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 December 31, 2003
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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.
- --------------------------------------------------------------------------------
(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)
211 Benigno Boulevard, Bellmawr, New Jersey 08031
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(Address of principal executive offices) (Zip Code)
(856)931-8163
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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
---- ----
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 February 14, 2004
- ------------------------------ --------------------------------
Common Stock, $ 2.00 par value 8,252,134 Shares
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of December 31, 2003 and June 30, 2003..............1-2
Consolidated Statements of Operations
for the Three Months and Six Months ended
December 31, 2003 and 2002 ............................3
Consolidated Statement of Stockholders' Equity
for the Six Months ended December 31, 2003.............4
Consolidated Statements of Cash Flows
for the Six Months ended
December 31, 2003 and 2002.............................5
Notes to Financial Statements.................................6-25
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... ..26-32
Item 4. Controls and Procedures.......................................33
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................34
SIGNATURES................................................................35
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND JUNE 30, 2003
ASSETS
December 31, June 30,
2003 2003
(UNAUDITED)
------------ --------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 3,364,395 $ 6,123,641
Restricted Cash 210,000 0
Accounts Receivable 270,222 193,689
Prepaid Expenses 1,028,397 488,414
Spare Parts Inventory 1,054,887 1,078,740
Other Current Assets 579,293 390,458
Net Assets of Discontinued
Operations - Current 93,713 98,588
------------- -------------
TOTAL CURRENT ASSETS 6,600,907 8,373,530
------------- -------------
PLANT & EQUIPMENT:
Leasehold Improvements -
Port of Palm Beach 987,774 953,110
Equipment 1,759,362 1,278,175
Vessel Not Placed in Service -
Royal Star 741,265 0
------------- -------------
3,488,401 2,231,285
LESS: Accumulated Depreciation
and Amortization 575,904 306,494
------------- -------------
TOTAL PLANT EQUIPMENT- NET 2,912,497 1,924,791
------------- -------------
OTHER ASSETS:
Notes Receivable 33,000,000 33,000,000
Morgage Contract Recveivable -
Related Party 13,750,000 0
Deposit on Mortgage Contract
Receivable 0 4,000,000
Deposits and Other Assets -
Related Parties 6,723,870 6,687,266
Deposits and Other Assets -
Non-Related Parties 369,285 535,239
------------- -------------
TOTAL OTHER ASSETS 53,843,155 44,222,505
------------- -------------
TOTAL ASSETS $ 63,356,559 $ 54,520,826
============= =============
See Notes to Consolidated Financial Statements.
1
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND JUNE 30, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
2003 2003
(UNAUDITED)
------------- -------------
CURRENT LIABILITIES:
Accounts Payable $ 1,686,970 $ 2,264,499
Accrued Expenses 2,071,216 2,341,209
Short-Term Debt 4,694,905 2,934,330
Short-Term Debt - Related Parties 183,164 183,164
------------- -------------
TOTAL CURRENT LIABILITIES 8,636,255 7,723,202
------------- -------------
LONG-TERM LIABILITIES:
Long-Term Debt - Net of Current Portion 6,434,020 0
Long-Term Debt - Related Parties 1,574,080 985,017
------------- -------------
TOTAL LONG-TERM LIABILITIES 8,008,100 985,017
------------- -------------
DEFERRED INCOME 8,226,540 8,226,540
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100 Par
Value, Authorized 500,000 Shares,
362,489 Issued and Outstanding 36,248,875 36,248,875
Common Stock, $2 Par Value, Authorized
25,000,000 Shares, Issued, 11,480,279
and 11,480,278, respectively and
Outstanding, 8,252,134 and 8,252,133,
respectively 22,960,557 22,960,555
Capital in Excess of Par 20,191,982 20,191,984
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) (39,067,512) (40,189,608)
------------- -------------
40,333,902 39,211,806
LESS:
Treasury Stock, 3,678,146 and 3,228,146
Shares, respectively, at Cost (1,839,073) (1,614,073)
Deferred Compensation, Net (9,166) (11,666)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 38,485,664 37,586,067
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,356,559 $ 54,520,826
============= =============
See Notes to Consolidated Financial Statements.
2
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------- ------------- ---------------
OPERATING REVENUES:
Gaming $ 5,948,208 $ 5,802,971 $ 12,442,895 $ 10,998,707
Fare 626,197 570,538 1,281,568 1,228,687
On Board 425,606 398,680 850,705 852,884
------------ ------------- ------------- ---------------
NET OPERATING REVENUES 7,000,011 6,772,189 14,575,169 13,080,278
------------ ------------- ------------- ---------------
OPERATING COSTS AND EXPENSES:
Gaming 2,079,088 1,859,085 4,158,704 3,803,778
Fare 852,933 790,594 1,566,687 1,510,782
On Board 231,356 201,787 426,597 397,008
Maritime & Legal Expenses 1,519,678 1,362,763 3,268,948 2,780,687
General & Administrative Expenses 809,083 1,091,880 1,719,518 1,848,169
General & Administrative Expenses -
Parent 385,428 487,139 615,589 973,994
ITG Vegas Bankruptcy Costs 110,119 0 368,681 0
Development Costs 133,841 51,211 159,196 142,107
Depreciation & Amortization 173,186 49,179 309,719 127,899
------------ ------------- ------------- ---------------
TOTAL OPERATING COSTS AND EXPENSES 6,294,712 5,893,637 12,593,640 11,584,424
------------ ------------- ------------- ---------------
OPERATING INCOME 705,300 878,552 1,981,529 1,495,853
------------ ------------- ------------- ---------------
OTHER INCOME (EXPENSE):
Interest and Financing Expenses (501,271) (271,834) (1,001,723) (588,839)
Interest Income 98,780 114,300 170,729 214,048
Other Income (Expense) 90,227 (64,017) 19,161 (23,948)
------------ ------------- ------------- ---------------
TOTAL OTHER INCOME (EXPENSE) (312,264) (221,551) (811,833) (398,739)
------------ ------------- ------------- ---------------
INCOME BEFORE TAX PROVISION 393,036 657,001 1,169,696 1,097,114
Less: State Income Tax Expense 30,000 62,000 47,600 89,000
------------ ------------- ------------- ---------------
NET INCOME $ 363,036 $ 595,001 $ 1,122,096 $ 1,008,114
============ ============= ============= ===============
NET INCOME PER COMMON SHARE:
BASIC $ 0.05 $ 0.06 $ 0.14 $ 0.09
============ ============= ============= ===============
DILUTED $ 0.04 $ 0.06 $ 0.11 $ 0.09
============ ============= ============= ===============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Basic 7,849,227 10,527,710 8,063,818 11,164,480
============ ============= ============= ===============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Diluted 9,949,537 10,527,710 10,008,039 11,164,480
============ ============= ============= ===============
See Notes to Consolidated Financial Statements.
3
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
Preferred Common
------------------------ ---------------------------
Number of Number of
Shares Amount Shares Amount
--------- ---------- ------------ -----------
BALANCE - JUNE 30, 2003 362,489 $ 36,248,875 11,480,278 $ 22,960,555
Shares Issued for Fractional Exchanges With
Respect to the One-for-twenty Reverse Stock
Split effected on March 13, 1992 --- --- 1 2
Purchase of Shares for Treasury in connection
with REB Trustee --- --- --- ---
Amortization of Deferred Compensation Costs --- --- --- ---
Net Income for the Six Months Ended
December 31, 2003 --- --- --- ---
--------- ---------- ------------ -----------
BALANCE - DECEMBER 31, 2003 362,489 $ 36,248,875 11,480,279 $ 22,960,557
========= ========== ============ ===========
Capital Treasury Deferred
in Excess Stock Compen-
of Par (Deficit) At Cost sation Total
------------- ------------ ------------- --------- ------------
BALANCE - JUNE 30, 2003 $ 20,191,984 $ (40,189,608) $ (1,614,073) $ (11,666) $ 37,586,067
Shares Issued for Fractional Exchanges With
Respect to the One-for-twenty Reverse Stock
Split effected on March 13, 1992 (2) --- --- --- ---
Purchase of Shares for Treasury in connection
with REB Trustee --- --- (225,000) --- (225,000)
Amortization of Deferred Compensation Costs --- --- --- 2,500 2,500
Net Income for the Six Months Ended
December 31, 2003 --- 1,122,096 --- --- 1,122,096
------------- ------------ ------------- --------- ------------
BALANCE - DECEMBER 31, 2003 $ 20,191,982 $ (39,067,512) $ (1,839,073) $ (9,166) $ 38,485,664
============= ============ ============= ========= ============
See Notes to Consolidated Financial Statements.
4
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
December 31,
----------------------------
2003 2002
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES: $ 1,122,096 $ 1,008,114
------------- ------------
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation and Amortization 309,719 127,899
Gain on Sale of Assets 3,853 0
Changes in Operating Assets and Liabilities -
(Increase) in Restricted Cash & Investments (210,000) 0
(Increase) in Accounts Receivable (76,532) (216,015)
(Increase) in Other Assets (164,982) 32,893
(Increase) Decrease in Prepaid Expenses (539,982) 27,605
Increase (Decrease) in Accounts Payable and
Accrued Expenses (847,516) 548,547
------------- ------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
BEFORE DISCONTINUED OPERATIONS (403,344) 1,529,043
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 4,800 0
------------- ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (398,544) 1,529,043
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits on Purchase of Palm Beach Princess Mortgage 0 (500,000)
Purchase of Royal Star (741,265) 0
Investment in Port Lease 0 (100,000)
Capital Expenditures (515,859) (303,424)
Decrease (Increase) in Other Investment Activity 861,324 4,936
------------- ------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
BEFORE DISCONTINUED INVESTING ACTIVITIES (395,800) (898,488)
CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES 0 0
------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (395,000) (898,488)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments on Short Term Notes (1,964,978) (210,511)
Decrease in Balances Due to/From Subsidiaries 4,875 (437)
------------- ------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES (1,960,103) (210,948)
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (4,875) 0
------------- ------------
NET CASH (USED IN) FINANCING ACTIVITIES (1,964,978) (210,948)
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,759,322) 419,607
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS 75 437
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 6,123,641 796,610
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 3,364,394 $ 1,216,654
============= ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 434,949 $ 0
Income Taxes $ 0 $ 0
See Notes to Consolidated Financial Statements.
