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, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9624
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International Thoroughbred Breeders, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2332039
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 1300, 1105 N. Market Street, Wilmington, Delaware 19899-8985
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(Address of principal executive offices) (Zip Code)
(302) 427-7599
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes No X
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the latest practicable date.
Class Outstanding at February 14, 2005
- ------------------------------ --------------------------------
Common Stock, $ 2.00 par value 10,567,487 Shares
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
(Unaudited)
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
as of December 31, 2004 and June 30, 2004............1-2
Consolidated Statements of Operations
for the Three Months and Six Months ended
December 31, 2004 and 2003 ..........................3
Consolidated Statement of Stockholders' Equity
for the Six Months ended December 31, 2004...........4
Consolidated Statements of Cash Flows
for the Six Months ended
December 31, 2004 and 2003...........................5
Notes to Financial Statements...............................6-21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........22-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk...30
Item 4. Controls and Procedures.....................................31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................32
Item 6. Exhibits and Reports on Form 8-K.....................32
SIGNATURES................................................................33
CERTIFICATIONS............................................................34-36
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND JUNE 30, 2004
ASSETS
December 31,
2004 June 30,
(UNAUDITED) 2004
----------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,640,895 $ 7,508,632
Accounts Receivable 596,314 223,411
Prepaid Expenses 1,032,933 738,504
Other Current Assets 203,725 153,625
Assets of Discontinued Operations 401,822 400,835
---------- -----------
TOTAL CURRENT ASSETS 3,875,688 9,025,007
---------- -----------
VESSELS, EQUIPMENT & LIVESTOCK:
Vessel - Palm Beach Princess 17,500,000 0
Leasehold Improvements - Port of Palm Beach 958,946 913,394
Equipment 2,086,940 2,217,322
Livestock 303,022 0
Vessel Not Placed in Service - Big Easy (formerly Empress II) 5,639,168 0
Vessel Not Placed in Service - Royal Star 2,406,912 1,321,494
---------- -----------
28,894,988 4,452,210
LESS: Accumulated Depreciation and Amortization 1,688,940 916,186
TOTAL VESSELS, EQUIPMENT & LIVESTOCK- NET 27,206,048 3,536,024
---------- -----------
OTHER ASSETS:
Notes Receivable 14,428,651 14,778,651
Mortgage Contract Receivable - Related Party 0 13,750,000
Deposits and Other Assets - Related Parties 8,136,957 8,410,940
Deposits and Other Assets - Non-Related Parties 1,290,820 334,975
Spare Parts Inventory 993,509 978,119
---------- -----------
TOTAL OTHER ASSETS 24,852,697 38,252,685
---------- -----------
TOTAL ASSETS $ 55,934,433 $ 50,813,716
========== ===========
See Notes to Consolidated Financial Statements.
1
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND JUNE 30, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2004 June 30,
(UNAUDITED) 2004
------------- -------------
CURRENT LIABILITIES:
Accounts Payable $ 1,721,366 $ 1,104,721
Accrued Expenses 2,876,429 2,169,197
Short-Term Debt 178,896 4,186,012
Deferred Interest - Short-Term 485,586 514,440
Vessel Lease Payable - Current Portion 879,238 0
Short-Term Debt - Related Parties 183,164 183,164
Liabilities of Discontinued Operations 315,598 310,798
------------- -------------
TOTAL CURRENT LIABILITIES 6,640,277 8,468,332
------------- -------------
LONG-TERM LIABILITIES:
Vessel Lease Payable - Long Term Portion 13,120,762 0
Long-Term Debt - Net of Current Portion 10,459 4,095,827
Deferred Interest - Long-Term 1,750,028 1,957,920
Long-Term Debt - Related Parties 218,242 285,649
------------- -------------
TOTAL LONG-TERM LIABILITIES 15,099,491 6,339,396
------------- -------------
DEFERRED INCOME 1,630,815 5,439,951
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $100 Par Value,
Authorized 500,000 Shares, 362,489
Issued and Outstanding 36,284,375 36,248,875
Common Stock, $2 Par Value, Authorized 25,000,000 Shares,
Issued, 11,480,563, and Outstanding,
10,567,487 and 7,802,134, respectively 22,965,125 22,960,557
Capital in Excess of Par 20,151,914 20,191,982
(Deficit) (subsequent to June 30, 1993,
date of quasi-reorganization) (46,375,860) (46,989,638)
------------- -------------
33,025,554 32,411,776
LESS:
Treasury Stock, 915,077 and 3,678,146 Shares,
respectively, at Cost (457,538) (1,839,073)
Deferred Compensation, Net (4,166) (6,666)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 32,563,850 30,566,037
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,934,433 $ 50,813,716
============= =============
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, 2004 AND 2003
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- ------------ --------------
