FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the latest practicable date.
Class Outstanding at May 20, 2005
- ------------------------------ ---------------------------
Common Stock, $ 2.00 par value 10,567,487 Shares
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE NINE MONTHS ENDED MARCH 31, 2005
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of March 31, 2005 and June 30, 2004...............1-2
Consolidated Statements of Operations
for the Three Months and Nine Months ended
March 31, 2005 and 2004 .............................3
Consolidated Statement of Stockholders' Equity
for the Nine Months ended March 31, 2005.............4
Consolidated Statements of Cash Flows
for the Nine Months ended
March 31, 2005 and 2004..............................5
Notes to Financial Statements...............................6-23
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........24-33
Item 3. Quantitative and Qualitative Disclosures About Market Risk...33
Item 4. Controls and Procedures......................................33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................34
Item 6. Exhibits and Reports on Form 8-K............................34
SIGNATURES................................................................35
CERTIFICATIONS............................................................36-39
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND JUNE 30, 2004
ASSETS
March 31,
2005 June 30,
(UNAUDITED) 2004
------------- -------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,495,777 $ 7,508,632
Accounts Receivable 529,015 223,411
Prepaid Expenses 1,921,873 738,504
Other Current Assets 315,526 153,625
Assets of Discontinued Operations 401,785 400,835
------------- -------------
TOTAL CURRENT ASSETS 4,663,976 9,025,007
------------- -------------
VESSELS, EQUIPMENT & LIVESTOCK:
Vessel - Palm Beach Princess 17,500,000 0
Leasehold Improvements - Port of Palm Beach 991,587 913,394
Equipment 3,012,766 2,217,322
Livestock 328,992 -
Vessel Not Placed in Service - Big Easy (formerly Empress II) 11,273,480 -
Vessel Not Placed in Service - Royal Star 2,712,338 1,321,494
------------- -------------
35,819,163 4,452,210
LESS: Accumulated Depreciation and Amortization 2,197,476 916,186
------------- -------------
TOTAL VESSELS, EQUIPMENT & LIVESTOCK- NET 33,621,687 3,536,024
------------- -------------
OTHER ASSETS:
Notes Receivable 14,328,651 14,778,651
Mortgage Contract Receivable - Related Party - 13,750,000
Deposits and Other Assets - Related Parties 8,161,438 8,410,940
Deposits and Other Assets - Non-Related Parties 1,237,564 334,975
Spare Parts Inventory 1,016,180 978,119
------------- -------------
TOTAL OTHER ASSETS 24,743,833 38,252,685
------------- -------------
TOTAL ASSETS $ 63,029,496 $ 50,813,716
============= =============
See Notes to Consolidated Financial Statements.
1
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND JUNE 30, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
2005 June 30,
(UNAUDITED) 2004
------------- -----------
CURRENT LIABILITIES:
Accounts Payable $ 4,133,810 $ 1,104,721
Accrued Expenses 3,307,622 2,169,197
Short-Term Debt 3,163,444 4,186,012
Deferred Interest - Short-Term 491,636 514,440
Vessel Lease Payable - Current Portion 879,238 -
Short-Term Debt - Related Parties 183,164 183,164
Liabilities of Discontinued Operations 317,998 310,798
------------- -------------
TOTAL CURRENT LIABILITIES 12,476,912 8,468,332
------------- -------------
LONG-TERM LIABILITIES:
Vessel Lease Payable - Long Term Portion 13,120,762 -
Long-Term Debt - Net of Current Portion 310,216 4,095,827
Deferred Interest - Long-Term 1,625,608 1,957,920
Advances From Related Parties 650,967 285,649
------------- -------------
TOTAL LONG-TERM LIABILITIES 15,707,553 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 36,284,375 36,248,875
Common Stock, $2 Par Value, Authorized 25,000,000
Shares,Issued, 11,482,563, and Outstanding,
11,482,563 and 7,802,134, respectively 22,965,126 22,960,557
Capital in Excess of Par 20,151,914 20,191,982
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) (45,726,745) (46,989,638)
------------- -------------
33,674,670 32,411,776
LESS:
Treasury Stock, 915,077 and 3,678,146 Shares,
respectively, at Cost (457,538) (1,839,073)
Deferred Compensation, Net (2,916) (6,666)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 33,214,216 30,566,037
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,029,496 $ 50,813,716
============= =============
See Notes to Consolidated Financial Statements.
2
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -------------------------------
2005 2004 2005 2004
------------- ------------ ------------- -------------
OPERATING REVENUES:
Gaming $ 8,489,580 $ 7,989,901 $ 20,137,067 $ 20,432,796
Fare 1,076,323 1,076,704 2,244,606 2,358,272
On Board 599,464 544,548 1,489,931 1,395,253
Other 115,618 86,554 302,697 232,112
------------- ------------ ------------- -------------
NET OPERATING REVENUES 10,280,985 9,697,707 24,174,301 24,418,433
------------- ------------ ------------- -------------
OPERATING COSTS AND EXPENSES:
Gaming 2,592,901 2,329,487 6,845,324 6,488,191
Fare 1,247,296 1,113,253 3,193,713 2,732,424
On Board 286,832 262,609 738,635 689,206
Maritime & Legal Expenses 1,813,085 1,781,171 4,705,421 5,050,119
General & Administrative Expenses 306,958 937,503 1,791,198 2,737,332
General & Administrative Expenses - Parent 420,196 571,136 1,429,202 1,179,085
Ship Development Costs - Big Easy 1,109,310 - 1,738,375 -
Ship Development Costs - Royal Star 12,336 - 118,754 -
Development Costs - Other 361,331 327,656 1,096,988 486,852
Depreciation & Amortization 556,495 203,038 1,521,596 514,007
ITG Vegas Bankruptcy Costs - 20,078 - 388,759
------------- ------------ ------------- -------------
TOTAL OPERATING COSTS AND EXPENSES 8,706,740 7,545,931 23,179,206 20,265,975
------------- ------------ ------------- -------------
OPERATING INCOME 1,574,245 2,151,776 995,095 4,152,458
------------- ------------ ------------- -------------
OTHER INCOME (EXPENSE):
Interest and Financing Expenses (639,424) (353,344) (1,996,685) (1,379,046)
Interest and Financing Expenses - Related Party (259,702) (8,000) (700,144) 15,979
(Loss) on Impairment of Note Receivable (100,000) - (450,000) -
Interest Income 9,493 15,792 17,520 42,632
Interest Income Related Parties 69,505 64,993 213,396 208,882
Other Income (Expense) - 16,239 211 16,239
------------- ------------ ------------- -------------
TOTAL OTHER INCOME (EXPENSE) (920,128) (264,320) (2,915,702) (1,095,314)
------------- ------------ ------------- -------------
INCOME (LOSS) BEFORE TAX PROVISION 654,117 1,887,456 (1,920,607) 3,057,144
AND EXTRAORDINARY ITEM
Income Tax (Benefit) Expense 5,000 122,400 (86,000) 170,000
------------- ------------ ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 649,117 1,765,056 (1,834,607) 2,887,144
EXTRAORDINARY ITEM - Fees charged to related
parties for Master Settlement Agreement ( Note 12),
less income tax of $440,000. - - 3,560,000 -
------------- ------------ ------------- -------------
NET INCOME $ 649,117 $ 1,765,056 $ 1,725,393 $ 2,887,144
============= ============ ============= =============
NET BASIC INCOME PER COMMON SHARE $ 0.06 $ 0.23 $ 0.17 $ 0.36
============= ============ ============= =============
NET DILUTED INCOME PER COMMON SHARE $ 0.06 $ 0.17 $ 0.16 $ 0.29
============= ============ ============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Basic 10,567,487 7,802,134 10,275,087 7,977,224
============= ============ ============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Diluted 11,221,096 10,108,167 10,871,605 10,129,978
============= ============ ============= =============
See Notes to Consolidated Financial Statements.
3
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2005
(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 Fractional Exchanges With
Respect to the One-for-twenty Reverse Stock
Split effected on March 13, 1992 355 35,500 2,283 4,568
Shares Issued for Options Granted
Options Issued at Less than Treasury Stock Cost - - - -
Amortization of Deferred Compensation Costs - - - -
Net Income for the Nine Months Ended March 31, 2005 - - - -
---------- ------------- ------------ ------------
BALANCE - MARCH 31, 2005 362,844 $ 36,284,375 11,482,562 $ 22,965,125
========== ============= ============ ============
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 Fractional Exchanges With
Respect to the One-for-twenty Reverse Stock
Split effected on March 13, 1992 (40,068) - - - -
Shares Issued for Options Granted - - 919,035 - 919,035
Options Issued at Less than Treasury Stock Cost - (462,500) 462,500 - -
Amortization of Deferred Compensation Costs - - - 3,750 3,750
Net Income for the Nine Months Ended March 31, 2005 - 1,725,393 - - 1,725,393
------------ ------------- ------------ ----------- -----------
BALANCE - MARCH 31, 2005 $ 20,151,914 $ (45,726,745) $ (457,538) $ (2,916) $ 33,214,215
============ ============= ============ =========== ===========
See Notes to Consolidated Financial Statements.