5
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations - Our operating subsidiary, ITG Vegas, Inc. is
currently engaged in an entertainment cruise and casino ship business, doing
business as the Palm Beach Casino Line, under a bareboat charter of the vessel
M/V Palm Beach Princess (the "Palm Beach Princess"). The Palm Beach Princess
performs fourteen cruises weekly, that is, a daytime and an evening cruise each
day. Each cruise is of five to six hours duration. During each cruise, the Palm
Beach Princess offers a range of amenities and services to her passengers,
including a full casino, sit-down buffet dining, live musical shows,
discotheque, bars and lounges, swimming pool and sundecks. The casino occupies
15,000 square feet aboard the ship and is equipped with approximately 400 slot
machines, all major table games (blackjack, dice, roulette and poker), and a
sports wagering book.
(B) Principles of Consolidation - The accounts of all subsidiaries are
included in the consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(C) Classifications - Certain prior years' amounts have been reclassified
to conform with the current years' presentation.
(D) Spare Parts Inventory - Spare parts inventory consists of operating
supplies, maintenance materials and spare parts. The inventories are carried at
cost. It is necessary that these parts be readily available so that the daily
cruise operations are not cancelled due to mechanical failures.
(E) Depreciation and Amortization - Depreciation of property and equipment
were computed by the straight-line method at rates adequate to allocate their
cost or adjusted fair value in accordance with U.S. generally accepted
accounting principles over the estimated remaining useful lives of the
respective assets. Amortization expense consists of the write off of major
vessel repairs and maintenance work normally completed at dry dock in the fall
of each year. These expenses are written off during a twenty four month period
following the dry dock period. For the three and six months ended December 31,
2003, the amortized expense was $37,809. There was no amortized expenses during
the first quarter of this fiscal year.
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. The Company performed an impairment test of its
intangible assets with indefinite lives during the fiscal year 2003 and
concluded that there was no impairment.
(F) Net Assets of Discontinued Operations - At December 31, 2003 and June
30, 2003, the remaining net assets and liabilities of Garden State Park and
Freehold Raceway were classified as "Net Assets of Discontinued Operations."
6
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(G) Deferred Income - The gain from the sale of our Garden State Park
property on November 28, 2000 in the amount of $1,439,951 and the gain from our
sale of the El Rancho property on May 22, 2000 in the amount of $2,786,589 have
been deferred until such time as the notes receivable on the sales have been
collected. Other amounts included in Deferred Income are fees/charges to Leo
Equity Group, Inc. in the amount of $3,000,000 and to MJQ Corp. in the amount of
$1,000,000 in connection with the final settlement with the Brennan Trustee.
(See Footnote 15 Related Party Transactions) These amounts have been deferred
until such time as the funds are received.
(H) Revenue Recognition - Casino revenue consists of gaming winnings net of
losses. Net income is the difference between wagers placed and winning payout to
patrons and is recorded at the time wagers are made. The vast majority of the
wagers are in the form of cash and we do not grant credit to our customers to a
significant extent. Fare revenues consist of admissions to our vessel and are
recognized as earned. On board revenues consist primarily of ancillary
activities aboard the vessel such as the sale of food and beverages, cabin
rental, gift shop, spa facility and skeet shooting. These revenues are
recognized on the date they are earned.
(I) Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 2003, funds classified as cash and cash
equivalents, which are primarily those of the Palm Beach Princess operations
under debtor-in-possession, are only available under bankruptcy court approval
guidelines.
(J) Restricted Cash - Restricted cash represents funds which have been put
in an escrow account previously established for the benefit of our Chapter 11
pre-petition creditors. During the most recent quarter payments of $1,257,000
were disbursed from this account.
(K) Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and cash
equivalents. The Company places its cash investments with high credit quality
financial institutions and currently invests primarily in U.S. government
obligations that have maturities of less than 3 months. The amount on deposit in
any one institution that exceeds federally insured limits is subject to credit
risk.
(L) Use Of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
(M) Recently Issued Accounting Pronouncements
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123". SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for an entity that
voluntarily changes to the fair-value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects on reported net
income and earnings per share and the entity's accounting policy decisions with
respect to stock-based employee compensation. Certain of the disclosure
requirements are required for all companies, regardless of whether the fair
value method or intrinsic value method is used to account for stock-based
employee compensation arrangements. This amendment to
7
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SFAS 123 became effective for financial statements for fiscal years ended after
December 15, 2002 and for interim periods beginning after December 15, 2002.
Accordingly, we have adopted the disclosure provisions of this statement in
fiscal 2003. Presently, the Company does not have any circumstances that would
require the implementation of these standards. Accordingly, the Company believes
the adoption of these statements will have no impact on its financial position
or results of operations
In March 2003 the Emerging Issues Task Force published Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables" (EITF00-21).
EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it performs multiple revenue generating activities and
how to determine whether such an arrangement involving multiple deliverables
contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this Issue is effective for revenue arrangements entered in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 on July
1, 2003 did not have any impact on our financial statements..
(2) ITG VEGAS, INC. CHAPTER 11 PLAN OF REORGANIZATION
On January 3, 2003, ITG Vegas, Inc.("ITGV"), our subsidiary operating the
Palm Beach Princess, and MJQ Corporation ("MJQ"), which owns 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 "Trustee") the promissory note of MJQ
Corporation 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, ITGV (together with MJQ
Corporation) 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 (the "Plan") in the Chapter 11
Cases of ITG Vegas, Inc. and MJQ Corporation (ITG Vegas, Inc. and MJQ
Corporation being hereinafter called the "Debtors"). The Plan is a plan of
reorganization 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 (the "Effective
Date"), 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 will continue as reorganized debtors.
The Plan included the following principal features:
1. On the Effective Date, all Allowed Administrative Expense Claims and all
Allowed Priority Tax Claims and Allowed Priority Non-Tax Claims were paid in
full (to the extent not already paid).
8
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. All pre-petition non-insider (non-affiliate), non-insured unsecured debt
of the Debtors will be paid in two installments, one-half on the Effective Date
and one-half (with interest thereon at 8% per year from the Effective Date) on
the six month anniversary of the Effective Date. The holders of such unsecured
pre-petition debt will receive security interests in the cash bank maintained on
board the Vessel (approximately $700,000) and in all of the shore side furniture
and equipment to secure the Plan payments to them. During the most recent
quarter $1,254,000 were disbursed from an escrow account previously established
for the benefit of the creditors. In addition, an amount equal to $70,000 will
be paid monthly into escrow as further collateral for the holders of such debt.
3. All non-insider claims covered by insurance will be entitled to payment
in accordance with the insurance coverages. There are no policy limits on the
Debtors' liability coverages and the holders of these claims will be required to
pursue the insurance proceeds for payment, except with respect to the
deductible, for which the Debtors shall remain obligated.
4. The Debtor's principal creditor, Donald F. Conway as Chapter 11 Trustee
for the Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee"), will
receive payment in full of all obligations over a period not to exceed three
years. Significantly, the Debtors' obligations to the Brennan Trustee have been
combined with the Company's indebtedness to the Brennan Trustee, for all of
which the Debtors and the Company will be jointly and severally liable. All of
the obligations to the Brennan Trustee will be secured by a first priority ship
mortgage against the Vessel and, with certain exceptions, first priority
security interests in all of the other assets of the Debtors, subject to the
security interests being granted in favor of the pre-petition unsecured
creditors as described in paragraph 2 above.
5. The payment obligations to the Brennan Trustee will consist of the
following:
(a) The balance of the purchase price that had been payable by ITG
Vegas for the purchase of the ship mortgage against the Vessel, in the amount of
$9,750,000;
(b) The balance of the Company's indebtedness to the Brennan Trustee
in respect of the purchase of stock in the Company, in the principal amount of
$1,511,035.70, plus interest thereon from December 13, 2002 to January 23, 2003
at 9% per annum and thereafter at 11% per annum until the Effective Date;
(c) A new obligation of the Company for the purchase of an additional
450,000 shares of the Company's stock from the Brennan Trustee, at $0.50 per
share, or $225,000;
The amounts described in subparagraphs (a), (b) and (c)) are collectively
called the "Payment Obligations" and totaling $11,623,414 as of October 15,
2003. A forbearance fee of $350,000 also accrued to the Brennan Trustee on the
Effective Date.
The Payment Obligation shall accrue interest at 12% per annum. Monthly
payments of $400,000 will be required to be made to the Brennan Trustee, to be
applied first to interest accrued and then to principal. In addition, the
Brennan Trustee shall be entitled to payment of a Stay Bonus in the amount of
$200,000 if the Payment Obligation shall not have been paid in full within 12
months after the Effective Date, and an additional $100,000 if the Payment
Obligation shall not have been paid in full within 24 months after the Effective
Date. Beginning with ITG Vegas' 2004 internal accounting year (commencing
December 29, 2003) and annually thereafter, 75% of ITG Vegas' Free Cash Flow (as
defined in the Plan)
9
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
for the period shall be paid to the Brennan Trustee as a Sweep Payment, to be
applied first to accrued and unpaid interest, then to principal on the Payment
Obligation, and thereafter to any unpaid Stay Bonuses.
6. Restrictions are imposed under the Plan on ITG Vegas making payments to
affiliated entities, including the Parent company. Payment of indebtedness to
affiliated entities of ITG Vegas generally will be subordinated and intercompany
advances and transfers from ITG to affiliated entities generally will be
prohibited, except that, if no default exists in the obligations to the Brennan
Trustee, (i) $50,000 per month may be paid by ITG Vegas to MJQ Corporation in
respect of the bareboat charter fee for use of the Vessel and (ii) $100,000 per
month will be permitted to be paid by ITG Vegas to the Company under the Tax
Sharing Agreement between them. The Company will enter into a Tax Sharing
Agreement with ITG Vegas effective on the Effective Date, pursuant to which ITG
Vegas will compensate the Company for the tax savings realized as a result of
ITG Vegas's inclusion in the Company's consolidated group of companies for
federal income tax purposes, in the amount of $100,000 per month, provided that
no such payments are permitted to be made if any default exists in respect of
the obligations to the Brennan Trustee.
The maximum amount of funds permitted to be up streamed by ITG Vegas to the
Company is $100,000 per month under the Tax Sharing Agreement (and, beginning in
2005, 25% of ITG's annual Free Cash Flow, as defined). The Company has no other
source of funds presently available. For these reasons, and since the $100,000
per month tax sharing payment will be suspended at any time when the Debtors are
not current in payment of their obligations to the Brennan Trustee, no assurance
can be given that the Company will be able to function as a going concern and
pay its debts as they become due.
