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, 2002
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------------- ---------------------------
Commission file number 0-9624
----------------------------------------------------------
International Thoroughbred Breeders, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2332039
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
211 Benigno Boulevard, Bellmawr, New Jersey 08031
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(856) 931-8163
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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, 2003
- ------------------------------ --------------------------------
Common Stock, $ 2.00 par value 8,252,133 Shares
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of December 31, 2002 and June 30, 2002..........1-2
Consolidated Statements of Operations
for the Three Months and Six Months ended
December 31, 2002 and 2001 ........................3
Consolidated Statement of Stockholders' Equity
for the Six Months ended December 31, 2002.........4
Consolidated Statements of Cash Flows
for the Six Months ended
December 31, 2002 and 2001.........................5
Notes to Financial Statements.............................6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......18-23
Item 4. Controls and Procedures...................................24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................25
SIGNATURES ......................................................26
CERTIFICATIONS..........................................................27-29
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND JUNE 30, 2002
ASSETS
December 31,
2002 June 30,
(UNAUDITED) 2002
------------ ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,216,654 $ 796,610
Accounts Receivable 253,696 37,682
Prepaid Expenses 470,655 190,639
Spare Parts Inventory 1,098,849 0
Other Current Assets 391,711 391,596
Net Assets of Discontinued
Operations - Current 118,332 123,569
------------ ------------
TOTAL CURRENT ASSETS 3,549,897 1,540,096
------------ ------------
EQUIPMENT:
Leasehold Improvements -
Port of Palm Beach 256,406 0
Equipment 752,540 723,420
------------ ------------
1,008,946 723,420
LESS: Accumulated Depreciation
and Amortization 182,810 113,061
------------ ------------
TOTAL EQUIPMENT, NET 826,136 610,359
------------ ------------
OTHER ASSETS:
Notes Receivable 33,000,000 33,000,000
Deposit on Purchase of Palm Beach
Princess Mortgage 4,000,000 3,500,000
Deposits and Other Assets -
Non-Related Parties 435,032 374,724
Deposits and Other Assets -
Related Parties 5,989,042 6,903,115
------------ ------------
TOTAL OTHER ASSETS 43,424,074 43,777,839
------------ ------------
TOTAL ASSETS $ 47,800,107 $ 45,928,294
============ ============
See Notes to Consolidated Financial Statements.
1
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND JUNE 30, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2002 June 30,
(UNAUDITED) 2002
------------ ------------
CURRENT LIABILITIES:
Accounts Payable $ 1,587,596 $ 1,324,351
Accrued Expenses 1,839,109 1,353,811
Short-Term Debt 2,789,006 1,062,280
------------ ------------
TOTAL CURRENT LIABILITIES 6,215,711 3,740,442
------------ ------------
DEFERRED INCOME 8,226,540 8,226,540
------------ ------------
LONG-TERM DEBT 0 0
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100 Par Value,
Authorized 500,000 Shares, 362,489 and 362,488
Issued and Outstanding, respectively 36,248,875 36,248,775
Common Stock, $2 Par Value,
Authorized 25,000,000 Shares,
Issued, 11,480,278 and 11,480,275, respectively and
Outstanding, 8,252,133 and 11,480,275, respectively 22,960,555 22,960,549
Capital in Excess of Par 20,191,984 20,192,090
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) (44,415,320) (45,423,435)
------------ ------------
34,986,094 33,977,979
LESS:
Treasury Stock, 3,228,145 Shares, at Cost (1,614,072) 0
Deferred Compensation, Net (14,166) (16,667)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 33,357,856 33,961,312
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,800,107 $ 45,928,294
============ ============
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, 2002 AND 2001
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------- --------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
REVENUE:
Revenue from Operations $ 6,792,811 $ 4,889,025 $ 13,112,238 $ 10,906,372
Other Income 0 77,277 0 78,056
Interest Income 114,300 94,057 214,048 238,393
----------------- ----------------- ----------------- -----------------
TOTAL REVENUES 6,907,111 5,060,359 13,326,286 11,222,821
----------------- ----------------- ----------------- -----------------
EXPENSES:
Cost of Revenues:
Operating Expenses 4,258,222 4,141,188 8,547,563 8,551,270
Depreciation & Amortization 49,179 13,251 127,899 24,045
General & Administrative Expenses -
Palm Beach Princess 1,132,525 858,519 1,848,770 1,456,194
General & Administrative Expenses -
Parent 487,139 540,230 973,994 1,080,620
Development Costs 51,211 194,988 142,107 241,603
Interest and Financing Expenses 271,834 139,452 588,839 215,935
----------------- ----------------- ----------------- -----------------
TOTAL EXPENSES 6,250,110 5,887,628 12,229,172 11,569,667
----------------- ----------------- ----------------- -----------------
INCOME (LOSS) BEFORE TAX PROVISION 657,001 (827,269) 1,097,114 (346,846)
State Income Tax Expense 62,000 0 89,000 22,000
----------------- ----------------- ----------------- -----------------
NET INCOME (LOSS) $ 595,001 $ (827,269) $ 1,008,114 $ (368,846)
================= ================= ================= =================
NET BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ 0.06 $ (0.07) $ 0.09 $ (0.03)
================= ================= ================ =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,527,710 11,480,272 11,164,480 11,480,270
================= ================= ================ ================