4
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
March 31,
------------------------------
2005 2004
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
INCOME BEFORE DISCONTINUED OPERATIONS $ 1,725,393 $ 2,887,144
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation and Amortization 1,521,596 514,007
Gain on Sale of Assets - -
Impairment of Note 450,000 -
Increase in Deferred Income 190,863 -
(Decrease) in Deferred Income - Related Parties (4,000,000) -
Changes in Operating Assets and Liabilities -
(Increase) in Restricted Cash & Investments - (420,000)
(Increase) in Accounts Receivable (305,604) (29,880)
(Increase) Decrease in Other Assets (161,901) 438,608
(Increase) in Prepaid Expenses (1,183,370) (104,816)
Increase (Decrease) in Accounts Payable and
Accrued Expenses 4,427,516 (1,913,932)
------------- ------------
CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
DISCONTINUED OPERATIONS 2,664,493 1,371,131
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 7,200 7,200
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,671,693 1,378,331
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and Improvements of Vessels (12,664,325) (1,084,163)
Security Deposit on New Bare Boat Charter -
Related Party MJQ Corp. - (600,000)
Loans Paid by Related Parties 3,523,175 -
Capital and Livestock Expenditures (1,688,566) (657,441)
(Increase) Decrease in Other Investment Activity (902,589) 200,266
Decrease in Other Investment Activity - Related Parties - 2,513
------------- ------------
CASH (USED IN) INVESTING ACTIVITIES
BEFORE DISCONTINUED INVESTING ACTIVITIES (11,732,305) (2,138,825)
CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES - -
------------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES (11,732,305) (2,138,825)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds Received PDS Note 2,850,000 -
Funds Received on Refinance of Note - 6,400,000
Principal Payments on Short Term Notes (60,220) (4,765,124)
Funds Received from Related Parties 545,054 -
Principal Payments on Long Term Notes (286,127) -
Decrease in Balances Due to/From Discontinued
Subsidiaries 6,250 6,113
------------- ------------
CASH PROVIDED BY FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES 3,054,957 1,640,989
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (6,250) (6,113)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,048,707 1,634,876
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,011,905) 874,382
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS (950) (1,087)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 7,508,632 6,123,641
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,495,777 $ 6,996,936
============= ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,439,344 $ 633,490
Income Taxes $ - $ 256,517
5
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations - International Thoroughbred Breeders, Inc., a
Delaware corporation ("ITB" and together with its subsidiaries, the "Company"),
was incorporated on October 31, 1980. Its principal operating subsidiary, ITG
Vegas, Inc. ("ITG Vegas") is currently engaged in an entertainment cruise and
casino ship business under a sub-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 first quarter of Fiscal 2005, we re-entered the equine business.
We currently own 30 horses, a share of 8 horses, and lease 2 other horses, all
of different ages. Several 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.
Using the funding provided by the PDS Transactions (see Note 2) and working
capital, our subsidiary, ITG Palm Beach, LLC ("ITGPB") began making alterations,
retrofits and improvements to the Empress II (subsequently renamed the Big Easy)
in our second fiscal quarter to prepare it for use as a casino cruise ship. It
is anticipated that the Big Easy will begin passenger service from the Port of
Palm Beach, Florida during our fourth quarter. The ship's reconstruction and
refurbishment was completed in April, 2005, and we are continuing to pursue
certification for passenger operations pursuant to the United States Coast
Guard's Alternative Compliance Program. Although the Alternative Compliance
Program certification procedure is less complex and time consuming than regular
Coast Guard certification, it is nevertheless a rigorous process involving the
jurisdiction of at least four separate departments of the United States Coast
Guard and the ship's classification society, Lloyd's Register. During the past
nine months the Company incurred approximately $1,740,000 of start up costs
which, according to the appropriate accounting pronouncement, have been expensed
as they have been incurred.
(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) 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.
(E) Accounting Periods - ITG Vegas ends its quarterly accounting period on
the last Sunday of each quarter. These end of the week cut offs create more
comparability of the Company's quarterly operations, by generally having an
equal number of weeks (13) and week-end days in each quarter. Periodically, this
system necessitates a 14 week quarter. The quarter ending March 31, 2005 was
such a quarter for which the ITG Vegas, Inc. subsidiary cut off was on April 3,
2005. The Company's current fiscal year will include a 53 week year for its
subsidiary, ITG Vegas, Inc.
(F) 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.
(G) Livestock - Livestock consists of thoroughbred horses and the assets
are stated at the lower of cost or market. Costs of maintaining horses and other
direct horse related costs are expensed in the period
6
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
incurred. Stud fees are capitalized and become the basis of the resulting foal.
(H) 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 includes 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 March 31, 2005 and 2004, the amortized expense was $46,709
and $42,486, respectively. For the nine months ended March 31, 2005 and 2004,
the amortized expense was $133,455 and $80,295, respectively.
As a result of the PDS transactions (see Footnote 2) we are leasing the
vessel M/V Palm Beach Princess under a Capital lease arrangement. The Company
began depreciating the M/V Palm Beach Princess during the first quarter of our
current fiscal year. Financing fees In connection with the PDS financings, are
being amortized over the life of the loans. For the three and nine months ended
March 31, 2005 the amortized expense associated with these finance costs was
$24,344 and $10,455, respectively. There were no amortized fees recorded in the
three or nine months ended March 31, 2004,
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.
(I) Net Assets of Discontinued Operations - At March 31, 2005 and 2004, the
remaining net assets and liabilities of Garden State Park and Freehold Raceway
were classified as "Assets of Discontinued Operations." and "Liabilities of
Discontinued Operations."
(J) Recent Accounting Pronouncements - In January 2003, the Financial
Accounting Standards 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.
(K) 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.
(L) Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
(M) 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.
7
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(N) 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.
(O) Deferred Income - The gain from the sale of our Garden State Park
property on November 28, 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 first quarter of Fiscal
2005 when we received payment for these charges.
(P) 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.
(Q) Capitalized Interest - during the nine months ended March 31, 2005, we
capitalized interest payments made under the Empress II (subsequently renamed
the Big Easy) sublease in the amount of $1,530,197. The interest payments will
be capitalized until the vessel is placed in service, estimated to be during our
fourth fiscal quarter, ending on June 30, 2005.
(2) PDS TRANSACTIONS
(A) On July 7, 2004, ITG Vegas and its subsidiary, ITG Palm Beach, LLC
("ITGPB") and its affiliated entities 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 (subsequently renamed the
Big Easy) ("Big Easy"), ITG Vegas and ITGPB obtained long-term charters to
operate, and options to purchase, the Princess and Big Easy. By way of these
sales/lease transactions, PBMC, ITG Vegas and the Company were able to
extinguish their joint debts to the Chapter 11 Trustee for the Bankruptcy Estate
of Robert E. Brennan ("the Brennan Trustee"). 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 Company. 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
payment of the Second Cherry Hill Note described in Note 5 below.
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 connection with
the Company's repurchase of 3,678,145 shares of its common stock (the "ITB
Obligation").
8
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of Closing, the aggregate outstanding amount of the Purchase Obligation and
ITB Obligation was $7,916,451.71, for all of which PBMC 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 Big Easy 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 Big
Easy under the Big Easy 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 $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 Big Easy. On March 1, 2004, PBE entered into an
agreement to purchase the vessel known as the M/V Empress II (subsequently
renamed the Big Easy)(the "Empress Sale Agreement") from Empress Joliet
Corporation at a purchase price of $3,800,000. The Big Easy has required in
excess of $12 million of alterations, retrofits and improvements to prepare it
for use as a casino cruise ship. As of March 31, 2005, ITG Vegas has incurred
$2,880,650 of that cost with the balance having been incurred by PBE. At Closing
of the PDS Transactions, 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
9
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
alterations, retrofit and improvements of the Big Easy. 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 Big Easy 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 Big Easy 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 Big Easy, as described in respect to the Princess
Charter above.