The foregoing summary of the Plan, the Payment Obligations to the Brennan
Trustee and the terms thereof are not intended to be complete. For further
information about the Payment Obligations and collateral therefor, the covenants
of the Company and the Debtors, events of default and other terms agreed to in
principle among the Debtors, the Company and the Brennan Trustee, reference is
made to the Term Sheet for Plan of Reorganization which is attached as Exhibit A
to the Plan and filed with the Securities and Exchange Commission on the
Company's Form 8-K filed on September 22, 2003. Reference is also made to the
Amendment to the Master Settlement Agreement, effective October 15, 2003
attached as an exhibit to this Form 10-Q.
ITG Vegas and the Company negotiated a document, executed on November 10,
2003 entitled Amendment to Master Settlement Agreement with the Brennan Trustee,
which incorporated the above- described terms and other modifications to the
Master Settlement Agreement previously entered into by the Brennan Trustee, the
Company, Palm Beach Princess, Inc. (predecessor of ITG Vegas, Inc.), MJQ
Corporation and others.
7. All of the outstanding shares of stock in ITG Vegas are owned by
International Thoroughbred Gaming Development Corporation ("ITGD"), which is a
wholly owned subsidiary of the Company. While ITGD will pledge all of its shares
of stock in ITG Vegas as additional collateral to the Brennan Trustee, in all
other respects the Company's indirect stock ownership of ITG Vegas is not
affected by the Plan.
By reaching the foregoing consensual plan of reorganization by agreement
with the Brennan Trustee, the Debtors have avoided the costs and delays of a
contested confirmation hearing with their largest creditor and developed a Plan
believed to be feasible.
10
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) MORTGAGE CONTRACT RECEIVABLE - RELATED PARTY
Effective February 20, 2002 we entered into a Master Settlement Agreement
with the Chapter 11 Trustee (the "Trustee") for the Bankruptcy Estate of Robert
E. Brennan. In accordance with the Master Settlement Agreement, through our Palm
Beach Princess, Inc. Subsidiary (which has been merged into ITGV) we entered
into a Purchase and Sale Agreement which provide for our purchase from the
Brennan Trustee of the promissory note of MJQ Corporation which is secured by a
ship mortgage against the vessel M/V Palm Beach Princess (the "Ship Mortgage
Obligation") for a purchase price of $13.75 million. Prior to the Effective Date
of ITGV's Plan of Reorganization (described in Note 2 above), Palm Beach
Princess, Inc. and its successor by merger, ITGV, were not obligated to complete
the purchase of the Ship Mortgage Obligation and were not liable for any failure
to pay the purchase price - the sole express remedy of the Brennan Trustee in
the event of a default was to terminate the Purchase and Sale Agreement, keep
the Ship Mortgage Obligation and cause forfeiture of our installment payments
previously made. We therefore did not accrue the purchase price as a liability
on our balance sheet. In negotiating a consensual Chapter 11 Plan among ITGV,
MJQ Corporation, the Brennan Trustee and other creditors, the Company agreed to
be liable for payment of the balance of the purchase price of the Ship Mortgage
Obligation (which was $9.75 million as of the Effective Date of the Plan). The
parent company and ITGV agreed to be jointly and severally liable for payment of
all obligations to the Brennan Trustee. As a result, the unpaid portion of the
purchase price of the Ship Mortgage Obligation and interest accrued to October
15, 2003 (which was capitalized) are recorded as liabilities on our balance
sheet, and the mortgage contract receivable is reflected as an asset, after
October 15, 2003. The Ship Mortgage Obligation will be delivered to the Company
upon full payment of our indebtedness to the Brennan Trustee, at which time the
Company, as owner of the Ship Mortgage Obligation, will be entitled to all of
the benefits thereof. If, however, we are unable to make all of the payments
when due under the Purchase and Sale Agreement (as modified in connection with
the Master Settlement Agreement) or otherwise default in performance of the
terms of any of our obligations to the Brennan Trustee, subject to applicable
grace periods, the Brennan Trustee may cause the liquidation of our only
operating business, the Palm Beach Casino Line, all of the assets of which are
pledged to secure our indebtedness to the Brennan Trustee, and/or the Brennan
Trustee may sell the mortgage receivable.
(4) NOTES RECEIVABLE
A portion of the proceeds from the sale of the non-operating former El
Rancho Hotel and Casino in Las Vegas to Turnberry/Las Vegas Boulevard, LLC
("Turnberry") on May 22, 2000 was used by us to purchase a promissory note in
the face amount of $23,000,000. The interest rate under such note will be
adjusted from time to time since the interest actually payable will be dependent
upon, and payable solely out of, the buyer's net cash flow available for
distribution to its equity owners ("Distributable Cash"). After the equity
investors in the buyer have received total distributions equal to their capital
contributions plus an agreed upon return on their invested capital, the next $23
million of Distributable Cash will be paid to 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 30th anniversary of our purchase of the note.
We may convert the promissory note, at our option, into a 33 1/3% equity
interest in the buyer during a six month period beginning at the 15th
anniversary of the issuance of the note. If not then converted, the note will
convert into a 33 1/3% equity interest in the buyer at the 30th anniversary of
its issuance. 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.
11
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 collectability of this note was determined by a real
estate appraisal completed in March, 2002 for a bank in anticipation of
financing for Turnberry.
In addition, we sold two large bronze sculptures located at the Garden
State Park property to Realen, in exchange for Realen's promissory note due
November 30, 2002, in the principal amount of $700,000. The Chapter 11 Trustee
for the Bankruptcy Estate of Robert E. Brennan claimed ownership of those
sculptures, and we settled the resulting litigation over the sculptures by
agreeing that the first $350,000 in principal payments made by Realen under such
note would be remitted to the Brennan Bankruptcy Trustee (together with one-half
of the interest paid by Realen under such note). The remaining $350,000 of the
$700,000 note is classified in other current assets on our balance sheet as of
June 30, 2003. As part of the settlement of the sculpture litigation, the party
who sold us the sculptures, agreed to reduce the amount of our obligation for
payment of the balance of the sculpture price (described in Note 7(A) below) by
the same principal amount, $350,000, given up by us to the Trustee. As of
November 14, 2003, Realen had not made the payment due to ITB in the amount of
$350,000 which was due on November 30, 2002. On January 30, 2003, the Trustee
instituted litigation against Realen and the Company demanding payment of the
first $350,000. On August 18, 2003 the judge granted a summary judgement against
Realen-Turnberry/ Cherry Hill, LLC in the sculpture litigation and dismissed a
cross claim that Realen- Turnberry/Cherry Hill, LLC had brought against ITB. On
February 20, 2004 Turnbury paid $466,363 to the Company in full satisfaction of
the note due us for the sale of the horse statues at Garden State Park. As a
result the Company is required to pay approximately $175,000 for satisfaction of
the note we owe on our original purchase of the statures. (See Note 16-C)
(5) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets -
non-related parties:
December 31, 2003 June 30, 2003
----------------- ---------------
Port Lease Rights $ 250,000 $ 250,000
Deposit on Ship Purchase (See Note 7-D) -0- 200,000
Other Misc. Assets 119,285 85,239
----------------- ---------------
Total $ 369,285 $ 535,239
================= ===============
12
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) DEPOSITS AND OTHER ASSETS - RELATED PARTIES
The following items are classified as Deposits and Other Assets - Related
Party Transactions (See Note 15):
December 31, June 30,
2003 2003
------------- -----------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,034,405 $ 2,034,405
Loan Transferred from Golf Course Project to
OC Realty, LLC 735,584 735,584
Note Receivable from Francis W. Murray * 2,600,749 2,600,749
Accounts Receivable from Francis W. Murray 35,099 35,099
Loans to Francis W. Murray 93,000 93,000
Advances to OC Realty, LLC 4,974 77,162
Accrued Interest on Loans to the Ft. Lauderdale Project
(OC Realty, LLC) 715,345 606,553
Accrued Interest Transferred from Golf Course Project to
OC Realty, LLC 287,327 287,327
Accounts Receivable from Frank Leo 23,441 23,441
Goodwill on Purchase of GMO Travel 193,946 193,946
------------- -----------
Total Deposits and Other Assets - Related Parties $ 6,723,870 $ 6,687,266
============= ===========
- --------------------------------------------------------------------------------
* The note receivable from Francis W. Murray is non-recourse except to his
stock in MJQ Corporation which stock was previously owned Michael J.
Quigley and now owned by our CEO, Francis W. Murray, subject to our lien.
13
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
December 31, 2003 June 30, 2003
Interest % -------------------------- ------------------------
Per Annum Current Long-Term Current Long-Term
-------------- ----------- ----------- ----------- ---------
International Thoroughbred
Breeders, Inc.:
- --------------------------
MCJEM, INC. (A) 15% $ 132,000 $ -0- $ 132,000 $ -0-
Chapter 11 Trustee for the Bankruptcy
Estate of Robert E. Brennan (B) 12% 3,458,448 6,301,956 1,511,036 -0-
Michael J. Quigley, III (C) 10% 900,000 -0- 900,000 -0-
Florida Bank, N.A. (D) Prime + .25% -0- -0- 200,000 -0-
First Insurance Funding Corp.(E) 6.95% 7,131 28,117 -0-
Francis X. Murray (F) 8% 159,165 159,164 -0-
William H. Warner(F) 12% 24,000 -0- 24,000 -0-
Other Various 25,000 25,000 -0-
ITG Vegas, Inc.:
- ----------------
International Game Technology (G) Various 111,836 132,064 16,709 -0-
Corporate Interiors (H) Prime + 2% 40,489 -0- 121,468 -0-
Enter. Innovations (I) 0% 20,000 -0- -0- -0-
Garden State Park:
- ------------------
Service America Corporation (J) 6% 160,000 -0- 160,000 -0-
----------- ----------- ----------- --------
Totals $ 5,038,069 $ 6,434,020 $ 3,277,494 $ -0-
Net Assets of Discontinued
Operations - Long Term -0- -0- -0- -0-
Net Liabilities of Discontinued
Operations - Long Term (160,000) -0- (160,000) -0-
Related Party Notes (183,164) -0- (183,164) -0-
----------- ----------- ----------- --------
Totals $ 4,694,905 $ 6,434,020 $ 2,934,330 $ -0-
=========== =========== =========== ========
- --------------------------------------------------------------------------------
The effective Prime Rate at December 31, 2003 and June 30, 2003 was 4%.