OPERATING REVENUES:
Gaming $ 6,317,979 $ 5,948,208 $ 11,647,486 $ 12,442,895
Fare 627,617 626,197 1,168,282 1,281,568
On Board 479,140 425,606 890,468 850,705
Other 90,257 101,599 187,079 144,510
-------------- ------------- ------------ --------------
NET OPERATING REVENUES 7,514,993 7,101,610 13,893,315 14,719,678
-------------- ------------- ------------ --------------
OPERATING COSTS AND EXPENSES:
Gaming 2,138,334 2,079,088 4,252,422 4,158,704
Fare 986,218 954,532 1,946,416 1,711,197
On Board 240,690 231,356 451,803 426,597
Maritime & Legal Expenses 1,424,555 1,519,678 2,892,336 3,268,948
General & Administrative Expenses 480,048 809,083 1,484,240 1,719,518
General & Administrative Expenses - Parent 581,423 385,428 1,009,006 615,589
Ship Development Costs - Big Easy 597,622 0 629,064 0
Ship Development Costs - Royal Star 39,573 0 106,418 0
Development Costs - Other 309,132 110,119 735,658 159,196
Depreciation & Amortization 566,222 133,841 965,101 309,719
ITG Vegas Bankruptcy Costs 0 173,186 0 368,681
-------------- ------------- ------------ --------------
TOTAL OPERATING COSTS AND EXPENSES 7,363,817 6,396,311 14,472,464 12,738,149
-------------- ------------- ------------ --------------
OPERATING INCOME (LOSS) 151,176 705,299 (579,149) 1,981,529
-------------- ------------- ------------ --------------
OTHER INCOME (EXPENSE):
Interest and Financing Expenses (376,290) (497,281) (1,387,891) (993,743)
Interest and Financing Expenses - Related Party (253,820) (3,990) (409,811) (7,980)
(Loss) on Impairment of Note Receivable (150,000) 0 (350,000) 0
Interest Income 1,656 26,835 8,027 26,840
Interest Income Related Parties 71,945 71,945 143,891 143,889
Other Income (Expense) (30) 90,227 211 19,161
-------------- ------------- ------------ --------------
TOTAL OTHER INCOME (EXPENSE) (706,539) (312,264) (1,995,572) (811,833)
-------------- ------------- ------------ --------------
INCOME (LOSS) BEFORE TAX PROVISION (555,363) 393,035 (2,574,722) 1,169,696
AND EXTRAORDINARY ITEM
Income Tax (Benefit) Expense (49,000) 30,000 (91,000) 47,600
-------------- ------------- ------------ --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (506,363) 363,035 (2,483,722) 1,122,096
EXTRAORDINARY ITEM - Fees charged to related
parties for Master Settlement Agreement ( Note 12),
less income tax of $440,000. 0 0 3,560,000 0
-------------- ------------- ------------ --------------
NET INCOME (LOSS) $ (506,363) $ 363,035 $ 1,076,278 $ 1,122,096
============== ============= ============ ==============
NET BASIC INCOME PER COMMON SHARE $ (0.06) $ 0.05 $ 0.14 $ 0.14
============== ============= ============= ==============
NET DILUTED INCOME PER COMMON SHARE $ (0.06) $ 0.04 $ 0.13 $ 0.11
============== ============= ============ ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Basic 7,804,418 7,849,227 7,803,015 8,063,818
============== ============= ============ ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - Diluted 7,804,418 9,949,537 8,260,287 10,008,039
============== ============= ============ ==============
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, 2004
(UNAUDITED)
Preferred Common
-------------------------- ----------------------------
Number of Number of
Shares Amount Shares Amount
----------- ------------ ------------ ------------
BALANCE - JUNE 30, 2004 362,489 $ 36,248,875 11,480,279 $ 22,960,557
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty Reverse
Stock Split effected on March 13, 1992 355 35,500 2,283 4,568
Shares Issued for Options Granted
Options Issued at Less than Treasury Stock Cost 0 0 0 0
Amortization of Deferred Compensation Costs 0 0 0 0
Net Income for the Six Months Ended December 31, 2004 0 0 0 0
----------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 2004 362,844 $ 36,284,375 11,482,562 $ 22,965,125
=========== ============ ============ ============
Capital Treasury Deferred
in Excess Stock Compen-
of Par (Deficit) At Cost sation Total
------------ ------------ ------------ ------------ ------------
BALANCE - JUNE 30, 2004 $ 20,191,982 $(46,989,638) $ (1,839,073) $ (6,666) $ 30,566,037
Shares Issued for Fractional Exchanges
With Respect to the One-for-twenty Reverse
Stock Split effected on March 13, 1992 (40,068) 0 0 0 0
Shares Issued for Options Granted 919,035 919,035
Options Issued at Less than Treasury Stock Cost 0 (462,500) 462,500 0 0
Amortization of Deferred Compensation Costs 0 0 0 2,500 2,500
Net Income for the Six Months Ended December 31, 2004 0 1,076,278 0 0 1,076,278
------------ ------------ ------------ ------------ -----------
BALANCE - DECEMBER 31, 2004 $ 20,151,914 $(46,375,860) $ (457,538) $ (4,166) $ 32,563,850
============ =========== ============ ============ ============
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, 2004 AND 2003
(UNAUDITED)
December 31,
------------------------------
2004 2003
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
INCOME BEFORE DISCONTINUED OPERATIONS $ 1,076,278 $ 1,122,096
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation and Amortization 965,101 309,719
Gain on Sale of Assets 0 3,853
Impairment of Note 350,000 0
Increase in Deferred Income 190,863 0
(Decrease) in Deferred Income - Related Parties (4,000,000) 0