The Empress Charter includes an option for PBE to purchase the Big Easy 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 Big Easy 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 "Big Easy
Sub-Charter") at Closing to charter the Big Easy to ITG Vegas and ITGPB for a
five year period. ITGPB plans to operate the Big Easy 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 Big Easy Sub-Charter is $100,000 per month ($1.2 million per year) plus one
percent (1%) of the gross operating revenues of the Big Easy. Under the Big Easy
Sub- Charter, PBE granted to ITG Vegas and ITGPB an option to purchase PBE's
right to acquire the Big Easy at the end of the term, for an exercise price
equal to the appraised value of the Big Easy, to be determined upon the
retrofitting and refurbishment of the Big Easy, to which certain amounts are to
be credited as described below (The "Big Easy Purchase Option"). As
consideration for the Big Easy 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 Big Easy 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 Big Easy 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 Big Easy Sub-Charter (i.e., the same
amounts as the charter hire payable by PBMC and PBE under the Big Easy Charter)
(the "Big Easy Additional Payments"). If ITG Vegas and ITGPB fail to make any
Big Easy Additional Payments when due, PBE may terminate the Big Easy Purchase
Option. Upon exercise of the Big Easy Purchase Option, ITG Vegas and ITGPB will
be entitled to credits against the exercise price of the Big Easy 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 improvements to the Big Easy which are
paid by ITG Vegas or ITGPB plus (iii) the aggregate amount of all Cash Flow
Sweep payments made under the Big Easy Sub-Charter, plus (iv) the portion of the
Big Easy Additional Payments made for the 13th month through the 60th month of
the term of the Big Easy 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).
10
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Guaranty Agreements. As a condition to entering into the PDS Transaction,
PDS required ITB , ITG Vegas, ITGPB, PBMC and PBE to guaranty performance of
certain of the PDS Transactions. ITB, ITG Vegas and ITGPB entered into Guaranty
Agreements guarantying the obligations of PBMC and PBE under the Princess
Charter, Princess Master Lease, Big Easy Charter and Big Easy Master Lease. ITB,
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 Big Easy 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 ITB. Upstream payments by ITG Vegas to
the Company are limited under the Princess Sub-Charter and Big Easy 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 Big Easy Sub-Charter, ITG
Vegas may make (i) tax sharing payments to ITB (payments equal to the federal
income tax savings to ITG Vegas resulting from its inclusion in ITB'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 Big Easy 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.
(B) On January 5, 2005, Royal Star Entertainment, LLC ("RSE"), a
wholly-owned indirect subsidiary of ITB, executed and delivered a promissory
note, amended as of January 17, 2005 in the original principal amount of
$2,850,000 (the "Note"), representing a loan funded on January 17, 2005 (the
"Loan") in such principal amount. Also on January 5, 2005, ITB entered into a
Guaranty Agreement dated as of January 6, 2005, guarantying payment of all sums
due and to become due by RSE under the Note. The Note is also secured by RSE's
Preferred Mortgage dated as of January 17, 2005, encumbering the vessel owned by
RSE and known as the "Royal Star." The lender and holder of the Note and
Mortgage is Cruise Holdings IV, LLC, an affiliate of PDS Gaming Corporation.
The Loan evidenced by the Note will be repayable on January 17, 2006.
Interest on the Loan will be payable monthly at a rate of 10% per annum. At
closing, RSE paid a closing fee to the lender in an amount equal to $78,375, or
2.75% of the principal amount of the Note. The sole member of RSE is ITG Vegas
and the proceeds of the Loan are to be used to make leasehold improvements under
the Maritime Office Complex Lease and Operating Agreement between ITG Vegas and
the Port of Palm Beach District, or to make improvements to the vessel Royal
Star or to the vessel Big Easy (formally known as Empress II), a vessel which
another subsidiary of ITG Vegas charters under a capital lease and charter. The
Company continues to explore venues for use of the vessel Royal Star in a casino
cruise operation. If RSE prepays the Note in connection with a sale of the
vessel Royal Star, it will be required to pay a 5% prepayment premium to the
lender.
On January 5, 2005, RSE entered into a Master Lease Agreement and Lease
Schedule No. 1, each dated as of January 6, 2005 (collectively, the "Lease")
with PDS Gaming Corporation providing for the lease by RSE of slot machines to
be located on the vessel Royal Star. Also on January 5, 2005, ITB entered into a
Guaranty Agreement dated as of January 6, 2005, agreeing to guaranty payment by
RSE of all sums becoming due under the Lease. The term of the Lease is three
years, with rental payments of $11,879 per month for the first four months and
$95,351.73 for the next thirty-two months. RSE paid a closing fee of $57,020.74,
and a security deposit in the amount of $95,351.73.
11
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The foregoing is a summary of the principal terms of RSE's loan and lease
transactions. The summary does not purport to be a complete summary and is
qualified in its entirety by reference to the documents which are filed as
exhibits to the Company's Form 8-K dated January 6, 2005.
(C) See Note 15 (Subsequent Events) in connection with a third PDS
financing which closed in April 2005.
(3) DESCRIPTION OF LEASING ARRANGEMENTS
As described in the footnote 2 above, the Company and several of its
subsidiaries have entered into sub charter transactions for two vessels and
lease transactions for equipment to be placed on three 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 vessels 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 described in note 2(A) also included the sub charter of the
Big Easy and a lease for gaming equipment aboard that vessel. PDS placed $6
million in a reserve account which included $2,880,652 of our funds for the
improvements to be made to the Big Easy. 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 will be expensed as incurred at the time the vessel is placed
in service. The gaming equipment lease will be accounted for as an operating
lease. The gaming equipment lease requires interest only payments for the first
six months. These payments for interest will be capitalized until the vessel is
placed in service and subsequently amortized over the life of the equipment.
Interest payments made on the Big Easy sub-lease and payments made for the
charter hire fees will be capitalized until the vessel is placed in service and
subsequently amortized over the life of the vessel.
The transaction described in Note 2(B) included a lease for gaming
equipment aboard the vessel, Royal Star. The gaming equipment lease will be
accounted for as an operating lease. The gaming equipment lease requires
interest only payments for the first four months of $11,879 per month and
$95,351.73 for the next thirty-two months.
See Note 15 (Subsequent Events) with respect to an additional lease of
gaming equipment.
Vessels, plant and equipment at March 31, 2005 include the following
amounts for capitalized leases:
Vessel, Palm Beach Princess $ 17,500,000
Less: allowance for depreciation (869,570)
-----------------
Capital Leases $ 16,630,430
=================
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 March 31, 2005:
Period ending March 31,
2006 $ 4,808,104
2007 5,661,156
2008 5,661,156
2009 5,661,156
2010 1,887,052
-------------------
Total minimum lease payments $ 23,678,624
Less: amount representing interest (9,678,624)
-------------------
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 March 31, 2005:
Period ending March 31,
2006 $ 2,099,310
2007 2,337,848
2008 1,947,276
-------------------
Total minimum lease payments $ 6,384,434
===================
(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.
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
(A), all of our and the Debtors' indebtedness to the Brennan Trustee was paid in
full.
13
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 of
the buyer 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 was to be dependent upon, and payable solely out of, the
buyer's net cash flow available for distribution to its equity owners
("Distributable Cash"). After the equity investors in the buyer 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 was
to be paid to us. We were to receive payments under the note equal to 33 1/3% of
all Distributable Cash until the maturity date, which was to occur 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 sold the Las Vegas Note to 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 $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 it generally is payable
prior to maturity only from distributable cash of the maker. The maker 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 fourth quarter of the Company's June 30,
2004 fiscal year and additional impairment charges of $200,000, $150,000 and
$100,000, respectively, recorded during the first, second and third quarters of
Fiscal 2005. 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
14
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. As of March 31, 2005 the Company has recorded
an impairment loss on this note of $450,000 and 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 $50,000 in the fourth
quarter of 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 the entity formed to acquire the Big Easy, the second vessel
which is chartered to a subsidiary of the Company, and which the Company expects
to operate 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) 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.
15
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:
March 31, 2005 June 30, 2004
------------------- --------------
Long-Term Prepaid Loan Costs $ 807,237 $ 0
Port Lease Rights 250,000 250,000
Other Misc. Assets 180,327 84,975
------------------- --------------
Total $ 1,237,564 $ 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 14):
March 31, June 30,
2005 2004
---------- ----------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,034,405 $ 2,034,405
A 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) 1,404,931 911,350
Purchase Option Deposits on Vessels 3,792,572 0
Goodwill on Purchase of GMO Travel 193,946 193,946
Advances to PBMC 0 616,534
Note Receivable from Francis W. Murray 0 2,600,749
Deposits on new lease for M/V Palm Beach Princess
and the Big Easy with. 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 $ 8,161,438 $ 8,410,941
=========== ==========
16
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
March 31, 2005 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 29,104 -0- 25,000 -0-
ITG Vegas, Inc.:
- ----------------
Cruise Holdings IV, LLC (D) 10% 2,850,000 -0- -0- -0-
International Game Technology (C) 8% 262,686 257,751 122,174 71,685
Other Various 21,654 52,465 -0- -0-
Garden State Park:
- ------------------
Service America Corporation (E) 6% 160,000 -0- 160,000 -0-
-------------- ------------ ----------- ------------
Totals $ 3,506,608 $ 310,216 $ 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 $ 3,163,444 $ 310,216 $ 4,186,012 $ 4,095,827
============== ============ =========== ============
The effective Prime Rate at June 30, 2004 was 4%.