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, 2002
Preferred Common
--------------------- ------------------------
Number of Number of
Shares Amount Shares Amount
--------- ---------- ------------ ----------
BALANCE - JUNE 30, 2002 362,488 $ 36,248,775 11,480,275 $ 22,960,549
Purchase of Shares for Treasury in
connection with REB Trustee
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty
Reverse Stock Split effected on March 13, 1912 1 100 3 6
Amortization of Deferred Compensation Costs --- --- --- ---
Net Income for the Six Months Ended December 31, 2002 --- --- --- ---
--------- ---------- ------------ ----------
BALANCE - DECEMBER 31, 2002 362,489 $ 36,248,875 11,480,278 $ 22,960,555
========= ========== ============ ==========
Capital Treasury Deferred
in Excess Stock Compen-
of Par (Deficit) At Cost sation Total
----------- ------------- ----------- ---------- ------------
BALANCE - JUNE 30, 2002 $ 20,192,090 $ (45,423,435) $ 0 $ (16,667) $ 33,961,312
Purchase of Shares for Treasury in
connection with REB Trustee (1,614,072) (1,614,073)
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty
Reverse Stock Split effected on March 13, 1912 (106) --- --- ---
Amortization of Deferred Compensation Costs --- --- 2,501 2,501
Net Income for the Six Months Ended December 31, 2002 --- 1,008,114 --- 1,008,115
----------- ------------- ----------- ---------- ------------
BALANCE - DECEMBER 31, 2002 $ 20,191,984 $ (44,415,320) $ (1,614,072 $ (14,166) $ 33,357,856
=========== ============= =========== ========== ============
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, 2002 AND 2001
(UNAUDITED)
Six Months Ended
December 31,
-----------------------------
2002 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES: $ 1,008,114 $ (368,846)
------------- ------------
Adjustments to reconcile income (loss) to net cash
provided by operating activities:
Depreciation and Amortization 127,899 26,545
(Gain) on Sale of Fixed Assets 0 (77,577)
Changes in Operating Assets and Liabilities -
(Increase) Decrease in Accounts Receivable (216,015) 549,798
(Increase) in Other Assets 32,893 (291,342)
Decrease (Increase) in Prepaid Expenses 27,605 (131,691)
Increase in Accounts Payable and Accrued Expenses 548,547 1,110,234
------------- ------------
CASH PROVIDED BY OPERATING ACTIVITIES 1,529,043 817,121
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits on Purchase of Palm Beach Princess Mortgage (500,000) (1,000,000)
Investment in Port Lease (100,000) 0
Proceeds from Auction of Garden State Park Fixed Assets 0 1,258,476
Capital Expenditures (303,424) (313,820)
Loans made on Development Projects 0 (739,894)
Increase in Other Investment Activity 4,936 13,551
------------- ------------
CASH (USED IN) INVESTING ACTIVITIES (898,488) (781,687)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments on Short Term Notes (210,511) (76,383)
Decrease in Balances Due to/From Subsidiaries (437) 7,003
------------- ------------
CASH (USED IN) FINANCING ACTIVITIES (210,948) (69,380)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 419,607 (33,946)
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS 437 (19,007)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 796,610 1,361,287
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,216,654 $ 1,308,334
============= ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 0 $ 0
Income Taxes $ 0 $ 0
Supplemental Schedule of Non-Cash Investing and Financing Activities:
On November 13, 2002 parts inventory in the amount of $1,103,125 was
recorded on the balance sheet as part of a non-cash transaction offset by
existing liabilities.
On Decemberr 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.
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
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming International Thoroughbred Breeders, Inc. and subsidiaries
(collectively, the "Company") will continue as a going concern. 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
unrelated affiliate 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 Palm Beach Princess is continuing 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. As described in Note 6 below 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 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.
The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
(A) Nature of Operations - ITGV is currently engaged in an entertainment
cruise and casino ship business under a bareboat charter of the vessel M/V Palm
Beach Princess (the "Palm Beach Princess"). The Palm Beach Princess performs
fourteen cruises weekly, that is, a daytime and an evening cruise each day. Each
cruise is of five to six hours duration. During each cruise, the Palm Beach
Princess offers a range of amenities and services to her passengers, including a
full casino, sit-down buffet dining, live musical shows, discotheque, bars and
lounges, swimming pool and sundecks. The casino occupies 15,000 square feet
aboard the ship and is equipped with approximately 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) 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 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
6
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
completed at dry dock in the fall of each year. These expenses are written off
during a one year period following the dry dock period. For the six months ended
December 31, 2002, the amortized expense was $55,650.
(E) Net Assets of Discontinued Operations - At December 31, 2002 and June
30, 2002, the remaining net assets and liabilities of Garden State Park and
Freehold Raceway were classified as "Net Assets of Discontinued Operations."
(F) Revenue Recognition - The Company recognized the revenues associated
with the casino operation on the Palm Beach Princess as they were earned.
(G) Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
(H) 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.
(I) 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.