Changes in Operating Assets and Liabilities -
(Increase) in Restricted Cash & Investments 0 (210,000)
Decrease (Increase) in Accounts Receivable (372,902) (76,532)
(Increase) in Other Assets (50,100) (164,982)
(Increase) in Prepaid Expenses (294,430) (539,982)
Increase in Accounts Payable and Accrued Expenses 1,583,876 (847,516)
------------ -------------
CASH (USED BY) OPERATING ACTIVITIES BEFORE
DISCONTINUED OPERATIONS (551,313) (403,344)
CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 4,800 4,800
------------ -------------
NET CASH (USED BY) OPERATING ACTIVITIES (546,513) (398,544)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and Improvements of Vessels (7,018,281) (741,265)
Loans Paid by Related Parties 3,374,623 0
Capital and Livestock Expenditures (777,305) (515,859)
(Increase) Decrease in Other Investment Activity (664,910) 861,324
------------ -------------
CASH (USED IN) INVESTING ACTIVITIES
BEFORE DISCONTINUED INVESTING ACTIVITIES (5,085,873) (395,800)
CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES 0 0
------------ -------------
NET CASH (USED IN) INVESTING ACTIVITIES (5,085,873) (395,800)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments on Short Term Notes (50,958) (1,964,978)
Principal Payments on Loans to Related Parties (183,405) 0
Decrease in Balances Due to/From Discontinued Subsidiaries 3,813 4,875
------------ -------------
CASH (USED IN) FINANCING ACTIVITIES
BEFORE DISCONTINUED FINANCING ACTIVITIES (230,550) (1,960,103)
CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (3,813) (4,875)
------------ -------------
NET CASH (USED IN) FINANCING ACTIVITIES (234,363) (1,964,978)
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,866,749) (2,759,322)
LESS CASH AND CASH EQUIVALENTS FROM
DISCONTINUED OPERATIONS (987) 75
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 7,508,632 6,123,641
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,640,896 $ 3,364,394
============ =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,611,503 $ 434,949
Income Taxes $ 0 $ 0
See Notes to Consolidated Financial Statements.
5
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations - ITG Vegas, Inc. ("ITGV") is currently engaged in
an entertainment cruise and casino ship business under a bareboat charter of the
vessel M/V Palm Beach Princess (the "Palm Beach Princess"). The Palm Beach
Princess performs fourteen cruises weekly, that is, a daytime and an evening
cruise each day. Each cruise is of five to six hours duration. During each
cruise, the Palm Beach Princess offers a range of amenities and services to her
passengers, including a full casino, sit-down buffet dining, live musical shows,
discotheque, bars and lounges, swimming pool and sundecks. The casino occupies
15,000 square feet aboard the ship and is equipped with approximately 425 slot
machines, all major table games (blackjack, dice, roulette and poker), and a
sports wagering book.
During the first quarter of Fiscal 2005, we re-entered the equine business
for which the Company was originally established. We currently own several
horses of different ages. Some are currently racing and a few are held as
broodmares but the majority are yearlings and two year olds in training. It is
our plan to bring these horses into racing if we consider them competitive after
completion of training.
Using the funding provided by the PDS Transaction (see Note 2) and working
capital, the Company's subsidiary, ITG Palm Beach, LLC (ITGPB") began making
alterations, retrofits and improvements to the Empress II (subsequently renamed
the Big Easy) in our second fiscal quarter to prepare it for use as a casino
cruise ship. It is anticipated that this vessel will be ready for operation in
late February or early March 2005. During the past six months the Company
incurred approximately $630,000 of start up costs which, according to the
appropriate accounting pronouncement, have been expensed as they have been
incurred.
(B) Principles of Consolidation - The accounts of all subsidiaries are
included in the consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(C) Classifications - Certain prior years' amounts have been reclassified
to conform with the current years' presentation.
(D) Spare Parts Inventory - Spare parts inventory consists of operating
supplies, maintenance materials and spare parts. The inventories are carried at
cost. It is necessary that these parts be readily available so that the daily
cruise operations are not cancelled due to mechanical failures.
(E) Depreciation and Amortization - Depreciation of property and equipment
were computed by the straight-line method at rates adequate to allocate their
cost or adjusted fair value in accordance with U. S. generally accepted
accounting principles over the estimated remaining useful lives of the
respective assets. Amortization expense consists of the write off of major
vessel repairs and maintenance work completed at dry dock period. These expenses
are written off during a two year period following the dry dock period. For the
three ended December 31, 2004 and 2003, the amortized expense was $43,373 and
$37,809, respectively. For the six months ended December 31, 2004 and 2003, the
amortized expense was $86,746 and $37,809, respectively.