14
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(A) On February 24, 2000, the Company sold several pieces of artwork to
Robert E. Brennan Jr., son of the Company's former Chairman and Chief Executive
Officer. The $218,000 sales price of the artwork was in excess of the original
cost of $186,600. The Company recorded a $31,400 gain on the sale in Fiscal
2000. In addition, the Company purchased two large bronze sculptures located on
the Garden State Park property that were previously on loan to the Company from
Mr. Brennan Jr. The purchase price of the sculptures was $700,000. In connection
with the transaction, the Company signed a $482,000 promissory note with Mr.
Brennan Jr. which represented the purchase price of the sculptures less the
sales price of the artwork sold to Mr. Brennan Jr. On July 27, 2000 the Company
received a notice from the Chapter 11 Trustee for the bankruptcy estate of
Robert E. Brennan (the "Chapter 11 Trustee") asserting certain ownership rights
in a number of items on loan to the Company, including the sculptures mentioned
above. After the Chapter 11 Trustee claimed ownership of the sculptures, an
arrangement was agreed to between the Company and the Chapter 11 Trustee
pursuant to which the Company was permitted to resell the sculptures to Realen
in May 2001, free and clear of any claim by the Chapter 11 Trustee, in exchange
for a $700,000 promissory note of Realen due November 30, 2002 (the "Realen
Sculpture Note"). Pursuant to the agreement between the Company and the Chapter
11 Trustee, payments by Realen under the Realen Sculpture Note were to be held
in escrow pending determination of the Chapter 11 Trustee's claims. On December
29, 2000, the Chapter 11 Trustee instituted suit against the Company seeking the
right to all payments and proceeds of the Realen Sculpture Note. After the end
of the fiscal year, in September 2001, a settlement agreement was entered into
among the Company, Robert E. Brennan, Jr., the Chapter 11 Trustee and others
pursuant to which, among other things, the litigation by the Chapter 11 Trustee
against the Company was dismissed with prejudice and the first $350,000 of
principal plus one-half of the interest received under the $700,000 Realen
Sculpture Note will be paid to the Chapter 11 Trustee. The balance (up to
$350,000 in principal plus one-half of the interest) will be paid to the
Company. As a result of this settlement, the Company and Mr. Brennan Jr. agreed
that (I) all claims of the Company against Mr. Brennan Jr. arising out of his
sale of the sculptures to the Company will be released and (ii) the promissory
note issued by the Company to Mr. Brennan Jr. will be amended (x) to reduce the
principal amount of such promissory note from $482,000 to $132,000, with
interest on that sum at the rate of 15% annum to accrue from November 30, 2001
only if the principal of such note is not paid in full by December 10, 2001, (y)
to make such promissory note due and payable on November 30, 2002, and (z) to
permit the Company to defer payment of the promissory note to such later date as
the Company shall have received payment in full of the Realen Sculpture Note.
The effect of the aforesaid settlement is therefore that the Company's loss of
the amount to be paid under the settlement agreement to the Chapter 11 Trustee
will be borne by Brennan Jr. by reduction to the Company's promissory note
payable to him. On February 20, 2004 Turnbury paid $466,363 to the Company in
full satisfaction of the note due us for the sale of the horse statues at Garden
State Park. As a result the Company is required to pay approximately $175,000
for satisfaction of the note we owe on our original purchase of the statures.
(See Note 16-C)
(B) Balance as of June 30, 2003: On December 13, 2002 we issued a twelve
month promissory note in the amount of $1,648,403 including interest of $34,330
to the Brennan Trustee for the Bankruptcy Estate of Robert E. Brennan for the
purchase of 3,228,146 shares of our common stock held or claimed by the Trustee.
The first principal payment of $137,367 was also paid on that date. The Stock
Purchase Note is secured by a security interest in proceeds and payments
receivable under the $10 million Realen Note.
Balance as of December 31, 2003: In connection with the Plan of
Reorganization we became liable for the purchase of the Ship Mortgage Obligation
in the amount of $9.75 million and that obligation was combined with the unpaid
balance of the Stock Purchase Note, and an additional 450,000 shares for
15
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
$225,000 , plus accrued interest, for a total amount due the Brennan Trustee of
$11,623,414 ("The Payment Obligation"). Effective October 15, 2003 we became
jointly and severally liable with ITG Vegas for the payment of the Payment
Obligation. If we are unable to continue to make timely payments of the Payment
Obligation the 3,678,146 shares of stock, which have been pledged as security,
could be sold by the Brennan Trustee and the assets of ITG Vegas, which also
secured the Payment Obligation could be liquidated by the Brennan Trustee. The
sale of said shares by the Trustee along with other uncontrollable stock
transfer events could effect the preservation of our net operating loss tax
carry forwards (NOL's). As of 6/30/03 the Company had $147,000,000 available in
Net Operating Loss carryforwards which can be used to offset taxable income.
Loss of our NOL's would cause the Company to pay Federal Income taxes on its
reported taxable income and reduce reportable net income.
(C) On January 26, 2001, we borrowed $1,000,000 from Michael J. Quigley,
III at an annual interest rate of 10%. Principal and interest on the note was
due on or about April 25, 2001. On May 14, 2001, the loan was modified to be due
on demand. The loan is secured by a pledge of the $10 million Realen Note, which
is subordinate to the security interest of the Trustee which secures the Stock
Purchase Note and by a pledge of the $23 million Turnberry Note. As of December
31, 2003, the remaining balance of $900,000 plus accrued interest of $292,876 is
due on demand. The accrued interest is shown on the Balance Sheet as accrued
expenses. On February 20, 2004 the Company paid in full its indebtedness to
Michael J. Quigley in the amount of $1,206,850 which included accrued interest.
(See Note 16-B)
(D) On March 19, 2003, we issued a two month promissory note in the amount
of $200,000 bearing interest at prime plus .25% to Florida Bank, N.A. The
proceeds of such note were used to fund a escrow deposit in connection with a
charter/purchase of an offshore gaming vessel. The escrow deposit was returned
to us on May 7, 2003 following the expiration of the negotiation period, and we
have satisfied the note to Florida Bank, N.A.
(E) Our directors and officers liability policy was financed by First
Insurance Funding Corp. for a $128,388 one year promissory note at a 7.99%
interest rate. At December 31, 2003, the principal balance on the note was
$7,131.
(F) 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 December 31, 2003 was $159,165. On February 3,
2003, we issued a promissory note for $20,000 bearing interest at 12% to William
H. Warner, Secretary of the Company. On June 30, 2003, Mr. Warner advanced to
the Company an additional $4,000. The proceeds from the all the related party
loans were used as working capital.
(G) On December 6, 2002, Palm Beach Princess, Inc. issued a twenty four
month promissory note in the amount of $21,000 bearing interest at 8% to
International Game Technology for the purchase of gaming equipment. A payment of
$2,100 was paid on delivery of the equipment and 23 consecutive monthly
installments of $854.80 were to be paid on the balance. As a result of the
institution of proceedings by our subsidiary, ITGV, under Chapter 11 of the
bankruptcy code, payments have been delayed until the effective date of the Plan
of Reorganization. (See Note 2) On December 22, 2003, ITG Vegas, Inc. issued a
twenty four month promissory note in the amount of $231,716 bearing interest at
8.5% to International Game Technology for the purchase of gaming equipment. A
payment of $30,000 was paid on delivery of the equipment and 24 consecutive
monthly installments of $10,532.85 are to be paid on the balance. At December
31, 2003, the principal balance on the two notes was $243,900.
16
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(H) On April 30 2003, ITG Vegas, Inc. issued a one year promissory note in
the amount of $161,958 bearing interest at prime plus 2% to Corporate Interiors
for the purchase of office furniture. Monthly payments of $13,496.46 are being
paid on the note. At December 31, 2003, the principal balance on the note was
$40,489.
(I) On December 19, 2003, ITG Vegas, Inc. issued a five month promissory
note in the amount of $20,000 to Entertainment Innovations, Inc. for the
purchase of gaming equipment. A payment of $4,000 was paid on delivery of the
equipment and 5 consecutive monthly installments of $4,000 are to be paid on the
balance. At December 31, 2003, the principal balance on the note was $20,000.
(J) In connection with the January 28, 1999 lease transactions for the
Garden State Park facility, the Company purchased equipment located at Garden
State Park and a liquor license 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 on December 28, 2003 and have not
been made. The Company is continuing to negotiate new terms under this note and
if unsuccessful the creditor may seek to enforce payment of the note.
(8) PURCHASE OF M/V ROYAL STAR
During the quarter ended December 31, 2003 our subsidiary, Royal Star
Entertainment, LLC, a Delaware limited liability company, purchased the vessel
M/V Royal Star ("Royal Star"). As of December 31, 2003 the Company has spent
$741,265 for the purchase and for legal and professional fees in connection with
the purchase. The Royal Star is a 232 foot vessel, built in 1985 and operates
under the flag of St. Vincent and Grenadines. 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. We are seeking financing in
order to make these improvements. Financing may be restricted by the Brennan
Trustee, funds which we may wish to spend for improvements are restricted by the
Brennan Trustee and we must make simultaneous dollar for dollar payments to the
BrennanTrustee for each dollar spent on improvements. In December 2003 we paid
the Trustee a prepayment of $1,200,000 on our obligation to him in order to
obtain his permission to purchase the Royal Star. Depreciation will not be
computed on the Royal Star until it is placed in service.
(9) LONG TERM DEBT - RELATED PARTIES
The following items are classified as short and long-term debt (See Note 15
- - Related Party Transactions):
December 31, June 30,
2003 2003
------------- -----------
Loan from Francis W. Murray $ 250,000 $ 250,000
Accrued Wages due and Advances
from Francis W. Murray 719,095 404,204
Advances from MJQ Corporation (FWM ownership) 604,985 330,813
----------- --------
Total Long Term Debt - Related Parties $ 1,574,080 $ 985,017
=========== ========
(10) NET INCOME PER COMMON SHARE
Income per common share is computed by dividing net income by the weighted
average number
17
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of shares of common stock outstanding. On December 13, 2002, the Company
purchased 3,228,145 shares of its Common Stock from the Trustee and on October
15, 2003 the effective date of the court approval of our Chapter 11 Bankruptcy
Plan, we purchased an additional 450,000 shares from the Trustee and have
accounted for the transaction on the cost method of accounting for treasury
stock. For the three and six months ended December 31, 2003, options to purchase
2,075,000 shares of Common Stock at $.269 per share and options to purchase
1,566,692 shares of Common Stock at $.50 per share (which includes 1,360,192
options having been authorized but not issued) were used in the computation of
diluted income per share because the exercise price of those options were above
average market price, however, the number of shares that would have been issued
from the exercise of stock options has been reduced by the number of shares that
could have been purchased from the proceeds at the average market price of the
Company's stock. The additional shares that would have been issued decreased the
stated earnings per share for the three and six month periods ended December 31,
2003. Options and warrants to purchase 4,046,500 shares of Common Stock at
various prices per share, for the three and six months ended December 31,2002
were not included in the computation of income per share because the exercise
price of those options and warrants were above market value.