(J) Net Income per Common Share - Income per common share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding. For the three months ended December 31, 2002 and 2001 the weighted
average number of shares outstanding is 10,527,710 and 11,480,272, respectively.
For the six months ended December 31, 2002 and 2001 the weighted average number
of shares outstanding is 11,164,480 and 11,480,270, respectively. On December
13, 2002, the Company purchased 3,228,145 shares of its Common Stock from the
Chapter 11 Trustee for the Bankruptcy Estate of Robert E. Brennan and have
accounted for the transaction on the cost method of accounting for treasury
stock. Options and warrants to purchase 4,046,500 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. Options and warrants to
purchase 4,046,500 of Common Stock at various prices per share, for the three
and six months ended December 31, 2001 were not included in the computation of
diluted loss per share as their effect would be anti-dilutive.
(K) Spare Parts Inventory - Spare parts inventory consists of operating
supplies, maintenance materials and spare parts. The inventories are carried at
cost. Should the Trustee be able to exercise his right to take possession of the
vessel, the Company would be required to forfeit the spare parts inventory along
with other current assets. It is necessary that these parts be readily available
so that the daily cruise operations are not cancelled due to mechanical
failures.
7
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) 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 Turnberry 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.
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.
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
December 31, 2002 and June 30, 2002. 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 5(A) below) by the same principal amount, $350,000, given up by us to the
Trustee. As of February 19, 2003, Realen had not made the payment in the amount
of $700,000 which was due on November 30, 2002.
8
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) DEPOSITS AND OTHER ASSETS - RELATED PARTIES
The following items are classified as deposits and other assets (See Note 9
- Related Party Transactions):
December 31, June 30,
2002 2002
----------- -----------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,034,304 $ $ 2,067,363
Loan Transferred from Golf Course Project to OC Realty,LLC 735,584 -0-
Accounts Receivable from Francis W. Murray 34,085 -0-
Loans to Francis W. Murray 93,000 -0-
Loan from Francis W. Murray (275,000) -0-
Advances from OC Realty, LLC (111,419)
-----------
Total Loans to OC Realty, LLC/Francis W. Murray 2,510,554
Accrued Interest on Loans to the Ft. Lauderdale Project
(OC Realty, LLC) 489,848 458,711
Accrued Interest Transferred from Golf Course Project to
OC Realty, LLC $ 163,299
-----------
Total Accrued Interest on Loans to OC Realty, LLC 653,147
Loans including accrued interest to the Golf Course Project -0- 911,169
in California
Deposits on Port Lease -0- 75,000
Advances (from)/to MJQ Corporation (35,468) 521,583
Accounts Receivable from Frank Leo 10,060 13,804
Accounts Receivable from Francis W Murray -0- 19,236
Port Lease Rights 250,000 -0-
Assets Assigned from Leo Equity Group, Inc. (See Note 9):
Note Receivable from Michael J Quigley III * 2,600,749 2,600,749
Accounts Receivable from MJQ Corp -0- 21,000
Accounts Receivable from Ft Lauderdale Project -0- 8,000
Loans to Francis W Murray -0- 93,000
Accounts Receivable from GMO Travel -0- 113,500
----------- -----------
Total Deposits and Other Assets $ 5,989,042 $ 6,903,115
=========== ===========
* The note receivable from Michael J. Quigley III is non-recourse except to his
stock in MJQ Corporation which stock is now owned by our CEO, Francis W. Murray,
subject to our lien.
9
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets -
non-related parties:
December 31, June 30,
2002 2002
--------- ---------
Loans to South American Gaming Projects $ 349,472 $ 349,472
Other Misc. Assets 85,560 25,252
--------- ---------
Total $ 435,032 $ 374,724
========= =========
(5) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
December 31, 2002 June 30, 2002
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 (the
"Trustee") for the Bankruptcy
Estate of Robert E. Brennan (B) 9% 1,511,036 -0- -0- -0-
Michael J. Quigley, III (C) 10% 900,000 -0- 900,000 -0-
First Insurance Funding Corp.(D) 6.95% 168,702 -0- -0- -0-
Frank A. Leo (E) 0% 75,000 -0- -0- -0-
Other Various 2,268 -0- 30,280 -0-
Garden State Park:
- ------------------
Service America Corporation (F) 6% 160,000 -0- 160,000 -0-
---------- ------- ----------- ------
Totals $ 2,949,006 $ -0- $ 1,222,280 $ -0-
Less:
Net Liabilities of Discontinued
Operations - Current (160,000) -0- (160,000) -0-
---------- ------- ----------- ------
Totals $ 2,789,006 $ -0- $ 1,062,280 $ -0-
========== ======= =========== ======
(A) Our promissory note payable to MCJEM, INC. represents the balance of
the purchase price owing from our purchase of two large bronze sculptures
located on the Garden State Park property. This note is due upon collection of
our note receivable from Realen in the amount of $350,000. (See Note 2.)
10
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(B) On December 13, 2002, we issued a twelve month promissory note in the
amount of $1,648,403 (the "Stock Purchase Note") bearing interest at 9% to
Donald F. Conway, the Chapter 11 Trustee (the "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. At December 31, 2002, the principal balance on the
note was $1,511,036. The Stock Purchase Note is secured by a security interest
in proceeds and payments receivable under the $10 million Realen Note. As of
February 14, 2003, we are in default on the note as no further payments have
been made to the Trustee on the note. (See Note 6.)