As a result of the PDS transaction (see Footnote 2) we are leasing the
vessel M/V Palm Beach Princess under a Capital lease arrangement. The Company
began depreciating the M/V Palm Beach Princess during the first quarter of our
current fiscal year.
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
warrant such a review. The carrying value of a long-lived or amortizable
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset. Losses on long-lived assets
to be disposed of are determined in a similar manner, except that fair values
are reduced for the cost of disposition. Effective January 4, 2002, SFAS 142
requires an annual impairment review based on fair value for all intangible
assets with indefinite lives.
(F) Net Assets of Discontinued Operations - At December 31, 2004 and 2003,
the remaining net assets and liabilities of Garden State Park and Freehold
Raceway were classified as "Assets of Discontinued Operations." and "Liabilities
of Discontinued Operations."
6
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(G) Recent Accounting Pronouncements - In January 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN") No. 46,
"Consolidation of Variable Interest Entities". In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation requires that the assets, liabilities, and results
of operations of a Variable Interest Entity ("VIE") be consolidated into the
financial statements of the enterprise that has a controlling interest in the
VIE. The provisions of this interpretation were effective immediately for all
arrangements entered into with new VIEs created after January 31, 2003, and
became effective during the period ended March 31, 2004 for any VIE created on
or before January 31, 2003. Based upon our review, we do not believe we have any
such entities or arrangements that would require disclosure or consolidation.
In March, 2003, the Emerging Issues Task Force published Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it performs multiple revenue generating activities and
how to determine whether such an arrangement involving multiple deliverables
contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this Issue is effective for revenue arrangements entered in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 on July
1, 2003 did not have any impact on our financial statements.
(H) Revenue Recognition - Casino revenue consists of gaming winnings net of
losses. Net income is the difference between wagers placed and winning payout to
patrons and is recorded at the time wagers are made. The vast majority of the
wagers are in the form of cash and we do not grant credit to our customers to a
significant extent. Fare revenues consist of admissions to our vessel and are
recognized as earned. On board revenues consist primarily of ancillary
activities aboard the vessel such as the sale of food and beverages, cabin
rental, gift shop, spa facility and skeet shooting. These revenues are
recognized on the date they are earned.
(I) Income Taxes - The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires a company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in its financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
(J) Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
(K) Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and cash
equivalents. The Company places its cash investments with high credit quality
financial institutions and currently invests primarily in U.S. government
obligations that have maturities of less than 3 months. The amount on deposit in
any one institution that exceeds federally insured limits is subject to credit
risk.
(L) Use Of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
(M) Deferred Income - The gain from the sale of our Garden State Park
property on November 28, 2000 in the amount of $1,439,951 has been deferred
until such time as the note receivable on the sale has been collected. In
connection with the PDS Transaction we have deferred the gain on the sale of
equipment of $190,863 over the term of the equipment lease. The deferred income
recorded as of June 30, 2004 included fees charged to Leo Equity Group, Inc. in
the amount of $3,000,000 and to Palm Beach Maritime Corp. (formerly MJQ Corp.)
in the amount of $1,000,000 in connection with the final settlement with the
Brennan Trustee. These amounts were deferred until the first quarter of Fiscal
2005 when we received payment for these charges.
7
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(N) Net Income per Common Share -Basic earnings per share is computed as
net income available to common shareholders divided by the weighted average
number of common shares outstanding during the quarter. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable through stock options and warrants utilizing the treasury stock method.
Diluted earnings per share is calculated by using the weighted average number of
common shares outstanding adjusted to include the potentially dilutive effect of
these occurrences.
(O) Capitalized Interest - during the six months ended December 31,
2004, we capitalized interest payments made under the Empress II (subsequently
renamed the Big Easy) sublease in the amount of $1,187,282. The interest
payments will be capitalized until the vessel is placed in service, estimated to
be during our third fiscal quarter, beginning on January 1, 2005.
(2) PDS TRANSACTION
On July 7, 2004, the Company and its subsidiaries ITG Vegas, Inc. ("ITG
Vegas") and ITG Palm Beach, LLC ("ITGPB") and its affiliates Palm Beach Maritime
Corporation ("PBMC") (formerly MJQ Corp.) and Palm Beach Empress, Inc.("PBE")
closed on a series of related transactions (the "PDS Transactions") pursuant to
which PBMC sold and then leased back the casino cruise ship Palm Beach Princess
("Princess"), PBE leased (as lessee) the casino cruise ship Empress II
(subsequently renamed the Big Easy) ("Big Easy"), ITG Vegas and ITGPB obtained
long-term charters to operate, and options to purchase, the Princess and Big
Easy. By way of these sales/lease transactions, PBMC, ITG Vegas and the Company
were able to extinguish their joint debts to the Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan ("the Brennan Trustee"). ITG Vegas's
investment in the Ship Mortgage Note, described below, was converted into an
investment in the options to purchase the two vessels.
