.
The timing and amount of payments on obligations owing to the Parent
Company at September 30, 2004 comprised primarily of the First Cherry Hill Note
and the Second Cherry Hill Note, remain unpredictable.
Outlook:
Based on our historical level of operations we believe that cash generated
from operations will be adequate to meet our anticipated lease/purchase payment
requirements and working capital needs. No assurances can be given, however,
that our business will generate sufficient cash flow from operations or that
future borrowings will be available to enable us to service our lease/purchase
payments or to make anticipated capital expenditures. Our future operating
performance and our ability to make payment under our leases will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond our control. Future results could be impacted for the following
reasons.
On July 7, 2004 we paid off the Brennan Trustee and entered into long-term
sub charters in connection with lease transactions for two vessels and
equipment. As a result of these transactions, lease payments made to PDS are at
a higher rate of interest (15.3% to 16.54%) than the interest that was being
paid to the Brennan Trustee (12%). The debt outstanding has also increased
significantly. Additionally, we must make charter hire payments for the Palm
Beach Princess of $50,000 per month plus 1% of its gross revenues and charter
payments for the Empress II of $100,000 per month plus 1% of its gross revenues.
Therefore our combined monthly charter payments predicated on capital lease
interest payments plus charter hire fees will be significantly higher than the
payments to the Brennan Trustee and the prior bare boat charter fee of $50,000
per month for the Palm Beach Princess would have been.
Effective July 7, 2004 we began leasing a second vessel, the Empress II.
The ship will need to be refurbished and refitted for use as an ocean going
casino cruise ship and is expected to be placed in service in January 2005 in
time for the beginning of our peak season. We will continue to incur costs for
the vessel while it is being refitted. We anticipate operating the vessel from
the same port as the Palm Beach Princess. It is possible that competition from
each vessel will have an adverse effect on the operations of the other vessel.
We will continue to incur costs on the vessel, Royal Star, while it is
being refurbished. The Company will need additional financing to make the
improvements and we will incur additional fees and interest costs on such
financing. We are currently exploring locations from which to operate the vessel
when it is ready to be placed in service.
ITG Vegas is scheduled to place the Palm Beach Princess in wet dock
beginning early in January 2005. During the period of wet dock, it is
anticipated that approximately 10 cruises will be lost and that approximately
$150,000 will be spent on routine maintenance items. However, the extent and
costs of repairs required to be done during the wet dock cannot accurately be
determined in advance.
Our working capital as of September 30, 2004 was $439,735 as compared to
$556,675 at June 30, 2004. The decrease in working capital during the past three
months was primarily due to the net effect of disbursements for the improvements
made to the Empress II and Royal Star and lease payments offset by the payoff of
the Brennan Trustee on our behalf.
28
Results of Operations for the Three Months Ended September 30, 2004 and 2003
Overall
Revenue from for the three months ended September 30, 2004 decreased
$1,239,746 from $7,618,068 in Fiscal 2004 to $6,378,322 in Fiscal 2005 primarily
as a result of decrease in revenues generated by the Palm Beach Princess
operations during the comparable periods. Operating expenses increased $744,829
from $6,363,819 in the three month period in Fiscal 2004 to $7,108,648 in Fiscal
2005 primarily the result of an increase in the development costs of $499,459 as
a result of our continued search both domestically and internationally for
additional gaming opportunities offset by a decrease in bankruptcy costs of
$257,016 as a result of the bankruptcy being finalized on July 17, 2004. Other
expense increased by $911,444 as a result of (1) an increase in the interest and
financing expense of $667,139 due to the higher debt level on the vessel leases
than that amount previously owed to the Brennan Trustee and an increase in the
rates of interest and (2) during the first quarter of Fiscal 2005 the Company
recorded an impairment loss in the amount of $200,000.
For the three months ended September 30, 2004 loss before an extraordinary
item was ($1,977,359) as compared to income of $859,060 for the three months
ended September 30, 2003. During the current fiscal quarter the Company recorded
extraordinary income, net of tax, of $3,560,000. This was the result of the
collection of success fees charged to Leo Equity Group, Inc. and Palm Beach
Maritime Corporation (formerly MJQ) for our efforts in connection with the final
settlement with the Chapter 11 Trustee for the Bankruptcy Estate of Robert E.
Brennan. We had deferred all income from these transactions until such time as
payment was received. During the first quarter of Fiscal 2005, we received
payment for the previously deferred income.