(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.(See Note 6.)
(D) Our directors and officers liability policy was financed by First
Insurance Funding Corp. for a $314,677 one year promissory note at a 6.95%
interest rate. At December 31, 2002, the principal balance on the note was
$168,702.
(E) In connection with the purchase of Leo Equity Group, Inc. stock
effective October 27, 2002, the Company issued a promissory note in the amount
of $250,000. The Company began making monthly payments of $25,000 in July 2002
when the Stock Purchase Agreement was originally signed. (See Note 6.)
(F) 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 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.
(6) COMMITMENTS AND CONTINGENCIES
See Note 9 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. On January 4, 2003, we began deferring payments of compensation
due to Mr. Murray.
We are responsible for remediation costs associated with an environmental
site on the Freehold Raceway property. We have accrued what we believe to be the
total cost of remediation. At December 31, 2002, the remaining balance of such
accrual was $130,398 for remediation costs. These accrued costs
11
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
are expected to be incurred during the next twenty months.
In connection with the January 28, 1999 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.
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 and a related Stock Purchase Agreement, and, through our Palm Beach
Princess, Inc. subsidiary, a Purchase and Sale Agreement, described below. These
agreements followed many months of negotiation with the Trustee of the details
of the transactions outlined in the letter of intent that had been signed by the
parties effective April 30, 2001. It was on the basis of the letter of intent,
initially, and then the Master Settlement Agreement that we have been operating
the vessel M/V Palm Beach Princess and conducting a casino cruise business since
April 30, 2001.
As permitted by the Master Settlement Agreement with the Trustee, we have
entered into a bareboat charter with MJQ Corporation, pursuant to which we have
chartered the vessel M/V Palm Beach Princess for the purpose of operating a
casino cruise business from the Port of Palm Beach, Florida. Under the bareboat
charter agreement, we are obligated to pay $50,000 per month as a charter hire
fee to the vessel's owner, MJQ Corporation. Other parties to the Master
Settlement Agreement include MJQ Corporation, Leo Equity Group, Inc. and Francis
W. Murray, our Chairman, who is also a director and officer of MJQ Corporation
and a director of Leo Equity Group, Inc. In October 2002, Mr. Murray purchased
the stock of MJQ Corporation and effective October 27, 2002 we purchased the
stock of Leo Equity Group, Inc. (See Note 9, Related Party Transactions.)
In accordance with the Master Settlement Agreement, through our Palm Beach
Princess, Inc. subsidiary we entered into a Purchase and Sale Agreement which
provides for our purchase from the Trustee of the promissory note of MJQ
Corporation, having an outstanding balance of principal and interest of
approximately $15.7 million as of June 30, 2002 and secured by a ship mortgage
against the M/V Palm Beach Princess (the "Ship Mortgage Obligation"). The
purchase price payable by us for the Ship Mortgage Obligation is $13.75 million.
We began making payments on account of such purchase price effective April 30,
2001, in monthly installments of $250,000. Such monthly installments continued
under the terms of the Purchase and Sale Agreement through July 31, 2002, at
which time a $9.75 million balloon payment was to be due. However, before July
31, 2002, we exercised our right to extend the time for payment of the balance
of the purchase price for up to three (3) additional months, to October 31,2002,
by paying fees of $70,000 for the first one month extension, an additional
$80,000 for the second month extension and an additional $100,000 for the third
month extension. On October 30, 2002, the Master Settlement Agreement was
amended to provide for a further extension of the due date for payment of the
$9.75 million balance under the Purchase and Sale Agreement until January 6,
2003, in consideration of our payment of $220,000 as an extension fee. On
January 3, 2003, we did not have the funds to complete the purchase by January
6, 2003 and the Trustee denied our request for a further extension of the
January 6, 2003 due date. Therefore, on January 3, 2003, in order to protect our
invested deposits and operation of the vessel, ITGV, successor by merger to our
subsidiary the Palm Beach Princess, Inc., filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. MJQ Corporation, the entity which ownes
the vessel, also filed for relief under Chapter 11 of the Bankruptcy Code. The
Trustee is the largest creditor in the
12
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MJQ/ITGV cases, and is secured by a mortgage against the vessel. Therefore, in
order to re-organize under a Chapter 11 plan on a basis under which we would
continue to operate the vessel, we will need to pay or provide for payment of a
minimum of $9.75 million payable to the Trustee. The Bankruptcy Court has
required ITGV to pay interest on said $9.75 million monthly to the trustee at an
interest rate of 12% per year.