All of the outstanding capital stock of PBMC is owned by Francis W. Murray,
the Chief Executive Officer of the Corporation. PBMC owns 50% of the outstanding
capital stock of PBE. The remaining 50% of the outstanding capital stock of PBE
is owned by Raymond Parello and has been pledged to the Company to secure
payment of the Second Cherry Hill Note described in Note 5 below.
The following is a summary of the principal terms of the PDS Transactions.
The summary does not purport to be a complete summary and is qualified in its
entirety by reference to the documents which were filed as exhibits to the Form
8-K filed on July 21, 2004.
Sale-Leaseback of the Princess. Prior to the closing of the PDS
Transactions (the "Closing"), the Princess was owned by PBMC. On May 13, 1999,
PBMC issued to Cambridge Capital Group, Inc. a note in the original principal
amount of $12,000,000 (the "Ship Mortgage Note"), which was subsequently
acquired by Donald F. Conway, as Chapter 11 Trustee of the Bankruptcy Estate of
Robert E. Brennan (the "Brennan Trustee"). The Ship Mortgage Note was secured by
a Second Naval Mortgage over the Princess (which became a first priority
mortgage when obligations secured by the first mortgage were paid) (the "Ship
Mortgage"). Pursuant to a Purchase and Sale agreement dated February 22, 2002,
ITG Vegas agreed to purchase the Ship Mortgage Note and Ship Mortgage from the
Brennan Trustee for a purchase price of $13,750,000 (the "Purchase Obligation").
In addition, the Company was indebted to the Brennan Trustee in connection with
the Company's repurchase of 3,678,145 shares of its common stock (the "ITB
Obligation"). As of Closing, the aggregate outstanding amount of the Purchase
Obligation and ITB Obligation was $7,916,451.71, for all of which PBMC, ITG
Vegas and the Company were jointly and severally liable. At the Closing, Cruise
Holdings I, LLC ("Cruise I"), a subsidiary of PDS Gaming Corporation ("PDS"),
purchased the Princess from PBMC for $14,000,000; $7,916,451.71 of which was
paid by PBMC directly to the Brennan Trustee to satisfy the Purchase Obligation
and ITB Obligation.
Also at Closing, Cruise I entered into a Bareboat Charter and Option to
Purchase (the "Princess Charter") and a Master Lease Agreement (together with
Lease Schedule No. 1 thereto, the "Princess Master Lease") to charter and lease
the Princess to PBMC and PBE for a period of five years. The charter hire/rent
payable by PBMC and PBE is $178,500 per month for the first 12 months
(equivalent to interest only on a capital lease obligation of $14,000,000) and
$391,762.80 for the remaining term (amortizing the capital lease obligation over
the next four years) of the Princess Charter. In addition, PBMC and PBE are
required to make annual cash flow sweep payments (equivalent to mandatory
principal prepayments) (the "Cash Flow Sweep") if the EBITDAR (earnings before
interest, taxes, depreciation, amortization and rents) from the operation of the
Princess and the Big Easy ("EBITDAR") is less than $10,000,000 per year. Any
Cash Flow
8
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sweep payments to be made under the Princess Charter will ultimately be made by
ITG Vegas and ITGPB (as the operators of the Princess), as described below.
The Princess Charter includes an option for PBMC to purchase the Princess
at the end of the term and is structured such that the monthly charter hire
payments under the Princess Charter will reduce the purchase price for the
Princess to zero in five years (assuming there are no payment defaults) and
title will automatically pass to PBMC at (or, if Cash Flow Sweep payments are
made, before) the end of the term of the Princess Charter.
PBMC and PBE entered into a Sub-Bareboat Charter (the "Princess
Sub-Charter") at Closing to charter the Princess to ITG Vegas and ITGPB for the
same five year period. ITG Vegas will operate the Princess, with ITGPB having
joined in the Sub-Bareboat Charter in order to be jointly and severally liable
with ITG Vegas for charter hire thereunder. The charter hire payable by ITG
Vegas and ITGPB to PBMC and PBE under the Princess Sub-Charter is $50,000 per
month ($600,000 per year) plus one percent (1%) of the gross operating revenues
of the Princess. Under the Princess Sub-Charter, PBMC granted to ITG Vegas and
ITGPB an option to purchase PBMC's right to acquire the Princess at the end of
the term, for an exercise price equal to the appraised value of the Princess,
$17,500,000, to which certain amounts are to be credited as described below (the
"Princess Purchase Option"). As consideration for the Princess Purchase Option,
ITG Vegas will make Cash Flow Sweep payments on the same terms as PBMC and PBE
are required to make such payments under the Princess Charter (and effectively
will make such payments directly to Cruise I on behalf of PBMC and PBE to the
extent any such payments are due). As further consideration for the Princess
Purchase Option, ITG Vegas and ITGPB are to make payments of $178,500 per month
for the first 12 months and $391,762.80 for the remaining four-year term of the
Princess Sub-Charter (i.e., the same amounts as the charter hire payable by PBMC
and PBE under the Princess Charter) (the "Princess Additional Payments"). If ITG
Vegas and ITGPB fail to make any Cash Flow Sweep payment or Princess Additional
Payment when due, PBMC may terminate the Princess Purchase Option. Upon exercise
of the Princess Purchase Option, ITG Vegas and ITGPB will be entitled to credits
against the exercise price of the Princess Purchase Option for (i) ITG Vegas's
investment of $7,244,000 in the Ship Mortgage Note (except to the extent
credited toward payment of the exercise price for the purchase option on the Big
Easy under the Big Easy Sub-Charter, described below), plus (ii) the aggregate
amount of all Cash Flow Sweep payments made under the Princess Sub-Charter, plus
(iii) the portion of the Princess Additional Payments made for the 13th month
through the 60th month of the term of the Princess Sub-Charter which would be
considered principal payments if such Additional Payments were payments of
principal and interest on a loan of $14,000,000 amortized over 48 months at an
interest rate of 15.3%. In addition, the exercise price for the assignment
option may be offset by any debts owing by PBMC to ITG Vegas and/or ITGPB.