(A) In connection with the PDS transactions, on July 7, 2004 the
outstanding principal balance was paid by PBMC directly to the Brennan Trustee
to satisfy this 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 March 31, 2005 was $159,164 and accrued interest
was $26,553. 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.
(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. In March 2005, ITG
Vegas, Inc. issued an additional thirty month promissory note in the amount of
$387,463 bearing interest at 8.15% to International Game Technology for the
purchase of fully reconditioned gaming equipment. Thirty consecutive monthly
installments of $14,319.49 are to be paid on the balance. At March 31, 2005, the
principal balance on the two notes to International Game Technology note was
$520,437 of which $262,686 was classified as short term and the balance of
$257,464 was classified as long term.
(D) On January 5, 2005, Royal Star Entertainment, LLC ("RSE"), a
wholly-owned subsidiary of the Company, executed and delivered a promissory
note, amended as of January 17, 2005 in the original
17
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
principal amount of $2,850,000 (the "Note"), representing a loan funded on
January 17, 2005 (the "Loan") in such principal amount. Also on January 5, 2005,
ITB entered into a Guaranty Agreement dated as of January 6, 2005, guarantying
payment of all sums due and to become due by RSE under the Note. The Note is
also secured by RSE's Preferred Mortgage dated as of January 17, 2005,
encumbering the vessel owned by RSE and known as the "Royal Star." The lender
and holder of the Note and Mortgage is Cruise Holdings IV, LLC, an affiliate of
PDS Gaming Corporation. The Loan evidenced by the Note will be repayable on
January 17, 2006. Interest on the Loan will be payable monthly at a rate of 10%
per annum. At closing, RSE paid a closing fee to the lender in an amount equal
to $78,375, or 2.75% of the principal amount of the Note. The sole member of RSE
is ITG Vegas, Inc., a wholly owned subsidiary of the Company, and the proceeds
of the Loan were used to make leasehold improvements under the Maritime Office
Complex Lease and Operating Agreement between ITG Vegas and the Port of Palm
Beach District, and to make improvements to the vessel Royal Star or to the
vessel Big Easy (formally known as Empress II), a vessel which another
subsidiary of ITG Vegas charters under a capital lease and charter. The Company
and ITG Vegas continue to explore venues for use of the vessel Royal Star in a
casino cruise operation. If RSE prepays the Note in connection with a sale of
the vessel Royal Star, it will be required to pay a 5% prepayment premium to the
lender.
(E) 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 and have not been paid. The
Company is continuing to negotiate new terms under this note and if successful
the creditor may seek to enforce payment of the note. In additional to the
principal amount due of $160,000 the accrued but unpaid interest is
approximately $27,600 as of March 31, 2005.
(9) COMMITMENTS AND CONTINGENCIES
See Note 2 for additional commitments and contingencies with respect to the
PDS Transactions.
See Note 14 for additional commitments and contingencies of the Company and
transactions with related parties.
As of March 31, 2005, the cost of refurbishing and retrofitting the Nig
Easy and placing it in service was approximately $12.4 million of which the
Company has incurred approximately $9.2 million and PPE has incurred
approximately $3.2 million. ITG Vegas' ability to generate sufficient working
capital with which to pay such costs have been adversely affected by delays and
cost overruns in connection with refurbishing and refitting the Big Easy and by
weather related and other uncertainties affecting its operations. As indicated
by the table at the end of this footnote, 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 Big Easy.
We are dependent upon the expected additional revenue from the operations of the
second vessel to cover the increased financing costs.
The Big Easy has been undergoing retrofit and improvements and had been
expected to be placed in service during our third fiscal quarter. The work was
being done on the vessel by Atlantic Dry Dock Corporation ("Atlantic").
Additional work had been required beyond the work which had been planned and
beyond what had been paid for, and we have disputed some of Atlantic's charges
for that work. Atlantic had refused to release the Big Easy to us until we paid
the full amount it claims we owe it, totaling $3.8 million. We are disputing
that amount. In the meantime, in order to obtain the release of the Big Easy, we
borrowed an additional $4.35 million from PDS on April 5, 2005 (see Note 15) and
entered into an escrow agreement with Atlantic and an independent escrow agent
under which those funds plus additional funds contributed by the Company are
being held in escrow to pay amounts ultimately determined to be owed to Atlantic
and interest thereon. As a result of such escrow, the Big Easy was released by
Atlantic on April 6, 2005 and is expected to be placed in service , operating
out of the Port of Palm Beach, during our fourth fiscal quarter ending June 30,
2005. We are continuing to pursue certification for passenger operations
pursuant to the United States Coast Guard's Alternative Compliance Program.
Although the Alternative Compliance Program certification procedure is less
complex and time consuming than regular Coast Guard certification, it is
nevertheless a rigorous process involving the jurisdiction of at least four
separate departments of the United States Coast Guard and the ship's
classification society, Lloyd's Register.
18
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 5, 2005, RSE entered into a Master Lease Agreement and Lease
Schedule No. 1, each dated as of January 6, 2005 (collectively, the "Lease")
with PDS Gaming Corporation providing for the lease by RSE of slot machines to
be located on the vessel Royal Star. Also on January 5, 2005, the Company
entered into a Guaranty Agreement dated as of January 6, 2005, agreeing to
guaranty payment by RSE of all sums becoming due under the Lease. The term of
the Lease is three years, with rental payments of $11,879 per month for the
first four months and $95,351.73 for the next thirty-two months. RSE also paid a
closing fee of $57,020.74, and a security deposit in the amount of $95,351.73.
See Note 15 (Subsequent Events) in connection with an April 2005 lease of
additional gaming equipment.
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 repayment of the $100,000 price 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. Additionally, we have the right to renew the lease for
two (2) additional terms of 5 years each. We were 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 Big Easy 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 Big Easy from the Port, with subsequent renewal options of four and three
years. Dockage charge is based upon $1.85 per foot of the vessel per day and a
wharfage and terminal charge per passenger which is normally included in our
admission fare
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 Big Easy.
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.
During the period that our subsidiary, ITG Vegas was in bankruptcy (January
3, 2003 to October 15, 2004) and thereafter, the 8 employees previously paid by
ITB were paid by MJQ, Inc. ("MJQ"), a company
19
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
owned by Francis W. Murray, our CEO. The wage expense was recorded by ITB and an
accounts payable was recorded to MJQ. MJQ was subsequently fully reimbursed by
ITB for the wages. This arrangement was the result of the restrictions placed on
the flow of cash to ITB from ITGV by the bankruptcy court. As a result, employer
contributions and employee deferrals to the ITB 401-K plan were suspended. The
Company has not yet decided which action, if any, should be taken with respect
to the retirement benefits.
The following summarizes commitments on non-cancelable contracts and leases as
of March 31, 2005:
Twelve Months Ended March 31,
-------------------------------------------------------------------- There-
2006 2007 2008 2009 2010 after Total
----------- ----------- ----------- ----------- ----------- --------- -------------
Capital Lease - P.B. Princess $ 4,808,104 $ 5,661,156 $ 5,661,156 $ 5,661,156 $ 1,887,052 $ 0 $ 23,678,624
Lease - Big Easy 3,264,400 3,620,430 3,620,430 3,620,430 1,206,810 0 15,332,500
Notes and Mortgages:
Principal 3,506,604 193,484 107,567 9,165 0 0 3,816,820
Interest 333,377 0 0 0 0 0 333,377
Deferred Interest Payments 600,000 600,000 600,000 600,000 0 0 2,400,000
Employee Contracts 507,756 0 0 0 0 0 507,756
Operating Leases:
Casino Equipment 1,388,439 182,311 131,914 9,717 0 0 1,712,381
Administrative & Office 2,099,310 2,337,848 1,947,276 0 0 0 6,384,434
Purchase Obligations - Big Easy 6,469,000 0 0 0 0 0 6,469,000
Purchase Obligations 1,231,244 101,966 61,006 61,006 61,006 223,687 1,739,915
Advances From Related Parties 0 650,967 0 0 0 0 650,967
----------- ----------- ----------- ----------- ----------- --------- -------------
Total $ 24,208,234 $ 13,348,162 $ 12,129,349 $ 9,961,474 $ 3,154,868 $ 223,687 $ 63,025,774
=========== =========== =========== =========== =========== ========= =============
(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.