The second agreement which we entered into with the Trustee pursuant to the
Master Settlement Agreement is a Stock Purchase Agreement. Under this Agreement,
which superseded all prior agreements and understandings between us and the
Trustee for the purchase of our common stock held or claimed by the Trustee, we
agreed to purchase up to approximately 2,235,000 shares of our common stock at a
purchase price of $0.50 per share on July 11, 2002. We desired to purchase these
shares in order to preserve our net operating loss carryforwards which otherwise
may be lost if the shares are transferred. As collateral security for our
payment of the purchase price for these shares, we granted to the Trustee a
security interest in all proceeds of (including all payments that might be made
in the future under) the $10 million Realen Note, described in Note 2 above. We
were unable to pay the purchase price under the Stock Purchase Agreement on July
11, 2002 (which price, at that date, was $892,500 for 1,785,000 shares). On
October 30, 2002, the Stock Purchase Agreement was amended to provide for an
extension of the due date on the purchase of the shares until December 13, 2002
at which time the Trustee agreed to accept payment of the purchase price for
3,228,145 shares (including additional shares over which the Trustee obtained
control) in the form of a twelve month promissory note bearing interest at 9% in
the amount of $1,648,402. (See Note 5(B).) Should the Trustee obtain control
over an additional 450,000 shares, we are further obligated to purchase those
shares at $0.50 per share. A principal payment of $137,367 was made on December
13, 2002. We are currently in default on the two payments of principal and
interest that were due to the Trustee through February 13, 2003 in the amount of
$296,368.
Through a subsidiary, 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 April 25, 2002. 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 we
estimate that the actual cost to make the improvements will be approximately
$600,000. As of February 14, 2003, we have made payments in the amount of
$335,288 on such improvements and we will continue payments on the project under
the protection of the Bankruptcy Court. 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.
In other transactions related to our acquisition of the Ship Mortgage
Obligation, we entered into an agreement to purchase the outstanding shares of
stock in Leo Equity Group, Inc. in order to acquire control of the lease and
operating agreement with the Port of Palm Beach District. Leo Equity Group, Inc.
owned the agreement with the Port of Palm Beach under which the Palm Beach
Princess vessel had been operating, and by our agreement to purchase the stock
in Leo Equity Group, Inc., the shareholder of Leo Equity Group, Inc. permitted
us to negotiate a new long-term agreement with the Port which would replace Leo
Equity Group's agreement with the Port. Effective October 27, 2002, we completed
the purchase of the stock of Leo Equity Group, Inc. The purchase price we agreed
to pay for the stock in Leo Equity Group, Inc. was $250,000, payable in ten
consecutive monthly installments of $25,000 each, without interest. As of
December 31, 2002, the remaining balance on the purchase of the stock was
$75,000. As further consideration, we also agreed to reduce the exercise price
of the seller's previously granted options to purchase 200,000 shares of our
common stock, to $0.50 per share. (See Note 9 below, Related Party
Transactions.)
13
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition to the commitments described above, we are in the process of
negotiating other potential acquisitions of gaming related businesses in foreign
countries. While we explore each business opportunity, including performance of
due diligence, and pending negotiation of definitive agreements, we have lent
approximately $600,000 to persons and entities having rights to certain of these
gaming opportunities. If such acquisitions are concluded, the businesses in
foreign countries would involve a significant additional investment and would
entail substantial risks, including political risks. There can be no assurance
that definitive agreements will be concluded or that we would be able to obtain
necessary funds to proceed, and there is no assurance that we will be able to
recover our loans should we not proceed.
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 10.)
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2002, in assessing the fair value of financial
instruments, we have used a variety of methods and assumptions, which were based
on estimates of market conditions and loan risks existing at that time. For
certain instruments, including cash and cash equivalents, investments, non-trade
accounts receivable and loans, and short-term debt, it was estimated that the
carrying amount approximated fair value for the majority of these instruments
because of their short-term maturity. The carrying amounts of long term debt
approximate fair value since our interest rates approximate current interest
rates that would be available to us in the market place.
Management believes that the carrying amounts of the two long-term notes
receivable approximate fair value and will continue to evaluate the fair value
of these instruments.
(8) STOCK OPTIONS AND WARRANTS
(A) EMPLOYEE AND NON-EMPLOYEE OPTIONS
At December 31, 2002, total employee options outstanding were 3,111,500 and
total non-employee options outstanding were 225,000. At December 31, 2001 all of
the employee and the non-employee options were exercisable.
(B) WARRANTS
At December 31, 2002, total warrants outstanding were 710,000. All warrants
were exercisable at December 31, 2002.
14
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) 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, $735,584 had been loaned to such project and we had accrued $163,299
of interest due on the loan. 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 ownes 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. At December 31, 2002, we had lent
$2,034,304 in total to MJQ Development and we have accrued interest in the
amount of $489,848 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 have the right to convert our
loan into an equity interest (subject to receiving certain third party
approvals), which would entitle us to receive a priority return of our
investment and a priority profits interest for up to three times our investment.
Repayment of these loans (and receipt of any return if we convert our loans to
equity) 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. 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.
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, 2002 is $900,000 and
we have accrued interest through that date in the amount of $192,247. 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.
(See Note 5.)
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.
15
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Francis X. Murray, the son of Francis W. Murray, is President and a director of
MJQ Corporation and President of our subsidiary, ITG Vages, 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 6 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 a balance of principal and interest outstanding of
approximately $15.7 million as of December 31, 2002 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.
Also, as set forth in Note 6 above, 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. is
$250,000, payable without interest in 10 monthly installments of $25,000 each.
As of December 31, 2002, the remaining balance on the purchase of the stock was
$75,000. 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. 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.