(11) COMMITMENTS AND CONTINGENCIES
See Note 2 for additional commitments and contingencies with respect to the
Chapter 11 Plan of Re-Organization.
See Note 3 for additional commitments and contingencies with respect to our
purchase of the Ship Mortgage Obligation from the Brennan Trustee.
See Note 15 for additional commitments and contingencies of the Company and
transactions with related parties.
Effective December 1, 2000, we entered into a five-year employment contract
with Francis W. Murray, our Chief Executive Officer. The contract provides for
annual compensation of $395,000, a $1,500 monthly automobile expense allowance,
a country club annual dues allowance and travel and entertainment reimbursements
for business expenses reasonably incurred by him in addition to participation in
various other benefits provided to our employees. As part of his employment
contract, Mr. Murray was awarded options to purchase 2,000,000 shares of our
Common Stock. Prior to January 4, 2003 we were deferring a portion of Mr.
Murray's salary and on January 4, 2003, we began deferring all payments of
compensation due to Mr. Murray due to a lack of funds resulting from the
institution of proceedings by our subsidiary, ITGV, under Chapter 11 of the
bankruptcy code. The related liability as of December 31, 2003 totaled $420,404.
With the sale of our Freehold Raceway property on January 28, 1999 we
assumed full responsibility for the costs associated with the clean up of
petroleum and related contamination caused by the leakage of an underground
storage tank which was removed in 1990, prior to our purchase of Freehold
Raceway. In February 2000 the N.J. Department of Environmental Protection
approved our remedial investigation workplan ("RIW"). Under the RIW numerous
test wells were drilled and the soil tested and monitored to determine the
extent and direction of the flow of underground hazardous material and reports
and conclusions of the tests were prepared for the State of New Jersey. However,
prior to obtaining a remedial action workplan from the State of New Jersey, the
work was stopped due to a lack of funds resulting from the institution of
proceedings by our subsidiary, ITGV, under Chapter 11 of the bankruptcy code. At
this time we are unable to predict the effects that such delay may cause, but it
is likely that some
18
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
retesting of the wells may be necessary. Prior to the delays it was estimated
that the cost to remediate the site would be approximately $750,000. As of June
30, 1999 we had accrued $362,000 and we accrued an additional amount of
approximately $388,000 during fiscal 2001 as the scope of the project was
further defined. Such accruals were made with the help of the environmental
consulting firm engaged by the Company. These costs include drilling of test
wells and monitoring, lab testing, engineering and administrative reports,
equipment and remediation of the site through a "pump and treat" plan. The
Company has made payments of approximately $93,600, $200,000, and $323,000
during fiscal years 2000, 2001, 2002 respectively which were charged against the
accrued balances. As of December 31, 2003 the accrued balance was $130,398. It
is estimated that completion of the site clean up will take approximately 18
months from the time the work is reinstated. It is unlikely that the Company
will receive any insurance reimbursement for our costs of this remediation
project.
In connection with the January 28, 1999 sale and lease transactions for the
Garden State Park facility, we purchased a liquor license owned by an
unaffiliated third party, Service America Corporation, for $500,000 financed by
a five (5) year promissory note at a 6% interest rate. At December 31, 2002, the
unpaid principal balance was $160,000. Yearly principal payments of $80,000 plus
interest are due on December 28, 2002 and December 28, 2003. The payment due on
December 28, 2002 has not been made as of February 19, 2003. 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 had the right
to (I) take possession of the liquor license if during the three year period
from Jan. 28, 1999 until Jan. 27, 2002 it had a use for the liquor license at
the OTB facility and (ii) to transfer the license to its name by paying Garden
State Park $100,000. The leases/buyer has transferred the license to its name by
paying us $100,000. 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. 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.
In the event the Company is unable to make all the payments under the
agreements with the Brennan Trustee or otherwise defaults in performance of the
terms of such indebtedness, the Company stands to lose its only operating
business. Subject to applicable grace periods, the Brennan Trustee can cause the
liquidation of our only operating business, the Palm Beach Princess line.
Through ITGV, we have negotiated with the Port of Palm Beach District a new
operating agreement and lease of space in a new office complex constructed at
the Port of Palm Beach adjacent to a new cruise terminal effective, as modified,
May 5, 2003. The term of the initial lease is five years at $183,200 per year
payable monthly. We are also required to make tenant improvements to the new
space in a minimum amount of $333,000, however that the actual cost to make the
improvements was approximately $950,000. We will have the right to a credit of
up to the minimum amount of improvements required of $333,000 of construction
costs against the initial term of our five year lease.
19
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following summarizes commitments on non-cancelable contracts and
leases.
Twelve Months Ended December 31,
--------------------------------------------------------------- There-
2004 2005 2006 2007 2008 after Total
----------- ----------- ----------- --------- --------- -------- ------------
Minimum Amounts
due to Brennan
Trustee $ 4,455,000 $ 5,060,000 $ 2,595,000 $ -- $ -- $ -- $ 12,110,000
Employee Contracts
(excluding severance
agreements) 722,883 688,476 -- 1,411,359
Boat Charter Fees 600,000 600,000 250,000 -- -- -- 1,450,000
Operating Leases 279,267 209,891 151,296 116,602 38,867 -- 795,923
----------- ----------- ----------- --------- --------- -------- ------------
Total $ 6,057,150 $ 6,558,367 $ 2,996,296 $ 116,602 $ 38,867 $ -- $ 15,767,282
=========== =========== =========== ========= ========= ======== ============
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.
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. (See Note 2.)
(12) TREASURY SHARES PURCHASED
On December 13, 2002, the Company issued a promissory note in the amount of
$1,648,403 to purchase 3,228,145 shares of its Common Stock from the Chapter 11
Trustee for the bankruptcy estate of Robert E. Brennan. In connection with our
Chapter 11 Plan of Reorganization, effective October 15, 2003, we purchased an
additional 450,000 shares for $225,000, and the total amount of our debt for the
purchases of stock as of October 15, 2003 was $1,873,413 which also includes
accrued interest. Such indebtedness was combined with the obligations to
purchase the Ship Mortgage Obligation, and is payable over the next three years
together with interest at 12% per annum. (See Note 2). If we are unable to
continue to make timely payments on any of our debt to the Brennan Trustee the
3,678,145 shares of stock, which have been pledged as security, could be sold by
the Trustee and the Trustee may cause the liquidation of our only operating
business. The sale of said shares by the Trustee along with other uncontrollable
stock transfer events could effect the preservation of our net operating loss
tax carry forwards (NOL's). As of 6/30/03 the Company had $147 million available
in Net Operating Loss carry forwards which can be used to offset taxable income.
Loss of our NOL's would cause the Company to pay Federal Income taxes on its
reported taxable income and reduce reportable net income.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2003, in assessing the fair value of financial
instruments, the Company has used a
20
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $33 million notes receivable, we have elected to defer the gain on the sale
and the interest to be accrued until such time that collectability can be
determined (See Note 4).
(14) STOCK OPTIONS AND WARRANTS
At a meeting of the Board of Directors of the Company held September 11,
2003, the Board unanimously authorized future grants of stock options for up to
385,000 shares of common stock, at an exercise price of $0.50 per share, to ITG
Vegas, Inc. management team, which included 180,000 shares earmarked for Francis
X. Murray, son of the Company's Chairman, subject, however, to confirmation of
ITG Vegas' Plan of Reorganization and subject to the prior payment of all
obligations of the Company to the Bankruptcy Trustee. Accordingly, no such
options will be issued or granted until the Bankruptcy Trustee shall have been
paid in full, at which time the Company will be authorized (but not obligated)
to grant such options provided that the grantee is still employed by the Company
at that time.
Also at the September 11, 2003 meeting of the Company's Board of Directors,
the Board unanimously authorized the future grant of options to purchase an
additional 20,000 shares of common stock to Mr. Francis X. Murray, at $0.50 per
share, subject to confirmation of ITG Vegas' Plan of Reorganization and the
prior payment of all obligations of the Company to the Bankruptcy Trustee. No
such options shall be granted or issued until the Bankruptcy Trustee shall have
been paid in full, at which time the Company will be authorized (but not
obligated) to grant such options. Such action was taken in order to compensate
Mr. F.X. Murray for his having personally guaranteed a loan of $300,000 for the
Company and for his providing to the Bankruptcy Trustee a personal guaranty for
portions of the Company's obligations.
At a meeting of the Board of Directors of the Company held on November 18,
2003, the Board authorized the future grant of options to purchase 25,000 shares
of common stock to each non-employee director, Mr. James Murray and Mr. Walter
ReDavid, at $0.50 per share, as compensation for their services as directors,
subject, however, to the prior payment of all obligations of the Company to the
Bankruptcy Trustee. Accordingly, no such options will be issued or granted until
the Bankruptcy Trustee shall have been paid in full, at which time the Company
will be authorized (but not obligated) to grant such options provided that the
grantee is still serving as a director of the Company at that time.
Also at the November 18, 2003 meeting of the Board, the Board authorized
the future grant of shares of common stock to each of Mr. Francis W. Murray and
Mr. Robert J. Quigley as compensation in lieu of their respective salaries,
which have been deferred since January 3, 2003, and in payment of the unpaid
principal of a $24,000 loan to the Company by Mr. William H. Warner, the
Company's Secretary. The Company will be authorized to pay the accrued salaries
to Messrs. Murray and Quigley and the unpaid loan principal to Mr. Warner in
shares of common stock, valued for such purpose at $0.50 per share, subject to
the prior payment of all obligations of the Company to the Bankruptcy Trustee.
No such shares will be granted and none of the accrued compensation will be paid
until the Bankruptcy Trustee shall have been paid in full, at which time the
Company will be authorized (but not obligated) to grant such shares provided
that the grantee (Mr. Murray, Quigley or Warner, as applicable) agrees to accept
such shares (valued at $0.50 per share) in payment of a portion, specified by
the grantee, of the Company's obligation to him.
21
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At December 31, 2003, total employee options outstanding were 3,111,500 and
total non-employee options outstanding were 425,000. At December 31, 2003 all of
the employee and non-employee options were exercisable.
At December 31, 2003, total warrants outstanding were 710,000. All warrants
were exercisable at December 31, 2003.