In connection with the retrofit and improvements made on the Big Easy,
Atlantic Dry Dock Corporation ("Atlantic") has brought suit "in rem" against M/V
Empress II (the "Big Easy") filed in the US District Court, Middle District of
Florida, Jacksonville Division alleging non-payment of their asserted claims. We
have disputed Atlantic's charges for certain portions of that work. We have
placed $4.3 million borrowed from PDS in an escrow account in order to obtain
release of the vessel until the disputed amount can be arbitrated or otherwise
resolved.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 2005, 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 impairment losses of $200,000,
$150,000 and $100,000
20
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
respectively, during the first, second and third quarters of Fiscal 2005 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 a 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 $50,000 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 in the amount of $4,000,000.
(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. The total amount
of our debt for the purchase of stock as of October 15, 2003 was $1,873,413
which also included accrued interest. 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 with respect to the purchase of all such
shares. (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 to 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 to 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
Transactions.
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 to November 18, 2003, which had
been deferred, in the form of 689,730 shares
21
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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.
In Fiscal 2003, the limited partnership's indebtedness to us, including
principal and accrued interest, in the amount of $929,541 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 (Ocean Club) described
below. Such indebtedness became due December 31, 2004 and bears an interest rate
of 6% and is now scheduled to be paid upon the completion of the Ocean Club
project.
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 March 31,
2005, we had lent $2,034,405 in total to MJQ Development and we have accrued
interest in the amount of $1,328,105 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 OC Realty's share of 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 $14 million (at present) and,
second, construction financing expected to amount to $25 to $30 million and
third, any capital invested by and fees payable to joint venture partners
including OC Realty. OC Realty's share of proceeds thereafter will range from
22.5% to 45%. 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. 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 condominium units will be adequate to meet its obligations and provide
sufficient return to OC Realty with which to pay OC Realty's debt to the
Company.
From time to time Francis W. Murray has advanced funds to the Company to
meet its operating expenses. Mr. Murray is normally reimbursed by the Company or
through miscellaneous advances it may make on his behalf or direct payments made
to him. During the nine months ended March 31, 2005 Mr. Murray has advanced the
Company a net amount of $365,318, without interest.
Effective January 1, 2005, Francis W. Murray began deferring salary due to
him. As of March 31, 2005, the Company owed Mr. Murray $91,152 in unpaid wages.
As of May 20, 2005, the Company owed Mr. Murray $151,192 in unpaid wages. This
unpaid amount is reflected in accrued expenses.
During the months of January and February of 2005, our Secretary deferred
wages in the amount of $26,920. This unpaid amount is reflected in accrued
expenses.
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 Transactions. 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
22
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and the Empress II (subsequently renamed the Big Easy) , 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 first quarter of Fiscal 2005, the Company re-entered the equine
business. In addition to the purchase of horses from outside parties, the
Company has purchased 14 horses and 5 horses on which we have a share, the
majority being one and two year olds, from Francis W. Murray at prices to be
determined by an 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.
It is our plan to bring these horses into racing if we consider them competitive
following the training period, to take advantage of the projected increase in
purses as a result of the introduction of slot machines in several state
jurisdictions.
(15) SUBSEQUENT EVENTS
On April 5, 2005, ITB and certain of its subsidiaries, ITG Vegas, Inc., ITG
Palm Beach, LLC, and Royal Star Entertainment, LLC, together with Palm Beach
Maritime Corporation, Palm Beach Empress, Inc., Francis W. Murray and Francis X.
Murray, executed and delivered as joint and several co-borrowers, a promissory
note payable to PDS in the amount of $4,350,000. The note evidences a loan made
by PDS to the Company, the proceeds of which were placed in escrow in order to
obtain the release of the vessel the Big Easy, which vessel was being held by
Atlantic Dry Dock Corp. ("Atlantic"), the dry dock company which had performed
the retrofit and improvements of the Big Easy in preparing it to be placed in
service.
The Big Easy had been undergoing retrofit and improvements and had been
expected to be placed in service during our third fiscal quarter. The work was
being done on the vessel by Atlantic. Additional work had been required beyond
the work which had been planned and beyond what had been paid for, and we have
disputed some of Atlantic's charges for that work. Atlantic refused to release
the Big Easy to us until we paid the full amount it claims we owe it, totaling
$3.8 million. We are disputing that amount. In the meantime, in order to obtain
the release of the Big Easy, we borrowed $4.35 million from PDS and entered into
an escrow agreement with Atlantic and an independent escrow agent under which
those funds plus additional funds contributed by the Company are being held in
escrow to pay amounts ultimately determined to be owed to Atlantic and interest
thereon. As a result of such escrow, the Big Easy was released by Atlantic on
April 6, 2005 and is expected to be placed in service, operating out of the Port
of Palm Beach, during our fourth fiscal quarter.
This $4.35 million note bears interest at 20% per annum, is secured by a
pledge of our promissory note in the face amount of $10 million payable to us by
Realen-Turnberry/Cherry Hill, LLC, and is due and payable on the earlier of
October 5, 2005 or such time as a long term loan refinancing is effectuated with
PDS. In connection with such refinancing of the note, we are obligated to
negotiate with PDS in good faith the covenants, collateral and other terms of a
long-term loan which would refinance all of our indebtedness and subcharter
obligations held by PDS and its affiliates, upon the economic terms which have
been agreed to in principle. Under those economic terms, we would pay interest
on $6.6 million of our debt at 20% per annum, reducing to 15% per annum once our
annualized EBIDTA reaches $17 million. Of that $6.6 million of our debt, $2.25
million would represent new advances to be made to us, and $4.35 million
represents refinancing of this note. Our other indebtedness to affiliates of
PDS, consisting of capital lease obligations in connection with the vessel
subcharters in the aggregate original principal amount of $20 million, and a
loan of $2.85 million obtained by Royal Star Entertainment in January 2005,
would be restructured and the maturity of the $2.85 million loan would be
extended as part of the refinancing, all upon substantially the same economic
terms as presently apply to those financings.
In the event we do not pay in full the $4.35 million note before October 5,
2005, we are obligated at that time to refinance with PDS that note and all of
our previous obligations to PDS and its affiliates mentioned above on the
economic terms summarized above and with such collateral and other covenants as
are set forth in a form of master loan agreement which is attached to the $4.35
million note. That form of loan agreement is much more restrictive than our
present obligations to PDS and its affiliates.
As further consideration to PDS in connection with the foregoing $4.35
million loan, ITG Vegas, Inc. and ITG Palm Beach, LLC entered into a three-year
lease of an additional $1.5 million of gaming equipment. Rental payments under
such lease are $50,000 per month for 36 months.
23
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 the timing of the installation of slot machines in Broward
County's three race tracks and one jai-alai as a result of a
referendum approved on March 8, 2005. Broward County is
contiguous to Palm Beach County in which county we conduct
operations;
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 the vessels, the Big Easy and the Royal Star, 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's territorial water 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 "Big Easy". After
refurbishing and retrofitting that vessel, we expect to place the Big Easy in
service during our fourth fiscal quarter which ends on June 30, 2005. The Big
Easy 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
sublease and sub bareboat charter and equipment lease transaction for the
purpose of operating and acquiring the vessels Palm Beach Princess and the Big
Easy. The Palm Beach Princess sub charter is being accounted for as a capital
lease. The accounting treatment for the Big Easy sub charter will be determined
after completion of improvements and appraisal 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 described
in footnote 2 of the financial statements). We intend to expand our gaming
operations by placing the Big Easy in operations during our fourth 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 first quarter of Fiscal 2005, we re-entered the equine business.
We currently own 30 horses, a share of 8 horses, and are leasing 2 other horses,
all 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
following the training period to take advantage of the projected increase in
purses as a result of the introduction of slot machines in several state
jurisdictions. We are stabling and training the majority of these horses in New
Jersey and in Brazil.
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 make the balloon payment for its 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.
24
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 passenger counts decrease.
During the first quarter and early in our second 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 during the
first quarter and four (4) of our daily cruises during the second quarter 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 during our first and
second fiscal quarters were materially impacted. However, during the third
fiscal quarter our revenues and cash flows for vessel operations have recovered
to normal levels. For the nine months ended March 31, 2005 our operating revenue
was sufficient to cover operating expenses of the vessel, the capital lease
payments on the Palm Beach Princess vessel and the equipment lease payments and
the charter fees on the Big Easy which were capitalized to the cost of the
vessel. However the operating revenues were not sufficient to cover the start up
costs of the Big Easy, the improvements made and the charter fees on the Big
Easy, the Parent Company expenses and other development costs. 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, and the $2.85 million of loan proceeds
received on January 5, 2005 from PDS Gaming Corporation to help meet the
remainder of our cash needs during the first nine months of Fiscal 2005.