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 connection with the
final settlement with the Trustee. Leo Equity Group, Inc. has 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. That $2.6 million debt from Mr. Quigley is a
non-recourse obligation which is payable solely from pledged shares of stock in
MJQ Corporation. Mr. Murray purchased the MJQ Corporation stock subject to our
lein securing payment of that debt. We have deferred all income from these
transactions until such time as payment is received.
On July 12, 2002, we borrowed $300,000 from Francis W. Murray at an annual
interest rate of 6%. The note is due on demand and interest is payable monthly.
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 is $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.
For additional information regarding related party transactions see
Footnote 15 in the consolidated
16
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
financial statements included in the Company's Form 10-K for the fiscal year
ended June 30, 2002.
(10) SUBSEQUENT EVENTS
(A) On January 3, 2003, ITG Vegas, Inc.("ITGV"),our subsidiary operating
the Palm Beach Princess and MJQ Corporation ("MJQ"), the entity owned by Francis
W. Murray which owns the vessel, 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
(BKC-PGH), January 3, 2003. The petition does not cover the parent company, ITB,
nor any other of ITB's subsidiaries. The Palm Beach Princess is continuing 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.
(B) In February 2003, we borrowed $58,750 from two corporate officers. The
loans are due on demand. These funds were used for working capital requirements
of the parent company.
17
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, 2002
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 debtor in possession operation of the Palm Beach Princess vessel
and ability to successfully develop a Chapter 11 plan of
re-organization ;
o termination of the bareboat charter under which we operate our
gaming business;
o general economic and business conditions affecting the tourism
business in Florida;
o competition;
o execution of our new business strategy;
o changes in laws regulating the gaming industry;
o fluctuations in quarterly operating results as a result of
seasonal and weather considerations; 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, 2002
included approximately $2.4 million in cash generated by the Palm Beach Princess
operations. Such cash flow was used, in part, to fund $500,000 of the payments
on account of the purchase price of the Ship Mortgage Obligation against the
Palm Beach Princess and $470,000 of fees to extend the closing under the
Purchase and Sale Agreement as described below, and also to explore other
potential business opportunities. We are exploring gaming related business
opportunities in various foreign countries and expect to continue to incur
expenses for exploring potential business opportunities in the future. As of
December 31, 2002, we have made loans of approximately $350,000 in relation to
the foreign projects and an additional $142,107 has been funded and expensed in
various foreign projects during the six months ended December 31, 2002. Until
January 3, 2003, all of our cash flow during the current fiscal year had come
from the Palm Beach Princess vessel.
On January 3, 2003, our only source of cash from operations was cut off
when ITG Vegas, Inc.("ITGV"),our subsidiary operating the Palm Beach Princess,
and MJQ Corporation ("MJQ"), an unrelated affiliate owned by Francis W. Murray,
filed voluntary petitions for relief under Chapter 11 of
18
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, 2002
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. We
have used all the available funds that we had prior to the bankruptcy filing to
pay some of our expenses and need to find immediate financing in order to pay
remaining existing liabilities as well as future expenses. The Palm Beach
Princess will continue 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.
Under our bareboat charter of the vessel, ITG Vegas, Inc. is obligated to
pay $50,000 per month as the charter hire fee to the vessel's owner, MJQ
Corporation. In order to obtain the bareboat charter, we negotiated and on
February 20, 2002 entered into a Master Settlement Agreement with the Chapter 11
Trustee of the Bankruptcy Estate of Robert E. Brennan (the "Trustee"), MJQ
Corporation and others. Pursuant to the Master Settlement Agreement we have
incurred the following financial commitments:
o For the purchase of the Ship Mortgage Obligation, we paid
$250,000 per month through July 31, 2002, and an additional $9.75
million balloon payment was due at that time. As permitted by the
Master Settlement Agreement we extended the date for payment of
the balloon payment on a month-to-month basis until October 31,
2002 by paying extension fees of $70,000 for the first month, an
additional $80,000 for the second month and an additional
$100,000 for the third month. On October 30, 2002, the Master
Settlement Agreement was amended to provide for a further
extension of the due date for the Purchase and Sale Agreement
until January 6, 2003 by paying $220,000 in extension fees. We
did not have the necessary funds to complete the purchase by
January 6, 2003. Therefore, on January 3, 2003, in order to
protect our invested deposits and our operation of the vessel,
ITGV filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code. Prior to the bankruptcy filing, our
subsidiary, Palm Beach Princess, Inc. which operated the vessel,
was merged into ITGV. MJQ Corporation also filed for relief under
Chapter 11 of the Bankruptcy Code. The Trustee is the largest
creditor in the MJQ Corp./ITGV cases, and is secured by a
mortgage against the vessel. Therefore, in order to re-organize
under a Chapter 11 plan on a basis under which we would continue
to operate the vessel, we will need to pay or provide for payment
of a minimum of $9.75 million payable to the Trustee. The
Bankruptcy Court has required ITGV to pay interest on said $9.75
million monthly to the trustee at an interest rate of 12% per
year.
o We were obligated to purchase approximately 1,785,000 shares of
our common stock from the Trustee at $0.50 per share (aggregate
purchase price of approximately $892,500), on July 11, 2002 and
we were unable to make such payment. On October 30, 2002, the
Stock Purchase Agreement was amended to provide for an extension
of the due date on the purchase of the shares until December 13,
2002, at which time the Trustee agreed to accept payment of the
purchase price for 3,228,145 shares (including additional shares
over which the Trustee has obtained control) in the form of a
twelve month promissory note in the amount of $1,648,402 bearing
interest at 9% per year. Should the Trustee obtain control over
an additional 450,000 shares, we are further obligated to
purchase those shares at $0.50 per share. A principal payment of
$137,367 was made on December 13, 2002. We are currently in
default on the two payments of principal and interest that were
due to the Trustee under such note through February 13, 2003 in
the amount of $296,368.