(15) RELATED PARTY TRANSACTIONS
During the third quarter of Fiscal 2001, we invested in two projects in
which our Chairman, President and Chief Executive Officer, Francis W. Murray,
also has a pecuniary interest. In connection with one such project, the Board of
Directors approved advances, as loans, of up to $1.5 million to a limited
partnership in which Francis W. Murray owned, at that time, an 80% equity
interest and owned the general partner, the proceeds of which were to be used to
pay costs and expenses for development of a golf course in Southern California.
Mr. Murray's equity interest in the limited partnership, indirectly through his
ownership of the general partner, as of December 26, 2002, was 64%. At December
26, 2002, loans of $735,584 were outstanding on such project and we had accrued
$155,945 of interest due on the loans. On December 26, 2002, the limited
partnership's indebtedness to us was assumed by OC Realty, LLC, a Florida
limited liability company which is owned by Francis W. Murray and which owns the
second real estate project described below. Such indebtedness is due December
31, 2004 and bears an interest rate of 6%.
In the second project, Mr. Murray is participating in the development of an
oceanfront parcel of land, located in Fort Lauderdale, Florida, which has
received all governmental entitlements from the City of Fort Lauderdale and the
state of Florida to develop a 14-story building to include a 5-story parking
garage, approximately 6,000 square feet of commercial space and a residential
9-story tower. The property had been owned by MJQ Development, LLC, which was
owned by Michael J. Quigley, III until December 26, 2002 when the property was
acquired by OC Realty, LLC, the entity owned by Mr. Murray. Mr. Quigley has no
relationship to Robert J. Quigley, one of our directors. OC Realty is developing
a condominium hotel resort on the property as discussed above. As of December
31, 2003, we had lent $2,034,405 in total to MJQ Development and we have accrued
interest in the amount of $715,3458 on the loan. Upon the acquisition of the
property, OC Realty assumed MJQ Development's indebtedness to us. These loans
bear interest at 12% and will be repayable out of the first proceeds, after
payment of bank debts, generated by the sale of the condominiums. We will also
have the right to receive, as participation interest, from available cash flow
of OC Realty if the project is successful, a priority return of our investment
and a priority profits interest for up to three times our investment. Repayment
of these loans and our participation interest will be subject to repayment of,
first, bank debt of approximately $5.5 million (at present) incurred in the
purchase of the real property and, second, construction financing expected to
amount to $25 to $30 million and third, capital invested by a joint venture
partner (expected to be up to $6.5 million) plus a 15% per annum return thereon.
At the time the loans to MJQ Development were approved, Mr. Murray stood to
receive a substantial contingent benefit from MJQ Development for his
participation in the project. Fair value and collectability of the original
investment of $2,034,405 and accrued interest was determined by the joint
venture through projections evidencing our collection upon build out and sale of
the project.
In order to raise the capital with which to proceed in the development of
the Ft. Lauderdale property, OC Realty has placed the Ft. Lauderdale property in
a joint venture in connection with which the other joint venture partner will
fund up to $6.5 million for development and receive a 50% equity interest. Our
loan and participation interest will be payable out of OC Realty 50% share of
distributions after repayment of debt and the new investor's capital investment
and 15% annual return thereon. The Company has assessed the
22
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
collectability of the advances made to OC Reality based on projections and
assessments of the future value and returns, and believes the carrying value of
these amounts represents fair value.
On January 26, 2001, we borrowed $1,000,000 from Michael J. Quigley, III at
an annual interest rate of 10%. Principal and interest on the note was due on or
about April 25, 2001. On May 14, 2001, the loan was modified to be due on
demand. The principal balance on the note at December 31, 2003 is $900,000 and
we have accrued interest through that date in the amount of $292,876. As
collateral for the loan, we pledged the $10 million Realen Note and the $23
million Turnberry Note. On February 20, 2002 Mr. Quigley released his security
interest in the Realen Note in connection with the Master Settlement
Agreement.On February 20, 2004 the Company paid in full its indebtedness to
Michael J. Quigley in the amount of $1,206,850 which included accrued interest.
(See Note 16-B)
Effective April 30, 2001, we entered into a bareboat charter with MJQ
Corporation, pursuant to which we are chartering the vessel M/V Palm Beach
Princess for the purpose of operating an entertainment casino cruise business
from the Port of Palm Beach, Florida. Michael J. Quigley, III was a principal of
MJQ Corporation. In October 2002, Francis W. Murray, our Chairman, President and
Chief Executive Officer purchased the stock of MJQ Corporation and has been an
officer and director of MJQ Corporation. Francis X. Murray, the son of Francis
W. Murray, is President and a director of MJQ Corporation and President of our
subsidiary, ITG Vegas, Inc., which operates the vessel. Under the bareboat
charter agreement, we are obligated to pay $50,000 per month as the charter hire
fee to MJQ Corporation. All costs of operating the vessel incurred by MJQ
Corporation on our behalf are to be reimbursed by us to MJQ Corporation. In
addition, as described in Note 7B above, we have entered into an amended Master
Settlement Agreement with the Chapter 11 Trustee of the Bankruptcy Estate of
Robert E. Brennan, MJQ Corporation and others to purchase from the Trustee the
Ship Mortgage Obligation of MJQ Corporation, having an original balance of
principal and interest outstanding of approximately $15.7 million for a purchase
price of $13.75 million. Pursuant to the Master Settlement Agreement, MJQ
Corporation and its officers and directors (including Francis W. Murray)
exchanged mutual releases with the Trustee and others having claims to the Ship
Mortgage Obligation.
We entered into an agreement to purchase all of the shares of outstanding
stock of Leo Equity Group, Inc. Mr. Francis W. Murray has been a director of Leo
Equity Group, Inc. Closing on the Leo Equity Group, Inc. stock purchase occurred
effective October 27, 2002. The purchase price payable by us for the stock in
Leo Equity Group, Inc. was $250,000, payable without interest in 10 monthly
installments of $25,000 each. As of March 31, 2003, this note was paid in full.
We also agreed to reduce the exercise price of previously granted options held
by the seller, Frank A. Leo (our former director and chairman), to purchase
200,000 shares of our common stock, from $4.00 per share to $0.50 per share,
while conditioning exercise of such options upon our first having consummated
the purchase of the shares required to be purchased by us from the Trustee under
the Stock Purchase Agreement. Due to the uncertainties that these options will
be exercisable, the Company has not recorded any expense for the change in
exercise price. The purpose of such acquisition was to enable us to obtain the
lease and operating agreement with the Port of Palm Beach District which had
been owned by Leo Equity Group, Inc. During the period we made the $25,000
monthly installments to Mr. Leo and before the note was paid in full, we made
advances on Mr. Leo's behalf. These advances totaled $23,441 as of December 31,
2003.
The Master Settlement Agreement with the Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan included a final settlement by the
Trustee with numerous parties. Among those parties were Frank A. Leo, Leo Equity
Group, Inc., Michael J. Quigley III and MJQ Corporation. During the quarter
ended March 31, 2002 we charged Leo Equity Group $3,000,000 and MJQ Corporation
$1,000,000 for their portion of expenses incurred by us and a success fee for
the efforts of International Thoroughbred Breeders, Inc. in
23
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
connection with the final settlement with the 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 have deferred all income from these transactions until such
time as payment is received. That $2.6 million debt from Mr. Quigley is a
non-recourse obligation which is payable solely from pledged shares of his stock
in MJQ Corporation (the "MJQ Debt"). Mr. Francis W. Murray purchased the MJQ
Corporation stock subject to our lien securing payment of the MJQ Debt. The
Company has assessed the collectablity of the MJQ Debt in the amount of $2.6
million. This amount is secured by the stock of MJQ Corporation which owns the
Palm Beach Princess vessel. Based on appraisals of the vessel, the Company
believes the loan amounts are carried at fair value.
Through the purchase of Leo Equity, we also purchased the assets and
operations of GMO Travel which was a 100% owned subsidiary of Leo Equity. GMO
Travel provides reservations and travel services for our Palm Beach Princess
subsidiary and other non-ship related travel activities. Travel services for the
Palm Beach Princess include reservations and travel services for its numerous
foreign employees and our customers, many of which rely on air travel to reach
our location. The goodwill recorded in the amount of $193,946 represents the
fair value of GMO Travel based on its discounted cash flows and the synergies
and cost savings gained by the Palm Beach Princess.
On July 12, 2002, we borrowed $300,000 from Francis W. Murray at an annual
interest rate of 6%. Repayment is restricted due to the Amended Master
Settlement Agreement signed with the Trustee and as of December 31, 2003, the
balance of the note of $250,000 is classified as Long-Term Debt - Related
Parties on the balance sheet.
On November 13, 2002, the Company and MJQ Corporation signed an agreement
and bill of sale which transferred maintenance materials and spare parts
inventory previously maintained by MJQ Corporation to Palm Beach Princess, Inc.
The value of the parts inventory sold and assigned was $1,103,125. Payment for
the inventory was made by way of offsets on amounts previously due to Palm Beach
Princess, Inc. by MJQ Corporation. Fair value of this inventory was determined
by actual invoice prices and estimates made by the Palm Beach Princess ship
engineers.
Francis X. Murray, President of our ITG Vegas, Inc. subsidiary and son of
Francis W. Murray, our President, CFO and CEO agreed to loan the company up to
$225,000 in the form of a line of credit. As of December 31, 2003 these loans
totaled $159,165. (See Note 7F)
(16) SUBSEQUENT EVENTS
(A) International Thoroughbred Breeders, Inc. and its wholly owned
subsidiary, Orion Casino Corporation (collectively, the "Company") have entered
into a Letter of Intent with Cherry Hill at El Rancho LP, a limited partnership
affiliated with Turnberry Associates, providing for monetization (through a sale
and a loan) of the promissory note payable to the Company by Turnberry/Las Vegas
Boulevard, LLC in the face amount of $23 million (the "Las Vegas Note"). The
Letter of Intent sets forth the parties' mutual understanding and agreement in
principle with respect to terms and conditions upon which the Company would sell
the Las Vegas Note to Cherry Hill at El Rancho LP (the "Buyer").
The following is a summary of the principal terms of sale of the Las Vegas
Note. The summary does not purport to be a complete summary and is qualified in
its entirety by reference to the complete Letter of Intent. The Letter of Intent
expressly states that it is legally binding upon the parties.