Our cash flows during our third quarter and into our fourth quarter also
have been materially impacted by the delay in putting the vessel "Big Easy" in
operation caused by the dry dock company not releasing the vessel due to
disputed charges and costs overruns. In April 2005, we borrowed $4.35 million to
obtain release of the vessel, but the delay and interest on the loan will
adversely effect our future cash flows. We are taking steps to conserve cash
flows such as extending terms of our payables and not paying discretionary
employee bonuses which were previously accrued. Additionally, our Chairman
delayed receiving salary during the third quarter and into our current fourth
fiscal quarter and we were able to borrow funds from our Chairman to help cover
expenses. Our Secretary has delayed receiving his salary during the first two
months of the third quarter.
Costs associated with refurbishing and retrofitting the Big Easy vessel and
placing it in service (including marketing expenses and other soft costs) are
expected to amount to approximately $12.4 million. The Company has incurred
approximately $9.2 million of those costs and PPE has contributed approximately
$3.2 million. Additional amounts necessary to begin operations of the Big Easy
vessel are expected to be provided from working capital. ITGV's ability to
generate sufficient working capital with which to pay such costs may be
adversely affected by continual delays in connection with Coast Guard approval
and by weather related and other uncertainties affecting its operations. The
costs associated with refurbishing and retrofitting the Big Easy for placing it
in service increased from our original estimate due to upgrades to the vessel,
expansion of our Mardi Gras theme build out, and improvements required by the
Coast Guard. Further delays in commencing the Big Easy will materially and
adversely affect our cash flow because of the continuing costs of carrying the
vessel. In excess of 150 crew members and other employees have been hired and
trained to operate the Big Easy, putting a severe drain on our cash flow and 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 large part to
procurement and refurbishment for the Big Easy. We are dependent upon the
expected additional revenue from the operations of the second vessel to cover
the increased financing costs.
In our last fiscal year, the Company purchased a third vessel, the 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. On January 17, 2005 we borrowed $2,850,000 from PDS Gaming Corporation
and portions of these funds were used for improvements to the
25
Royal Star, maritime office improvements and improvements to the Big Easy. 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.
Under the PDS Transaction signed on July 7, 2004 PBMC and PBE are required
to make annual and quarterly annualized payments based on seasonality factors of
cash flow sweep payments if the EBITDAR (earnings before interest, taxes,
depreciation, amortization and rents) from the operation of the Princess and the
Big Easy is less than $10,000,000 per year. In October, 2004 the Company made a
required payment of $190,415 which was due for our first fiscal quarter.
Payments for the second and third quarter are not required to be made.
The Company anticipates $2.5 million of capital expenditures for Port
improvements, the timing of which is subject to financing. The Company expects
to defer making the improvements until financing is in place.
The following summarizes commitments on non-cancelable contracts and leases as
of March 31, 2005:
Twelve Months Ended March 31,
------------------------------------------------------------------- There-
2006 2007 2008 2009 2010 after Total
---------- ---------- ---------- ----------- ---------- --------- -----------
Capital Lease - P.B. Princess $ 4,808,104 $ 5,661,156 $ 5,661,156 $ 5,661,156 $ 1,887,052 $ 0 $ 23,678,624
Lease - Big Easy 3,264,400 3,620,430 3,620,430 3,620,430 1,206,810 0 15,332,500
Notes and Mortgages: 0
Principal 3,506,604 193,484 107,567 9,165 0 0 3,816,820
Interest 333,377 333,377
Deferred Interest Payments 600,000 600,000 600,000 600,000 0 0 2,400,000
Employee Contracts 507,756 0 0 0 0 0 507,756
Operating Leases:
Casino Equipment 1,388,439 182,311 131,914 9,717 0 0 1,712,381
Administrative & Office 2,099,310 2,337,848 1,947,276 0 0 0 6,384,434
Purchase Obligations - Big Easy 6,469,000 0 0 0 0 0 6,469,000
Purchase Obligations 1,231,244 101,966 61,006 61,006 61,006 223,687 1,739,915
Other Long-Term Debt - RP 650,967 650,967
---------- ---------- ---------- ----------- ---------- --------- -----------
Total $ 24,208,234 $ 13,348,162 $ 12,129,349 $ 9,961,474 $ 3,154,868 $ 223,687 $ 63,025,774
========== ========== ========== =========== ========== ========= ===========
Upstream payments by ITGV to the Company are limited under the Princess
Sub-Charter and the Big Easy 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 the Big Easy 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 the Big Easy 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.
26
Outlook:
Based on our historical level of operations for the Palm Beach Princess and
additional revenues anticipated from the operations of the Big Easy, we believe
that once the Big Easy is placed in service, cash generated from operations will
be adequate to meet our anticipated lease/purchase and loan 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 and loan
payments or to make anticipated capital expenditures. Our future operating
performance and our ability to make payments under our leases and other debts
will be subject to future economic conditions and to financial, business and
other factors, many of which are beyond our control.
On July 7, 2004 we paid off the Brennan Trustee and entered into long-term
sub charters in connection with capital lease transactions for two vessels and
equipment. As a result of these transactions, capital 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 Big Easy of $100,000 per month plus 1% of its gross revenues
and aggregate gaming equipment lease payments to PDS of $222,400 per month after
the initial interest only payments are made. Also, on January 17, 2005 we
borrowed an additional $2.85 million at 10% per annum, adding an additional
$95,352 of payments per month, after a four month period of interest only
payments, to our debt service requirements per month. Additionally, on April 5,
2005 we borrowed $4,350,000 from PDS at an interest rate of 20% per annum, which
is due on October 5, 2005, adding approximately $72,500 per month to our debt
service. Therefore our annual combined charter payments predicated on capital
lease interest payments plus charter hire fees plus loan payments plus gaming
equipment rental will be significantly higher than the debt service payments and
equipment rentals were for the year ended June 30, 2004. Under the terms of the
promissory note, PDS could force the refinance of all of our debt at higher
interest rates (see Note 15).
Effective July 7, 2004 we began leasing a second vessel, the Big Easy. The
ship has completed its refurbishing and retrofit for use as an ocean going
casino cruise ship and is expected to be placed in service in our fourth fiscal
quarter ending June 30, 2005. We will continue to incur substantial costs for
the vessel and its personnel while we are waiting for Coast Guard certifications
and permits. 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.
During the first quarter of this fiscal year, we re-entered the equine
business for which the Company was originally established. We currently own 30
horses, own a share in 8 horses, and are leasing 2 other horses, all 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. Our horse operation has not produced any revenue during the period.
We have purchased livestock, including stud fees which total $329,000 as of
March 31, 2005 and our training and operational expenses are approximately
$45,000 per month. We do not expect to have any significant revenues from the
horse operation during our 2005 Fiscal year. These costs could increase
substantially in the near future if additional horses are purchased.
Our working capital as of March 31, 2005 was a negative $(7,812,936) as
compared to a positive amount of $556,675 at June 30, 2004. The decrease in
working capital of $8,369,100 during the past nine months was primarily due to
the net effect of cash provided by operating activities of $2,671,693, less
disbursements of approximately $13,350,000 for purchasing of the Big Easy,
improvements made to the Big Easy and Royal Star and for purchase of horse
livestock and equipment, offset by the payoff of the Brennan Trustee on our
behalf, which amount of approximately $4,000,000 was classified as a current
liability as of June 30, 2004 and current liabilities recorded as a result of
our leasing arrangements with PDS of approximately $900,000.
27
Results of Operations for the Three Months Ended March 31, 2005 and 2004
Overall
Revenue for the three months ended March 31, 2005 increased $583,278 from
$9,697,707 in Fiscal 2004 to $10,280,985 in Fiscal 2005 primarily as a result of
increase in revenues generated by the Palm Beach Princess operations during the
comparable periods. Operating expenses increased $1,160,810 from $7,545,931 in
the three month period in Fiscal 2004 to $8,706,741 in Fiscal 2005 primarily as
the result of 1) recording start up costs for the Big Easy of $1,109,310
compared to last year when no start up costs were recorded, 2) our additional
payment of other development costs of $318,179 as a result of our continued
search, both domestically and internationally, for additional gaming
opportunities and our entry into the equine business, and 3) an increase in
Depreciation and Amortization of $353,457 as a result of depreciation being
recorded on the Palm Beach Princess as a result of capital leasing arrangements
effective in July, 2004.
Operating income for the three months ended March 31, 2005 was $1,574,245
as compared to $2,151,776 for the comparative period of last year. Operating
Income before depreciation for the current period was $2,130,740 as compared to
$2,354,814 for the comparative period of last year.