19
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, 2002
ITGV is committed to making the tenant improvements to new office space at
the Port of Palm Beach. Total costs of such improvements are expected to be
approximately $600,000. As of February 19, 2003, ITGV had expended $335,288 for
such improvements.
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, our
possible sources of cash 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 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. We are attempting to borrow on these
Notes for additional working capital but such borrowing is expected to be
difficult to obtain as long as the timing and amounts of payments under the
Notes remain unpredictable.
While management believes that the $10 Million Note and the $23 Million
Note owned by us have substantial value and, ultimately, should generate
significant cash payments to us, the timing of receipt of any such payments
cannot be accurately predicted and we may not receive substantial payments under
the notes for one year or more. We will seek to borrow against the notes in
order to obtain funds for our short term obligations and current expenses and
also for capital expenditures of any new business we enter. However, there can
be no assurance that we will be able to borrow the necessary funds.
Our working capital as of December 31, 2002 was a negative ($2,665,814) as
compared to a negative ($2,200,346) at June 30, 2002. The decrease in working
capital during the past six months was primarily caused by the use of cash to
make payments of $500,000 on the Ship Mortgage Obligation, pay the extension
fees of $470,000 on the purchase and to fund on-going development projects
partially offset by the cash provided by operating activities. Other
transactions affecting working capital that did not require the use of cash was
the purchase of the spare parts inventory in the amount of $1,103,125 and the
assumption of additional debt primarily from the Trustee in the amount of
$1,648,403.
20
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, 2002
Results of Operations for the Three Months Ended December 31, 2002 and 2001
Revenue for the three months ended December 31, 2002 increased $1,846,752
from $5,060,359 in Fiscal 2002 to $6,907,111 in Fiscal 2003 primarily as a
result of increased revenues generated by the Palm Beach Princess operations
during the comparable quarters. Expenses increased $362,482 from $5,887,628 in
the three month period in Fiscal 2002 to $6,250,110 in Fiscal 2003 primarily the
result of an increase in Palm Beach Princess operating costs during the
comparable quarters and financing costs incurred during the second quarter of
Fiscal 2003 primarily associated with the amended Purchase and Sale Agreement
for the Palm Beach Princess operation in the amount of $220,000, partially
offset by a decrease in development costs and a decrease in corporate general
and administrative expenses during the comparable quarters primarily the result
of the relocation costs during the prior fiscal year.
During the three months ended December 31, 2002, total revenue from vessel
operations was $6,772,189 as compared to $4,957,317 for the three months ended
December 31, 2001. The increase in revenue of $1,814,872 during the comparable
quarters primarily resulted from an increase in casino gaming and on board
revenue primarily the result of an increase in the passenger count and the
number of cruises during the comparable periods partially offset by a decrease
in fare revenues primarily associated with competitive pricing related to the
ship competing with another gaming vessel for the full quarter of operation in
Fiscal 2003 as compared to only 20 days in Fiscal 2002. Total expenses before
income taxes for the comparable periods increased $665,029 from $4,910,624 for
the three months ended December 31, 2001 to $5,575,653 for the three months
ended December 31, 2002 primarily as a result of an increase in the number of
passengers and the number of cruises which increased operating costs, increases
in sales and marketing expenses associated with competition, a $231,000 increase
in accrued employee bonus compensation costs related to our full calendar year
of operation and $220,000 in financing fees offset by a decrease in other
operating expenses. Income before income tax expense for the second quarter of
operation in Fiscal 2003 was $1,196,536 as compared to $46,693 in the comparable
quarter of Fiscal 2002.
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 2003, out of the 177 scheduled cruises, none were cancelled as
compared to Fiscal 2002 where out of 168 scheduled cruises, 13 were cancelled
for weather or mechanical difficulties.
21
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, 2002
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the three month periods ended December 31, 2002 and
2001:
Three Months Ended
December 31,
-------------------------------------
Description 2002 2001 Change
- ------------------------------------- ----------- ----------- ---------
Passenger Count 53,147 45,613 7,534
Number of Cruises 177 155 22
Revenue:
Fare $ 570,538 $ 574,542 $ (4,004)
On Board 398,680 347,374 51,306
Casino 5,802,971 4,035,401 1,767,570
----------- ----------- ---------
Total Revenue 6,772,189 4,957,317 1,814,872
----------- ----------- ---------
Expenses:
Casino Operating Expenses 1,859,085 1,587,544 271,541
Hotel and Gift Shop Expenses 201,787 217,660 (15,873)
Sales, Marketing and Advertising 790,594 669,424 121,170
Maritime and Legal Expenses 1,362,763 1,478,489 (115,726)
Administrative and Finance 1,361,424 957,507 403,917
----------- ----------- ---------
Total Expenses 5,575,653 4,910,624 665,029
----------- ----------- ---------
Income Before Income Tax Expense $ 1,196,536 $ 46,693 $1,149,843
=========== =========== =========
For the second quarter of Fiscal 2003, our net income was $595,001 or $0.06
per share as compared to a loss for the comparable period in prior fiscal year
of ($827,269) or ($0.07) per share.