Acquisition of the Big Easy. On March 1, 2004, PBE entered into an
agreement to purchase the vessel known as the M/V Empress II (subsequently
renamed the Big Easy)(the "Empress Sale Agreement") from Empress Joliet
Corporation at a purchase price of $3,800,000. The Big Easy requires
approximately $8,500,000 of alterations, retrofits and improvements to prepare
it for use as a casino cruise ship, a portion of which in the amount of
$2,880,652, is being paid by ITG Vegas. At Closing, PBE assigned to Cruise
Holdings II, LLC ("Cruise II"), a subsidiary of PDS and affiliate of Cruise I,
all of its rights, title and interest in and to the Empress Sale Agreement, and
the sum of $6,000,000 was deposited in a blocked account to be used to pay costs
of the alterations, retrofit and improvements of the Empress. Such deposit was
funded to the extent of $2,880,652 by ITG Vegas.
Also at Closing, Cruise II entered into a Bareboat Charter and Option to
Purchase (the "Empress Charter") and a Master Lease Agreement (together with
Lease Schedule No. 1 thereto, the "Empress Master Lease") to charter and lease
the Big Easy to PBMC and PBE for a period of five years. The charter hire is
$82,695 for the first 12 months (equivalent to interest only on a $6 million
capital lease obligation) and $171,702.54 for the remaining term (amortizing the
capital lease obligation over the next four years) of the Big Easy Charter. In
addition, PBMC and PBE are required to make annual Cash Flow Sweep payments
(equivalent to mandatory prepayments of principal) based on the EBITDAR from
operation of the Princess and Empress as described in respect to the Princess
Charter above.
The Empress Charter includes an option for PBE to purchase the Big Easy at
the end of the term and is structured the same as the Princess Charter in that
the monthly payments of charter hire under the Empress Charter will reduce the
purchase price for the Big Easy to zero (assuming there are no payment defaults)
and title will automatically pass to PBE at (or, if Cash Flow Sweep payments are
made, before) the end of the
9
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
term of the Empress Charter.
PBMC and PBE also entered into a Sub-Bareboat Charter (the "Big Easy
Sub-Charter") at Closing to charter the Big Easy to ITG Vegas and ITGPB for a
five year period. ITGPB plans to operate the Big Easy as a casino cruise
business from the Port of Palm Beach, with ITG Vegas having joined in the
Sub-Bareboat Charter in order to be jointly and severally liable with ITGPB for
charter hire thereunder. The charter hire payable by ITG Vegas and ITGPB under
the Big Easy Sub-Charter is $100,000 per month ($1.2 million per year) plus one
percent (1%) of the gross operating revenues of the Big Easy. Under the Big Easy
Sub- Charter, PBE granted to ITG Vegas and ITGPB an option to purchase PBE's
right to acquire the Big Easy at the end of the term, for an exercise price
equal to the appraised value of the Big Easy, to be determined upon the
retrofitting and refurbishment of the Big Easy, to which certain amounts are to
be credited as described below (The "Big Easy Purchase Option"). As
consideration for the Big Easy Purchase Option, ITG Vegas will make Cash Flow
Sweep payments on the same terms as PBMC and PBE are required to make such
payments under the Big Easy Charter (and effectively will make such payments
directly to Cruise II on behalf of PBMC and PBE to the extent any such payments
are due). As further consideration for the Big Easy Purchase Option, ITG Vegas
and ITGPB are to make payments of $82,695 per month for the first 12 months and
$171,702.54 for the remaining term of the Big Easy Sub-Charter (i.e., the same
amounts as the charter hire payable by PBMC and PBE under the Big Easy Charter)
(the "Big Easy Additional Payments"). If ITG Vegas and ITGPB fail to make any
Big Easy Additional Payments when due, PBE may terminate the Big Easy Purchase
Option. Upon exercise of the Big Easy Purchase Option, ITG Vegas and ITGPB will
be entitled to credits against the exercise price of the Big Easy Purchase
Option for (i) ITG Vegas's investment in the Ship Mortgage Note (except to the
extent credited toward payment of the exercise price for the purchase option on
the Princess under the Princess Sub-Charter, described above), plus (ii) the
amounts of costs for the retrofit and improvements to the Big Easy which are
paid by ITG Vegas or ITGPB plus (iii) the aggregate amount of all Cash Flow
Sweep payments made under the Big Easy Sub-Charter, plus (iv) the portion of the
Big Easy Additional Payments made for the 13th month through the 60th month of
the term of the Big Easy Sub-Charter which would be considered principal
payments if such Additional Payments were payments of principal and interest on
a loan of $6,000,000 amortized over 48 months at an interest rate of 16.54%. In
addition, the exercise price for the assignment option may be offset by any
debts owing by PBMC to ITG Vegas and/or ITGPB.