Other net expenses increased by $ 655,808 as a result of (1) an increase in
the interest and financing 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 third quarter of Fiscal 2005, the Company
recorded an impairment loss in the amount of $100,000 on the Second Cherry Hill
Note Receivable.
Net Income for the three months ended March 31, 2005 was $649,117 or $.06
per diluted share as compared to income of $1,765,056 or $.17 per diluted share
for the three months ended March 31, 2004.
For the three months earnings before interest, taxes, depreciation and
amortization and our unusual items of extraordinary income and vessel start up
costs (Adjusted EBITDA) was $3,252,386 as compared to $2,371.053 for the
comparable period last year. The increase in Adjusted EBITDA was due to
increases from the vessel operations (see the discussion on Vessel Operations
below).
Reconciliation of Non-GAAP Measures to GAAP
Adjusted EBITDA or earnings before interest, taxes, depreciation and
amortization and unusual items is not a measure of performance or liquidity
calculated in accordance with generally accepted accounting principles. EBITDA
information is presented as a supplemental disclosure because management
believes that it is a widely used measure of such performance in the gaming
industry. In addition, management uses Adjusted EBITDA as the primary measure of
the operating performance of its operations, including the evaluation of
operating personnel. Adjusted EBITDA should not be construed as an alternative
to operating income, as an indicator of the Company's operating performance, or
as an alternative to cash flows from operating activities, as a measure of
liquidity, or as any other measure of performance determined in accordance with
generally accepted accounting principles. The Company has significant uses of
cash flows, including capital expenditures, interest payments, taxes, lease and
debt principal repayments, which are not reflected in Adjusted EBITDA. It should
also be noted that other gaming companies that report EBITDA information may
calculate EBITDA in a different manner than the Company. A reconciliation of the
Company's Adjusted EBITDA and unusual items to net income (GAAP), is shown
below.
28
Reconciliation of Adjusted EBITDA to Net Income (GAAP)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- --------------------------
2005 2004 2005 2004
------------- ------------ ------------ -----------
Total Adjusted EBDITA $ 3,252,386 $ 2,371,053 $ 4,374,030 $ 4,682,704
Depreciation & Amortization (556,495) (203,038) (1,521,596) (514,007)
Interest & Financing Expenses (899,126) (361,344) (2,696,828) (1,363,067)
Interest Income 78,998 80,785 230,916 251,514
Tax Benefit (Expense) on Income (5,000) (122,400) 86,000 (170,000)
------------- ------------ ------------ -----------
Net Income (Loss) before Unusual Items 1,870,763 1,765,056 472,522 2,887,144
Extraordinary Item 0 0 3,560,000 0
Start Up Costs for Vessels (1,121,646) 0 (1,857,129) 0
Impairment Loss (100,000) 0 (450,000) 0
------------- ------------ ------------ -----------
Net Income (Loss) $ 649,117 $ 1,765,056 $ 1,725,393 $ 2,887,144
============= ============ ============ ===========
Vessel Operations
During our third Fiscal quarter total net revenue from vessel operations
was $10,165,367 as compared to $9,611,153 for the comparative quarter of 2004.
The increase in revenue of $554,214 during the comparable quarters was the
result of a number of factors. The operating subsidiary which operates the Palm
Beach Princess ends its quarterly accounting period on the last Sunday of each
quarter. These end of the week cut offs normally create more comparability of
the Company's quarterly operations by generally having an equal number of weeks
(13) and weekend days in each quarter. Periodically, this system necessitates a
14 week quarter. Our third quarter of Fiscal 2005 was such a quarter. Therefore,
the number of cruises, revenues and expenses reported for the third Fiscal
quarter for this year include one additional week of operations as compared to
the third quarter of 2004. The average revenue per week during the third Fiscal
quarter of 2005 was $726,098 as compared to $739,319 during the comparative
period of Fiscal 2004, or a decrease of 1.8%. This was the result of a decrease
of the average number of passengers per week of 2.5% for Fiscal 2005, partially
offset by a slight increase in the revenue per passenger to $118, as compared to
Fiscal 2004. Casino operating expenses which also includes food, beverage and
entertainment increased $263,414 from $2,329,487, or 29.2% of casino revenue in
Fiscal 2004 to $2,592,901, or 30.5% of casino revenue in Fiscal 2005 primarily
the result of dividing costs, many of which are fixed by their nature, over
increased revenues.
During the quarter a portion of the employee costs normally incurred by the
Palm Beach Princess for operational and administrative salary expenses were
allocated to the Big Easy start up operation. These allocations were made to
more accurately reflect the cost of preparing the Big Easy for use as a casino
gaming vessel. Approximately $295,000 of salaries allocated to the Big Easy were
expensed as developmental costs and approximately $60,000 of salary costs were
capitalized as part of the vessel costs. These capitalized costs reflect the
value of vessel improvements completed by company employees. This allocation
should be taken into consideration when comparing operating results from year to
year for the Palm Beach Princess.
Sales, marketing and advertising expenses increased $184,421 from $960,941
in Fiscal 2004 to $1,145,362 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 in the quarter ending September 30, 2004 and the first
week of the quarter ending December 31, 2004. Maritime and legal expenses
increased $31,914, primarily as a result of recording one additional week of
operstions. Finance expenses increased $574,330 from $165,380 in Fiscal 2004 to
$739,710 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 $352,025 from $200,197 in
Fiscal 2004 to $552,222 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 not record depreciation
on the vessel because it operated the vessel under an operating lease.
Administration expense decreased $535,048 from $842,007 in Fiscal 2004 to
$306,959 in Fiscal 2005 due
29
in part to a reversal of bonus accrual during the current fiscal year, $212,258
of bonus the Company had accrued during the first six months of this fiscal year
and $52,402 of bonus the Company had accrued as of June 30, 2004, which will not
be paid, steps taken to reduce expenses during this quarter and the allocation
of salaries to the Big Easy as stated above. Income before income tax expense
for the third quarter of operation in Fiscal 2005 was $2,728,296 as compared to
income before income tax of $3,069,361 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 third quarter
of Fiscal 2005 the ship completed 196 cruises compared to 174 cruises during the
same period last year. During the current quarter no cruises were cancelled due
to inclement weather.
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the 14 weeks ended April 3, 2005 and for the 13
weeks ended March 28, 2004:
Three Month Period Ended
--------------------------------
Description April 3, 2005 March 28, 2004 Change
- --------------------------------------------- ------------- --------------- -----------
Passenger Count 86,148 82,076 4,072
Number of Cruises 196 174 22
Revenue:
Gaming $ 8,489,580 $ 7,989,901 $ 499,679
Fare 2,680,977 2,557,525 123,452
On Board 1,151,464 1,036,805 114,659
Less: Promotional Allowances
Fare (1,604,654) (1,480,821) (123,833)
On Board (552,000) (492,257) (59,743)
------------ -------------- ----------
Total Revenue 10,165,367 9,611,153 554,214
------------ -------------- ----------
Expenses:
Casino Operating Expenses 2,592,901 2,329,487 263,414
Hotel and Gift Shop Expenses 286,832 262,609 24,223
Sales, Marketing and Advertising Expenses 1,145,362 960,941 184,421
Maritime and Legal Expenses 1,813,085 1,781,171 31,914
Finance and Vessel Leasing Expenses 739,710 165,380 574,330
Depreciation and Amortization 552,222 200,197 352,025
Administrative 306,959 842,007 (535,048)
------------ -------------- ----------
Total Expenses 7,437,071 6,541,792 895,279
------------ -------------- ----------
Income Before Income Tax Expense $ 2,728,296 $ 3,069,361 $ (341,065)
============ ============== ==========
Results of Operations for the Nine Months Ended March 31, 2005 and 2004
Overall
Revenue from for the nine months ended March 31, 2005 decreased $244,132,
or 1% from $24,418,433 in Fiscal 2004 to $24,174,301 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 $2,913,231 from
$20,265,975 in the nine month period in Fiscal 2004 to $23,179,206 in Fiscal
2005 primarily the result of 1) recording start up costs for the Big Easy of
$1,738,375 and for the Royal Star of $118,754 wherein last year no start up
costs were recorded , 2) an increase in other development costs of $610,137 as a
result of our continued search both domestically and internationally for
additional gaming opportunities and our entry into the equine business, 3) an
increase in Depreciation and Amortization of $966,985 as a result of
depreciation being recorded on the Palm Beach Princess as a result of leasing
30
arrangements effective in July, 2004. The increase in operating expenses was
offset in part by a decrease in the bankruptcy costs of $388,759 due to the
bankruptcy being finalized in July 2004.
The Operating Income for the nine months ended March 31, 2005 was $995,095
as compared to operating income of $4,152,458 for the comparative period of last
year. Operating Income before depreciation for the current period was $2,516,691
as compared to $4,666,465 for the comparative period of last year.