Results of Operations for the Six Months Ended December 31, 2002 and 2001
Revenue for the six months ended December 31, 2002 increased $2,103,465
from $11,222,821 in Fiscal 2002 to $13,326,286 in Fiscal 2003 primarily as a
result of increased revenues generated by the Palm Beach Princess operations
during the comparable periods. Expenses increased $659,505 from $11,569,667 in
the six month period in Fiscal 2002 to $12,229,172 in Fiscal 2003 primarily the
result of an increase in Palm Beach Princess operating costs during the
comparable quarters and financing costs incurred during the second quarter of
Fiscal 2003 primarily associated with the amended Purchase and Sale Agreement
for the Palm Beach Princess operation in the amount of $470,000, partially
offset by a decrease in development costs and a decrease in corporate general
and administrative expenses during the comparable quarters primarily the result
of relocation costs incurred during the prior fiscal year.
During the first half of Fiscal 2003, total revenue from vessel operations
was $13,080,278 as compared to $10,898,355 for the first half of Fiscal 2002.
The increase in revenue of $2,181,922 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 and the number of cruises during
the comparable periods partially offset by a decrease in fare revenues primarily
associated with the competitive pricing discussed above. Total expenses before
income taxes for the comparable periods increased $840,381 from $10,014,997 for
the six months ended December 31, 2001 to $10,885,377 for the six months ended
22
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, 2002
December 31, 2002 primarily as a result of an increase in the number of
passengers and the number of cruises which increased operating costs, increases
in sales and marketing expenses associated with competition, the accrued
employee bonus compensation costs discussed above and $470,000 in financing fees
offset by a decrease in other operating expenses. Income before taxes from
operation of the vessel for the six months ended December 31, 2002 was
$2,224,901 as compared to $883,359 for the six months ended December 31, 2001.
Out of the 356 scheduled cruises during the first half of Fiscal 2003, none were
cancelled for weather or mechanical difficulties as compared to Fiscal 2002
where out of 355 scheduled cruises, 17 cruises were cancelled for weather or
mechanical difficulties.
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the six month periods ended December 31, 2002 and
2001:
Six Months Ended
December 31,
-------------------------------------
Description 2002 2001 Change
- ------------------------------------- ------------ ----------- ----------
Passenger Count 113,532 102,778 10,754
Number of Cruises 356 330 26
Revenue:
Fare $ 1,228,687 $ 1,305,344 $ (76,657)
On Board 852,884 792,912 59,972
Casino 10,998,707 8,800,100 2,198,607
------------ ----------- ----------
Total Revenue 13,080,278 10,898,355 2,181,922
------------ ----------- ----------
Expenses:
Casino Operating Expenses 3,803,778 3,424,170 379,609
Hotel and Gift Shop Expenses 397,008 450,729 (53,721)
Sales, Marketing and Advertising 1,510,782 1,398,839 111,943
Maritime and Legal Expenses 2,780,687 2,968,095 (187,408)
Administrative and Finance 2,363,122 1,773,164 589,958
------------ ----------- ----------
Total Expenses 10,885,377 10,014,997 840,381
------------ ----------- ----------
Income Before Income Tax Expense $ 2,224,901 $ 883,359 $ 1,341,541
============ =========== ==========
During the first half of Fiscal 2003, our income was $1,008,114 or $.09 per
share as compared to a loss for the comparable period in Fiscal 2002 of
($368,846) or ($0.03) per share. The change of $1,376,960 was primarily the
result of the increase in net income from operation of the vessel.
23
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, 2002
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.
As of February 18, 2003, we completed an evaluation, under the supervision
and with the participation of our management, including our chief executive
officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing, our
chief executive officer and chief financial officer concluded that the Company's
disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS
There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
24
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K with respect to the
quarter ended December 31, 2002.
25
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 19, 2003 /s/Francis W. Murray
-----------------------------------------------------
Francis W. Murray, President, Chief Executive Officer
and Chief Financial Officer
26
CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 19, 2003
/s/Francis W. Murray____________
Chairman/Chief Executive Officer/Chief Financial Officer
27
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of
International Thoroughbred Breeders, Inc. (the "Company") for the three and six
months ended December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Francis W. Murray, Chief
Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Francis W. Murray
------------------------
Name: Francis W. Murray
Title: President and CEO
February 19, 2003
28
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of
International Thoroughbred Breeders, Inc. (the "Company") for the three and six
months ended December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Francis W. Murray, Chief
Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Francis W. Murray
------------------------------
Name: Francis W. Murray
Title: Chief Financial Officer
February 19, 2003
29