Lease of Gaming Equipment. At Closing, ITG Vegas and ITGPB entered into a
Master Lease, together with three Lease Schedules (the "Gaming Equipment
Lease"), to lease certain new and used gaming equipment from PDS for use on the
two vessels. A portion of the equipment was previously owned and used by ITG
Vegas on the Princess and was sold to PDS at Closing, for $500,000, pursuant to
a Warranty Bill of Sale and Transfer Agreement and then leased back pursuant to
the Gaming Master Lease. Each Schedule of the Gaming Equipment Lease has a term
of three years from the time the equipment under that Schedule is delivered to
and accepted by ITG Vegas and ITGPB. Aggregate rent for all gaming equipment
will be approximately $1.4 million per year. ITG Vegas and ITGPB have an option
to purchase the leased equipment at the end of the term for a purchase price
equal to the fair market value of the equipment at such time (less, to the
extent any items of equipment were replaced during the previous 12-month period,
the excess of the then-current book value of the replacement equipment over the
book value of the old equipment at the time of replacement).
Guaranty Agreements. As a condition to entering into the PDS Transaction,
PDS required International Thoroughbred Breeders, Inc. ("ITB") and together with
its subsidiaries, collectively "the Company", ITG Vegas, ITGPB, PBMC and PBE to
guaranty performance of certain of the PDS Transactions. ITB, ITG Vegas and
ITGPB entered into Guaranty Agreements guarantying the obligations of PBMC and
PBE under the Princess Charter, Princess Master Lease, Big Easy Charter and Big
Easy Master Lease. ITB, PBMC and PBE entered into a Guaranty Agreement
guarantying the obligations of ITG Vegas and ITGPB under the Gaming Equipment
Lease.
Additional Security. As security for the performance by ITG Vegas under the
Guaranty Agreements described above and the Princess and Big Easy Sub-Charters,
ITG Vegas entered into a Collateral Assignment of the Maritime Office Complex
Lease and Operating Agreement and Other Lease as well as a Leasehold Mortgage
pursuant to which it assigned as collateral to Cruise I and Cruise II its rights
under its lease for space, and its operating rights, at the Port of Palm Beach.
10
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Limitation on Upstream Payments to ITB. Upstream payments by ITG Vegas to
the Company are limited under the Princess Sub-Charter and Big Easy Sub-Charter.
If the "YTD Result" (defined as 10/12ths of annualized EBITDAR from operation of
the two vessels) is greater than $8,000,000 at the end of any of the first three
fiscal quarters or EBITDAR from operation of the two vessels is greater than
$8,000,000 at the end of any fiscal year, and if ITG Vegas and ITGPB have made
all payments due under the Princess Sub- Charter and Big Easy Sub-Charter, ITG
Vegas may make (i) tax sharing payments to the Company (payments equal to the
federal income tax savings to ITG Vegas resulting from its inclusion in the
Company's consolidated group for federal income tax purposes) including any tax
sharing payments previously deferred as a result of the limitation under the
Princess Sub-Charter or Big Easy Sub-Charter, and (ii) other payments to the
Company in an amount which, together with charter hire payments in excess of
$100,000 per month to PBMC and PBE for the two vessels, shall not exceed
$200,000 per month (a "Restricted Payment"). If ITG Vegas is prohibited from
making any Restricted Payment for any month, once such payments are again
allowed, such Restricted Payment may be made to the Company, provided that the
total amount of Restricted Payments paid by ITG Vegas to the Company, PBMC and
PBE in any twelve-month period may not exceed $2,400,000.
(3) DESCRIPTION OF LEASING ARRANGEMENTS
As described in the footnote 2 above, on July 7, 2004 the Company and
several of its subsidiaries entered into sub lease transactions for two vessels
and charter transactions for equipment to be placed on the vessels. The sub
charter for the Palm Beach Princess, which is currently in service, will be
accounted for as a capital lease and the lease for the gaming equipment
currently aboard the vessel and the lease for new gaming equipment will be
accounted for as an operating lease.
Principal payments made will reduce the capital lease purchase liability
and the interest portion of each monthly payment will be expensed. Depreciation
expense will be recorded for the Palm Beach Princess using an estimated useful
life of 20 years. Sub charter fees of $50,000 per month plus 1% of gross
revenues of the Palm Beach Princess will be expensed as incurred.