24
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In exchange for the Las Vegas Note, the Company will receive cash payments
from the Buyer of $2.8 million, a non-recourse loan in the amount of $5 million,
and a promissory note of indeterminate value and collectibility to be issued by
an affiliate of the Buyer. The Company will not be liable for payments of
principal on the $5 million loan included in the foregoing purchase price.
However, the Company will be obligated to pay interest and fees aggregating
$600,000 per year for five (5) years in order to obtain the loan. Closing of our
sale of the Las Vegas Note is expected to occur in March, 2004.
(B) On February 20, 2004 the Company paid in full its indebtedness to
Michael J. Quigley in the amount of $1,206,850 which included accrued interest.
(C) On February 20, 2004 Turnberry paid $466,363 to the Company in full
satisfaction of the note due us for the sale of the horse statues at Garden
State Park. As a result the Company is required to pay approximately $175,000
for satisfaction of the note we owe on our original purchase of the statues.
25
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
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 our most recent Annual Report on Form 10-K, could affect our future
results and could cause those results to differ materially from those expressed
in our forward-looking statements:
o risk of default under the settlement with the Brennan Trustee as
a result of which, subject to applicable grace periods, the
Brennan Trustee could cause the liquidation of our only operating
business, the Palm Beach Princess line, and could sell stock in
ITB that was pledged to him, which may result in the loss of our
NOL's;
o termination of the bareboat charter under which we operate our
gaming business;
o lack of cash flow for the Parent Company to continue to operate
and pay its debts as a result of the Chapter 11 proceedings of
our operating subsidiary and agreed upon restrictions in
connection with such subsidiary's indebtedness;
o general economic and business conditions affecting the tourism
business in Florida;
o competition;
o changes in laws regulating the gaming industry;
o fluctuations in quarterly operating results as a result of
seasonal and weather considerations; and
o events directly or indirectly relating to our business causing
our stock price to be volatile.
Liquidity and Capital Resources
Cash flow and liquidity during the six month period ended December 31, 2003
included approximately $2.8 million in cash generated by the Palm Beach Casino
Line operation. Such cash flow was used together with our existing cash balances
as of June 30, 2003 to fund payments to the Brennan Trustee in the amount of
approximately $2,150,000, our indebtedness to the Brennan Trustee, and to prepay
finance fees. Additionally we used approximately $741,265 in cash for the
purchase of a second vessel and approximately $515,000 for the purchase of new
equipment for the vessel and our offices. During the most recent quarter we also
disbursed $1,254,000 to our pre-petition bankruptcy creditors and deposited an
additional $210,000 in an escrow account for the benefit of the creditors.
On January 3, 2003, ITG Vegas, Inc.("ITGV"), our subsidiary operating the
Palm Beach Princess, and MJQ Corporation ("MJQ"), 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 does not cover
the Parent company, ITB, nor any other of ITB's subsidiaries. The Parent Company
has used all the available funds that we had prior to the bankruptcy filing to
pay some of our expenses and needs to find immediate financing in order to pay
remaining existing liabilities as well as future expenses. Since the
26
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
bankruptcy filing, and until October 15, 2003, the only source of funds to the
Parent Company was limited to loans made by Company officers, collection of a
loan previously made to a South American gaming project and refunds from vendors
and tax agencies relating to our prior racetrack operations. The Palm Beach
Princess continued to operate as "debtor-in-possession" under the jurisdiction
of the Bankruptcy Court until the Effective Date, October 15, 2003 and
subsequently as reorganized debtors in accordance with the applicable provisions
of the Bankruptcy Code and orders of the Bankruptcy Court.
The Bankruptcy filing has severely limited our ability to make timely
payments by our Parent to its creditors and corporate vendors which has affected
our ability to retain the professional services and vendors who serve our
company. Since January 2003 our Chairman and the President of our Brazil
subsidiary have deferred their salaries and other officers and employees have
not received reimbursement of many of their business expenses in order to
conserve cash. Additionally employee benefits have been reduced and salary
increases have been restricted. The Parent Company has been forced to reduce
services and its budget. The majority of our vendors continue to provide
services however it may be likely that some will stop providing services in the
near future if payment terms are not successfully negotiated. This may include
the services provided by our professionals or the services provided to our
stockholders through our stock transfer agent. Additionally, we risk losing the
services of some of our employees. The Company believes that it has several
options to cure such deficiencies. On September 12, 2003 the United States
Bankruptcy Court for the Southern District of Florida (Palm Beach Division)
issued an order confirming the Amended Joint Chapter 11 Plan of Reorganization
(the "Plan") in the Chapter 11 cases of ITG Vegas, Inc., the Company's wholly
owned subsidiary, and MJQ Corporation. On the effective date of the Plan,
October 15, 2003, and so long as the ITGV subsidiary remains current with its
obligations to the Donald F. Conway, as Chapter 11 Trustee for the bankruptcy
estate of Robert E. Brennan ("the Brennan Trustee") then ITGV will be permitted
to upstream $100,000 per month to the Parent Company. (See the paragraphs below
concerning the bankruptcy order). The currently monthly budgeted cash expenses,
including payroll, but exclusive of the Chairman and the President of the Brazil
subsidiary, of the Parent company are approximately $100,000 per month. The
Company plans to negotiate the payment of past bills while keeping essential
bills current. The Company continues to incur expenses for exploring potential
opportunities in various foreign countries. If the company were to discontinue
its exploration of these opportunities additional funds could be used for
payment of Parent Company expenses but the Company would lose the potential
business opportunities. So long as the Brennan Bankruptcy Trustee continues to
be our principal creditor, payments to the Parent company will be limited to
$100,000 per month. We intend to re-finance that debt as soon as reasonably
possible in order to eliminate or lessen restrictions on our operating
subsidiary's providing cash to the Parent Company.
On October 15, 2003, the Chapter 11 Plan of Reorganization (the "Plan") in
the Chapter 11 cases of ITG Vegas, Inc., the Company's wholly owned subsidiary,
and MJQ Corporation became effective. On the effective date 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, will be discharged, except as otherwise provided in the Plan or
confirmation order. Post-confirmation, each of the Debtors will continue as
reorganized debtors. See Note 2 to the financial statements for a summary of our
obligations in connection with the Plan.
Monthly payments of $400,000 with interest at 12% will be required to be
made to the Brennan Trustee, to be applied first to interest accrued and then to
principal. In addition, the Brennan Trustee shall be entitled to payment of a
Stay Bonus in the amount of $200,000 if the Payment Obligation shall not have
been paid in full within 12 months after the Effective Date, and an additional
$100,000 if the Payment Obligation shall not have been paid in full within 24
months after the Effective Date. Beginning with ITG Vegas' 2004 internal
accounting year (commencing December 29, 2003) and annually thereafter, 75% of
ITG Vegas' Free Cash Flow (as defined in the
27
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
Plan) for the period shall be paid to the Brennan Trustee as a Sweep Payment to
be applied to the aforesaid debt.
Under the Plan, the maximum amount of funds permitted to be upstreamed by
ITG Vegas to the Parent Company without the consent of the Brennan Trustee is
$100,000 per month as a tax sharing payment (See Note 2 to the financial
statements). The Parent Company has no other source of funds presently
available. For these reasons, and since the $100,000 per month tax sharing
payment will be suspended at any time when the Debtors are not current in
payment of their obligations to the Brennan Trustee, no assurance can be given
that the Company will be able to function as a going concern and pay its debts
as they become due.
In the event the Company is unable to make all the payments under the
agreements with the Brennan Trustee or otherwise defaults in performance of the
terms of such indebtedness, the Company stands to lose its only operating
business. Subject to applicable grace periods, remedies available to the Brennan
Trustee, if we default, include the liquidation of our only operating business,
the Palm Beach Princess line. Additionally, if we default (subject to the
applicable grace periods) the 3,678,146 shares of stock which we are buying from
the Brennan Trustee, all of which are pledged to the Brennan Trustee, could be
sold by the Brennan Trustee. The sale of these shares by the Trustee along with
other uncontrollable stock transfer events could affect the preservation of our
net operating loss tax carry forwards (NOL's). As of 6/30/03 the Company had
$147,000,000 available in Net Operating Loss carryforwards which can be used to
offset taxable income. Loss of our NOL's would cause the Company to pay Federal
Income taxes on its reported taxable income and reduce reportable net income.
In connection with our purchase of a second vessel, the Trustee required a
prepayment of $950,000 to be applied to the Ship Mortgage payment. Additionally
we were required to pay the final installment of the forbearance fee in the
amount of $250,000. Our use of ITG-Vegas funds to pay for improvements of the
vessel is restricted by the Brennan Trustee and, if permitted to be spent,
ITG-Vegas must make simultaneous dollar for dollar payments to the Brennan
Trustee for each dollar spent on improvements.
We are in default on the principal and interest payments due to Service
America in the approximate amount of $160,000 for the purchase of the liquor
license at Garden State Park. The Company is continuing to negotiate new terms
under this note and if unsuccessful the creditor may bring action to attempt to
collect this debt.
ITGV's cash flow from operations of the vessel is seasonal. The period July
1st to December 31st is a seasonably slow period for the vessel operation. The
period from January 1st to June 30th has been a period of increased activity and
profits for the vessel. Certain of ITGV's operating costs, including the charter
fee payable to the vessel's owner, fuel costs and wages, are fixed and cannot be
reduced when passenger loads decrease or when rising fuel or labor costs cannot
be fully passed through to customers. Passenger and gaming revenues earned from
the vessel must be high enough to cover such expenses.
Unless and until ITGV successfully emerges from its Chapter 11 case and
pays in full all the debts to the Brennan Trustee, our possible sources of cash
(in addition to the $100,000 per month tax sharing payments as mentioned above)
include the two promissory notes we received when we sold our Garden State Park
real property in November, 2000 and our Las Vegas real property in May, 2000.
One such Note is in the face amount of $10 million, issued by
Realen-Turnberry/Cherry Hill, LLC, the purchaser of the Cherry Hill property
(the "$10 Million Note"), and the other promissory note is in the face amount of
$23 million, issued by Turnberry/Las Vegas Boulevard, LLC, purchaser of our Las
Vegas real property (the "$23 Million Note"). Under both Notes, interest and
principal payments will be dependent upon, and payable solely out of, the
obligor's net cash flow available for distribution to its equity owners. After
the obligor's equity investors have received aggregate distributions equal to
28
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
their capital contributions plus an agreed upon return on their invested
capital, the next $10 million of distributable cash in the case of the $10
Million Note, and the next $23 million of distributable cash in the case of the
$23 Million Note, will be paid to us, and following our receipt of the face
amount of the Note we will receive 33 1/3% of all distributable cash of the
obligor until maturity of the Note. The probable timing and amounts of payments
under these Notes cannot be predicted.