Net Income for the three months ended September 20, 2004 was $1,582,641 or
$.15 per diluted share as compared to $859,060 or $.10 per diluted share for the
three months ended September 30, 2003.
Vessel Operations
During the three months ended September 30, 2004, net operating revenue
from vessel operations was $6,281,500 as compared to $7,575,158 for the three
months ended September 30, 2003. The decrease in revenue of $1,293,658 during
the comparable quarters was due to a decrease in the number of cruises which
resulted in a decrease in passenger counts of 7.5%. Additionally, during the
current quarter our revenue per passenger fell 9% from $123.20 per passenger in
Fiscal 2004 to $112.22 in Fiscal 2005. This decrease of revenue per passenger
for this quarter follows a trend which began in the forth quarter of Fiscal
2004. However, the Company believes the decrease in the first quarter of Fiscal
2005 was due primarily to the uncertainties of the hurricanes because for month
of October 2004, our revenues per passenger have recovered and were at
approximately $137.00. During the current quarter gaming revenues decreased
$1,165,180, or 18%, from $6,494,687 in the first quarter of Fiscal 2004 to
$5,329,507 in the first quarter of Fiscal 2005. Net fare and on board income
decreased $128,478 or 12%. Casino operating expenses which also includes food,
beverage and entertainment increased $34,470 from $2,029,618, or 32% of casino
revenue in fiscal 2004 to $2,114,088, or 40% of casino revenue in fiscal 2005
primarily the result of dividing costs, many of which are fixed by their nature,
over reduced revenues.
Sales, marketing and advertising expenses increased $161,435 from $713,754
in fiscal 2004 to $875,189 in fiscal 2005. The increase was the result of
additional advertising and promotions to attract customers after the
cancellation of cruises due to the hurricanes, inclement weather and curfews
following the hurricanes. Maritime and legal expenses decreased $281,488 or 16%
as a result of fewer cruises being performed during the current quarter. Finance
expenses increased $400,720 from $236,458 in fiscal 2004 to $637,178 in fiscal
2005 as a result of the interest paid on the capital lease and the charter hire
payments for the Palm Beach Princess which was effective July 7, 2004.
Depreciation and amortization increased $263,883 from $130,397 in fiscal 2004 to
$394,280 in fiscal 2005. As a result of the capital lease arrangement for the
Palm Beach Princess the Company is recording depreciation on the vessel as
compared to last year when the Company did
29
not record depreciation because it operated the vessel under an operating lease.
Administration expense decreased $116,417 or 10% from $1,119,064 in fiscal 2004
to $1,002,647 in fiscal 2005 due to fewer days of operation and steps taken to
reduce expenses during this quarter. The loss before income tax expense for the
first quarter of operation in fiscal 2005 was $(420,776) as compared to income
before Income Tax of $1,351,357 in the comparable quarter of fiscal 2004.
The Palm Beach Princess performs fourteen cruises weekly, that is, a
daytime and an evening cruise each day. Each cruise is of five to six hours
duration. During each cruise, the Palm Beach Princess offers a range of
amenities and services to her passengers, including a full casino, sit-down
buffet dining, live musical shows, discotheque, bars and lounges, swimming pool
and sundecks. The casino occupies 15,000 square feet aboard the ship and is
equipped with approximately 400 slot machines, all major table games (blackjack,
dice, roulette and poker), and a sports wagering book. During the first quarter
of Fiscal 2005 the ship completed 156 cruises and 25 cruises were missed due to
hurricanes and inclement weather. During the first quarter of Fiscal 2004 the
ship completed 167 cruises and 11 cruises were missed due to scheduled wet dock
maintenance.