Other net expenses increased by $1,820,387 as a result of (1) an increase
in the interest and financing 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 nine months of Fiscal 2005 the
Company recorded an impairment loss in the amount of $450,000 on the Second
Cherry Hill Note Receivable.
For the nine months ended March 31, 2005 the (loss) before an extraordinary
item was $1,920,607 as compared to income of $3,057,144 for the nine months
ended March 31, 2004. During the first quarter of the current Fiscal year 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.
Net Income for the nine months ended March 31, 2005 was $1,725,393 or $.16
per diluted share as compared to $2,887,144 or $.29 per diluted share for the
nine months ended March 31, 2004.
For the nine months ended March 31, 2005 earnings before interest, taxes,
depreciation and amortization and our unusual items of extraordinary income and
vessel start up costs (Adjusted EBITDA) was $4,374,030 as compared to $4,682,704
for the corresponding period. The decrease in Adjusted EBITDA of $308,674 was
primarily due to the losses sustained in the first quarter because of the
hurricanes which is reflected in the nine month operating results, partially
offset by better operating results during our second and third fiscal quarters.
See the reconciliation of Adjusted EBITDA to net income in the three month
operating results paragraphs of this section.
Vessel Operations
Operations for the nine months were materially impacted by hurricanes and
inclement weather which struck Florida and the Palm Beach area during our first
quarter of operations. The negative effect of those hurricanes on our operations
during the first quarter is also reflected in the financial results for the nine
months ended March 31, 2005. During the nine months ended March 31, 2005, total
net operating revenue from vessel operations was $23,871,604 as compared to
$24,186,322 for the nine months ended March 31, 2004. The decrease in revenue of
$314,718 during the comparable nine months was due to the loss of revenue
reported in our first fiscal 2005 quarter due to the hurricanes, partially
offset by an additional week of operations included in the nine month results
(see the Vessel Operations results for the 3 months ended March 31, 2005 for an
explanation of our weekly accounting periods). The average number of passengers
per cruise during the nine months increased slightly from 388 in fiscal 2004 to
389 in fiscal 2005, however, the revenue per passenger declined from $121 in
fiscal 2004 to $117 in fiscal 2005 for the nine month periods. During the
current nine month period gaming revenues decreased $295,729 from $20,432,796 in
the first nine months of fiscal 2004 to $20,137,067 in the first nine months of
fiscal 2005. Net fare and on board income decreased $18,989. Casino operating
expenses which also includes food, beverage and entertainment increased $357,133
from $6,488,191 or 31.8% of casino revenue in fiscal 2004 to $6,845,324 or 34%
of casino revenue in fiscal 2005 primarily the result of dividing costs, many of
which are fixed by their nature, over reduced revenues.
During the nine month period ending March 31, 2005 a portion of the
employee costs normally incurred by the Palm Beach Princess for operational and
administrative salary expenses were allocated to the Big Easy start up
operation. These allocations were made to more accurately reflect the cost of
preparing the Big Easy for use as a casino gaming vessel. Approximately $915,000
of salaries allocated to the Big Easy were expensed as developmental costs and
approximately $160,000 of salary costs were capitalized as part of the vessel
costs. These capitalized costs reflect the value of vessel improvements
completed by company employees. This allocation should be taken into
consideration when comparing operating results from year to year for the Palm
Beach Princess.
31
Sales, marketing and advertising expenses increased $396,696 from
$2,527,627 in Fiscal 2004 to $2,924,323 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 $344,698 or 6.8%
as a result of the allocation of salary expenses as stated above. Finance and
vessel lease expenses increased $1,992,560 from $218,000 in fiscal 2004 to
$2,210,560 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 $1,207,708 from $300,743
in Fiscal 2004 to $1,508,451 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 not record depreciation
because it operated the vessel under an operating lease. Administrative expenses
decreased $1,354,941 from $2,876,139 in Fiscal 2004 to $1,521,198 in Fiscal 2005
due to the reversal of accrued bonus during the first six months of this fiscal
year in the amount of $212,258 and $57,402 of bonus the Company had accrued as
of June 30, 2004 but will not pay, steps taken to reduce expenses during this
quarter, and the allocation of salary expenses as stated above. Income before
income tax expense for the first quarter of operation in Fiscal 2005 was
$3,417,692 as compared to income before Income Tax of $6,036,297 in the
comparable nine month period 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 nine months of
Fiscal 2005 the ship completed 524 cruises and 33 cruises were missed due to
hurricanes and inclement weather. Whereas during the nine months of Fiscal 2004
the ship completed 517 cruises.
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the 40 weeks ended April 3, 2005 and for the 39
weeks ended March 28, 2004:
Nine Month Period Ended
-------------------------------
Description April 3, 2005 March 28, 2004 Change
- --------------------------------------------- --------------- -------------- ------------
Passenger Count 203,751 200,590 3,161
Number of Cruises 524 517 7
Revenue:
Gaming $ 20,137,067 $ 20,432,796 $ (295,729)
Fare 5,857,985 5,777,102 80,883
On Board 3,012,676 2,633,764 378,912
Less: Promotional Allowances
Fare (3,613,379) (3,418,829) (194,550)
On Board (1,522,745) (1,238,511) (284,234)
------------- ------------ -----------
Total Revenue 23,871,604 24,186,322 (314,718)
------------- ------------ -----------
Expenses:
Casino Operating Expenses 6,845,324 6,488,191 357,133
Hotel and Gift Shop Expenses 738,635 689,206 49,429
Sales, Marketing and Advertising Expenses 2,924,323 2,527,627 396,696
Maritime and Legal Expenses 4,705,421 5,050,119 (344,698)
Finance and Vessel Leasing Expenses 2,210,560 218,000 1,992,560
Depreciation and Amortization 1,508,451 300,743 1,207,708
Administrative 1,521,198 2,876,139 (1,354,941)
------------- ------------ -----------
Total Expenses 20,453,912 18,150,025 2,303,887
------------- ------------ -----------
Income Before Income Tax Expense $ 3,417,692 $ 6,036,297 $ (2,618,605)
============= ============ ===========
Horse Operations
During the first quarter of this fiscal year, we re-entered the equine
business. We currently own 30 horses, shares in 8 horses, and lease 2 horses,
all of different ages. Some are currently racing, and a few are
32
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
horses in New Jersey and in Brazil. Additionally, the Company has purchased 14
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. Our horse operation has produced insignificant revenue
during the period. Training and operational expenses of $297,118 for the nine
month period are reported in Development Costs-Other. It is our plan to bring
these horses into racing if we consider them competitive following the training
period to take advantage of the projected increase in purses as a result of the
introduction of slot machines in several state jurisdictions.
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
Evaluation of Disclosure 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 March 31, 2005 in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
33
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the retrofit and improvements made on the Big Easy,
Atlantic Dry Dock Corporation ("Atlantic") has brought suit "in rem" against M/V
Empress II (the "Big Easy") filed in the US District Court, Middle District of
Florida, Jacksonville Division alleging non-payment of their asserted claims. We
have disputed Atlantic's charges for certain portions of that work. We have
placed $4.3 million borrowed from PDS in an escrow account in order to obtain
release of the vessel until the disputed amount can be arbitrated or otherwise
resolved.
Our subsidiary, ITG Vegas, Inc., successor by merger to Palm Beach
Princess, 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 6. EXHIBITS
Exhibits Description
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
32.1 CEO Certification pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 CFO Certification pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
34
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
May 23, 2005 /s/Francis W. Murray
----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer
and Chief Financial Officer
35
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-15(e) and 15d-15(e) and internal
control over financial reporting (as defined in Exchange Act Rules 13a
- 15(f) and 15d - 15 (f) 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) designed such internal control over financial reporting, or
caused such disclosure controls and procedures to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles:
c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report on such evaluation; and
d) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth quarter in the case of an annual report)
that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting.
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 and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; 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 over financial reporting.
Date: May 23, 2005
/s/Francis W. Murray____________
Chairman/Chief Executive Officer/
Chief Financial Officer
36
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-15e and 15d-15e) and internal
control over financial reporting (as defined in Exchange Act Rules 13a
- 15(F) and 15d - 15 (F) 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) designed such internal control over financial reporting, or
caused such disclosure controls and procedures to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles:
c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report on such evaluation; and
d) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth quarter in the case of an annual report)
that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting.
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 and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; 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 over financial reporting.
Date: May 23, 2005
/s/Francis W. Murray____________
Chairman/Chief Executive Officer/
Chief Financial Officer
37
Exhibit 32.1
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 and nine
months ended March 31, 2005 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 Executive Officer
May 23, 2005
38
Exhibit 32.2
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 and nine
months ended March 31, 2005 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
May 23, 2005
39