Another source of cash to the Company would be the collection of a note
currently due from Realen- Turnberry/Cherry Hill, LLC from the sale of horse
statues at Garden State Park. The amount due and owing is $350,000 plus accrued
interest, however, when the collection of this note is made the Company will be
required to pay an offsetting note due to the original seller of the horse
statues when they were sold to us in the amount of $132,000 plus accrued
interest. The net funds that would be collected would be $218,000 plus accrued
interest. The Company is negotiating with Realen-Turnberry/Cherry Hill LLC for
collection of this note but the timing of such collection is uncertain. On
February 20, 2004 Turnberry paid $466,363 to the Company in full satisfaction of
the note due us for the sale of the horse statues at Garden State Park. As a
result the Company is required to pay approximately $175,000 for satisfaction of
the note we owe on our original purchase of the statues.
Our working capital as of December 31, 2003 was a (deficit) of ($2,035,355)
as compared to $650,328 at June 30, 2003. The decrease in working capital during
the past six months was primarily the result of recording the note obligation
for the purchase of the ship mortgage from the Brennan Trustee which current
portion is $3,458,448, offset by positive cash generated from the operating
activities of the casino vessel.
Results of Operations for the Three Months Ended December 31, 2003 and 2002
Overall
Revenue for the three months ended December 31, 2003 increased $227,822
from $6,772,189 in Fiscal 2003 to $7,000,011 in Fiscal 2004 primarily as a
result of increased revenues generated by the Palm Beach Princess operations
during the comparable periods. Operating expenses increased $ 401,075 from
$5,893,637 in the three month period in Fiscal 2003 to $6,294,712 in Fiscal 2004
primarily the result of an increase in Palm Beach Princess operating costs
during the comparable quarters. Interest and financing expenses increased
$229,437 in connection with our purchase of the Ship Mortgage and our common
stock from the Brennan Trustee and costs associated with the bankruptcy filing
of $110,119 that we incurred, partially offset by a decrease in corporate
general and administrative expenses during the comparable periods.
For the second quarter of Fiscal 2004, our net income was $363,036 or $0.05
per share and $.04 per share on a diluted basis as compared to income for the
comparable period in the prior fiscal year of $595,001 or $0.06 per share on a
basic and diluted basis. During the three months ended December 31, 2003 we had
3,641,692 options whose exercise price was lower than our weighted average price
of common stock which caused a decrease in diluted earnings per share.
Vessel Operations
During the three months ended December 31, 2003, total net revenue from
vessel operations was $7,000,011 as compared to $6,772,189 for the three months
ended December 31, 2002. The increase in revenue of $227,822 during the
comparable quarters primarily resulted from an increase in casino gaming revenue
primarily the result of an increase in the passenger count of 7%, offset by a
slight decrease in the average revenue per passenger during the comparable
periods. Net fare and on board income increased $82,585 or 9%. Casino operating
expenses which also
29
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
includes food, beverage and entertainment increased $220,003 from $ 1,859,085 or
32% of gross casino revenue in Fiscal 2003 to $2,079,088 or 35% of gross casino
revenue in Fiscal 2004 primarily the result of the increasedpassenger count.
Sales, marketing and advertising expenses increased slightly due to the increase
in passenger count. Maritime and maintenance costs to operate the ship increased
$156,915 from $1,362,763 in Fiscal 2003 to $1,519,678 in Fiscal 2004. Bankruptcy
fees increased $110,119 as a result of our bankruptcy filing on January 3, 2003,
Interest and financing fees decreased $163,058 a a result of the interest on the
Trustee Note being recognized by the Parent Company, effective October 15, 2003.
Income before state income tax expense for the second quarter of operation in
Fiscal 2004 was $1,165,577 as compared to $1,197,138 in the comparable quarter
of Fiscal 2003, a decrease of $31,561 for the quarter.
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 second quarter
of Fiscal 2004 the ship completed 176 cruises compared to 177 cruises during the
same period last year
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the three months ended December 31, 2003 and 2002:
Three Months Ended
December 31,
-------------------------------------
Description 2003 2002 Change
- --- ----------------------------------- ----------- ----------- --------
Passenger Count 56,922 53,147 3,775
Number of Cruises 176 177 (1)
Operating Revenue:
Gaming $ 5,948,208 $ 5,802,971 $ 145,237
Fare 1,605,106 1,515,148 89,958
On Board 804,242 716,286 87,956
Less: Promotional Allowances (1,357,545) (1,262,216) (95,329)
----------- ----------- --------
Net Operating Revenue 7,000,011 6,772,189 227,822
----------- ----------- --------
Operating Costs and Expenses:
Gaming 2,079,088 1,859,085 220,003
Fare 852,933 790,594 62,339
On Board 231,356 201,787 29,569
Maritime and Legal Expenses 1,519,678 1,362,763 156,915
General and Administrative Expenses 809,083 1,091,279 (282,196)
Professional Fees - Bankruptcy 110,119 -0- 110,119
Interest and Financing Fees 61,831 224,889 (163,058)
Depreciation and Amortization 170,346 44,655 125,691
----------- ----------- --------
Total Operating Costs and Expenses 5,834,434 5,575,052 259,382
----------- ----------- --------
Income Before State Income
Tax Expense $ 1,165,577 $ 1,197,138 $ (31,561)
=========== =========== =========
30
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
Results of Operations for the Six Months Ended December 31, 2003 and 2002
Overall
Revenue for the six months ended December 31, 2003 increased $1,494,891
from $13,080,278 in Fiscal 2003 to $14,575,169 in Fiscal 2004 primarily as a
result of increased revenues generated by the Palm Beach Princess operations
during the comparable periods. Operating expenses increased $1,009,216 from
$11,584,424 in the six month period in Fiscal 2003 to $12,593,640 in Fiscal 2004
primarily the result of an increase in gaming income and a 4.3% increase in the
passenger count during the period and costs associated with the bankruptcy
filing of $368,681, partially offset by a decrease in corporate general and
administrative expenses during the comparable periods. Net Income for the six
months ended December 31, 2003 was $1,122,096 as compared to net income of
$1,008,114 for the comparative period last year. The increase was the result of
an increase in operating income of $485,676 reduced by additional interest and
financing expense in connection with our purchase of the Ship Mortgage and
purchase of our common stock from the Brennan Trustee. Net Income per share for
the six months ended December 31, 2003 was $.14 and on a diluted basis was $.11
as compared to net income per share for the six months ended December 31, 2002
of $.09 on a basic and diluted basis. For the six months ended December 31, 2003
we had 3,641,692 options whose exercise price was lower than our weighted
average price of the common stock which caused a decrease in diluted earnings
per share.
Vessel Operations
During the first half of Fiscal 2004, total net revenue from vessel
operations was $14,575,169 as compared to $13,080,278 for the first half of
Fiscal 2003. The increase in revenue of $1,494,891 during the comparable periods
primarily resulted from an increase in casino gaming and on board revenue
primarily the result of an increase in the passenger count of 4.3% and an
approximate 6.8% increase in the average revenue per passenger during the
comparable periods. Net fare and on board income increased $50,702 or less than
2%. Casino operating expenses which also includes food, beverage and
entertainment increased $354,926 from $3,803,778 or 34% of gross casino revenue
in Fiscal 2003 to $4,158,704 or 33% of gross casino revenue in Fiscal 2004
primarily the result of the increased passenger count. Sales, marketing and
advertising expenses increased slightly due to the increase in passenger count.
Maritime and maintenance costs to operate the ship increased $488,261 from
$2,780,687 in Fiscal 2003 to $3,268,948 in Fiscal 2004, also primarily due to
the scheduled wet dock maintenance during the second quarter. Administrative
expenses decreased 10% in Fiscal 2004. Income before state income taxes from
operation of the vessel for the six months ended December 31, 2003 was
$2,516,934 as compared to $2,225,502 for the six months ended December 31, 2002.
During the six months ended December 31, 2003 the ship completed 343 cruises as
compared to 356 cruises during the corresponding period last year. During this
year 12 cruises were missed due to wet dock maintenance.
31
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the six month periods ended December 31, 2003 and
2002:
Six Months Ended
December 31,
-------------------------------------
Description 2003 2002 Change
- --- ----------------------------------- ---------- ----------- ----------
Passenger Count 118,409 113,532 4,877
Number of Cruises 343 356 (13)
Operating Revenue:
Gaming $ 12,442,895 $ 10,998,707 $ 1,444,188
Fare 3,219,576 3,256,571 (36,995)
On Board 1,596,959 1,488,570 108,389
Less: Promotional Allowances (2,684,261) (2,663,570) (20,692)
---------- ----------- ---------
Net Operating Revenue 14,575,169 13,080,278 1,494,891
---------- ----------- ---------
Operating Costs and Expenses:
Gaming 4,158,704 3,803,778 354,926
Fare 1,566,687 1,510,782 55,905
On Board 426,597 397,008 29,589
Maritime and Legal Expenses 3,268,948 2,780,687 488,261
General and Administrative Expenses 1,605,044 1,767,048 (162,004)
Professional Fees - Bankruptcy 368,681 0 368,681
Interest and Financing Fees 362,830 479,771 (116,941)
Depreciation and Amortization 300,743 115,702 185,041
---------- ----------- ---------
Total Operating Costs and Expenses 12,058,234 10,854,776 1,203,458
---------- ----------- ---------
Income Before State Income
Tax Expense $ 2,516,934 $ 2,225,502 $ 291,432
========== =========== =========
32
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED DECEMBER 31, 2003
Item 4. - CONTROLS AND PROCEDURES
Evaluation of Disclosure 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.
The Company's management with the participation of our chief executive
officer and chief financial officer is continuing to perform evaluations of the
design and operation of the Company's entire system of internal controls and
financial reporting over a period of time that will be adequate for it to
determine, whether, as of the end of the Company's current fiscal year, the
design and operation of our internal controls and procedures are effective.
CHANGES IN INTERNAL CONTROLS
There were no changes that occurred during the fiscal quarter covered by
this Quarterly Report on Form 10- Q that have materially affected, or are
reasonablely likely to materially affect, our internal controls over financial
reporting.
33
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description of Exhibit
- ------- ----------------------
10.1 Amendment to Master Settlement Agreement, October 15, 2003.
31.1 Certification pursuant to rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K with respect to
the quarter ended December 31, 2003.
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.
February 23, 2004 /s/Francis W. Murray
-----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer
and Chief Financial Officer
35