The following is a comparative summary of income and expenses of the Palm Beach
Princess operation for the three months ended September 30, 2004 and 2003:
Three Months Ended
September 30,
------------------------
Description 2004 2003 Change
- --- ----------------------------------- ---------- ---------- -----------
Passenger Count 55,977 61,487 (5,510)
Number of Cruises 156 167 (11)
Revenue:
Gaming $ 5,329,507 $ 6,494,687 $(1,165,180)
Fare 1,479,831 2,136,192 (656,361)
On Board 867,483 917,357 (49,874)
Less: Promotional Allowances
Fare (939,166) (1,480,821) 541,655
On Board (456,155) (492,257) 36,102
----------- ----------- -----------
Total Revenue 6,281,500 7,575,158 (1,293,658)
----------- ----------- -----------
Expenses:
Casino Operating Expenses 2,114,088 2,079,618 34,470
Hotel and Gift Shop Expenses 211,113 195,241 15,872
Sales, Marketing and Advertising
Expenses 875,189 713,754 161,435
Maritime and Legal Expenses 1,467,781 1,749,269 (281,488)
Finance Expenses - Net 637,178 236,458 400,720
Depreciation and Amortization 394,280 130,397 263,883
Administrative 1,002,647 1,119,064 (116,417)
----------- ----------- -----------
Total Expenses 6,702,276 6,223,801 478,475
----------- ----------- -----------
Income (Loss) Before Income
Tax Expense $ (420,776) $ 1,351,357 $ (1,772,133)
=========== =========== ===========
Horse Operations
During the quarter, we re-entered the equine business for which the Company
was originally established. We currently own several horses of different ages.
Some are currently racing, and a few are held as broodmares but the majority are
yearlings and two year olds in training. It is our plan to bring those horses
into racing if we consider them competitive after training is completed. We are
stabling and training the majority of these
30
horses in New Jersey and in Brazil. Additionally, the Company has committed to
purchasing several horses, the majority being one and two year olds, from
Francis W. Murray at values to be determined by a current appraisal of their
values. Payment for such horses will only be made out of profits realized from
the horses purchased from Mr. Murray, if any. Effective September 1, 2004, the
Company has taken over the stabling and training costs for these horses
previously owned by Mr. Murray. Our horse operation did not produce any revenue
during the quarter. Training and operational expenses of approximately $25,000
are reported in Development Costs. We expect these costs to increase
substantially in the near future as additional horses are purchased.
Inflation
To date, inflation has not had a material effect on the Company's
operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to material interest rate risk, foreign currency
exchange rate risk, commodity price risk or other relevant market rate or price
risks.
ITEM 4. - CONTROLS AND PROCEDURES
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the filing of this report, we completed an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were effective.
There have not been any significant changes that occurred during the fiscal
quarter ended September 30, 2004 in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
31
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
Part II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our subsidiary, ITG Vegas, Inc., successor by merger to Palm Beach
Pricness, Inc., initiated proceedings under Chapter 11 of the Bankruptcy Code on
January 3, 2003. Such Chapter 11 case was closed on July 17, 2004. (See Note 4)
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 28, 2004 Mr. Francis W. Murray exercised his option to purchase 2
million shares of our Common Stock at an exercise price of $0.26875 per share.
The Company issued 2 million shares of Treasury stock it received for proceeds
of $537,500. The proceeds were used for working capital. Also on July 28, 2004
the Company issued 689,730 Treasury shares to Mr. Murray in payment of the
deferred salary of $344,865 we owed to him for the period from January 3, 2003
until November 18, 2003.
On August 31, 2004 the Company issued 73,339 Treasury shares to Robert
Quigley in payment of the deferred salary of $36,670 we owed to him for the
period from January 3, 2003 until November 18, 2003.
The sales of shares to Messrs. Murray and Quigley were made under Section
4(2) of the Securities Act of 1933, as amended, as transactions by the issuer
not involving a public offering. Each of Messrs. Murray and Quigley are members
of our Board of Directors and are fully familiar with our financial condition
and affairs. Each acquired the shares for investment, without a view to any
distribution of those shares, and their resale or other disposition of those
shares is restricted.
ITEM 6. EXHIBITS
Exhibit Description of Exhibit
31.1 CEO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
31.2 CFO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
32 CEO & CFO Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32
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.
November 22, 2004 /s/Francis W. Murray
-----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer
and Chief Financial Officer
33
Exhibit 31.1
CEO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 22, 2004
/s/Francis W. Murray
---------------------------------
Chairman/Chief Executive Officer/
Chief Financial Officer
34
Exhibit 31.2
CFO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 22, 2004
/s/Francis W. Murray
------------------------------------
Chairman/Chief Executive Officer/
Chief Financial Officer
35
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of
International Thoroughbred Breeders, Inc. (the "Company") for the three months
ended September 30, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Francis W. Murray, Chief Financial Officer of
the Company, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Francis W. Murray
------------------------------
Name: Francis W. Murray
Title: Chief Financial Officer
November 22, 2004
36