The transaction also included the sub charter of the Big Easy and a lease
for gaming equipment aboard the vessel. PDS placed $6 million in a reserve
account which included $2,880,652 of our funds for the improvements to be made
to the Big Easy. When such improvements are completed the vessel will be
appraised and the accounting treatment for the transactions will be determined
at that time. Sub charter fees of $100,000 per month plus 1% of gross revenues
will be expensed as incurred at the time the vessel is placed in service. The
gaming equipment lease will be accounted for as an operating lease. The gaming
equipment lease requires interest only payments for the first six months. These
payments for interest will be capitalized until the vessel is placed in service
and subsequently amortized over the life of the equipment. Interest payments
made on the Big Easy sub-lease and payments made for the charter hire fees will
be capitalized until the vessel is placed in service and subsequently amortized
over the life of the vessel.
Vessels, plant and equipment at December 31, 2004 include the following
amounts for capitalized leases:
Vessel, Palm Beach Princess $ 17,500,000
Less: allowance for depreciation (566,687)
-----------
Capital Leases $ 16,933,313
===========
11
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 2004:
Period ending December 31,
2005 $ 4,168,315
2006 5,661,156
2007 5,661,156
2008 5,661,156
2009 3,302,341
-------------
Total minimum lease payments $ 24,454,124
Less: amount representing interest (10,454,124)
-------------
Present value of net minimum lease payment $ 14,000,000
=============
Operating Leases
The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2004:
Period ending December 31,
2005 $ 1,281,134
2006 1,362,146
2007 1,248,634
-------------
Total minimum lease payments $ 3,891,914
=============
(4) ITG VEGAS, INC. CHAPTER 11 PLAN OF REORGANIZATION
On January 3, 2003, ITG Vegas, Inc. ("ITG Vegas"), our subsidiary operating
the Palm Beach Princess, and Palm Beach Maritime Corp.("PBMC") (formerly MJQ
Corp.), which owned the Palm Beach Princess vessel, an entity owned by Francis
W. Murray, filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the Southern District of Florida, Palm Beach Division (the "Bankruptcy
Court"), In re: ITG Vegas, Inc., Case No. 03-30038. The petition did not cover
the Parent company, ITB, nor any other of ITB's subsidiaries. The Palm Beach
Princess continued to operate as "debtor-in-possession" under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. We had previously entered
into a Master Settlement Agreement to purchase from the Chapter 11 Trustee for
the Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee") the
promissory note of Palm Beach Maritime Corp. for $13.75 million. We did not have
funds necessary to complete that purchase by January 6, 2003, the date required
for payment of the balance of such purchase price. Therefore, on January 3,
2003, in order to protect our invested deposits and operation of the vessel, ITG
Vegas (together with Palm Beach Maritime Corp) filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code.
On September 12, 2003, the Bankruptcy Court issued an order confirming the
Amended Joint Chapter 11 Plan of Reorganization in the Chapter 11 cases of ITG
Vegas, Inc. and Palm Beach Maritime Corp. (ITG Vegas, Inc. and Palm Beach
Maritime Corp. being hereinafter called the "Debtors"). The Plan was a plan of
reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code which was
jointly proposed by the Debtors. As of October 15, 2003, the effective date of
the Plan, all claims, debts, liens, security interests and encumbrances of and
against the Debtors and against all property of their respective bankruptcy
estates, which arose before confirmation, were discharged, except as otherwise
provided in the Plan or confirmation order. Post-confirmation, each of the
Debtors continued as reorganized debtors.
12
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
With the consummation of the PDS Transactions described above in Note 2,
all of our and the Debtors' indebtedness to the Brennan Trustee was paid in
full.
On July 17, 2004, the Bankruptcy Court issued a final decree closing the
Debtors' Chapter 11 cases.
(5) NOTES RECEIVABLE
(A) Second Cherry Hill Note
A portion of the proceeds from the sale of the non-operating former El
Rancho Hotel and Casino in Las Vegas to Turnberry/Las Vegas Boulevard, LLC
("Turnberry") on May 22, 2000 was used by us to purchase a promissory note of
the buyer in the face amount of $23,000,000 (the "Las Vegas Note"). The interest
rate under such note was to be adjusted from time to time since the interest
actually payable was to be dependent upon, and payable solely out of, the
buyer's net cash flow available for distribution to its equity owners
("Distributable Cash"). After the equity investors in the buyer had received
total distributions equal to their capital contributions plus an agreed upon
return on their invested capital, the next $23 million of Distributable Cash was
to be paid to us. We were to receive payments under the note equal to 33 1/3% of
all Distributable Cash until the maturity date, which was to occur on the 30th
anniversary of our purchase of the note. We had the option to convert the
promissory note into a 33 1/3% equity interest in the buyer during a six month
period beginning at the 15th anniversary of the issuance of the note. If not
then converted, the note was to be converted into a 33 1/3% equity interest in
the buyer at the 30th anniversary of its issuance. Fair value and the
collectability of this note was determined by a real estate appraisal completed
in July, 2003 for a bank in anticipation of financing for Turnberry.
On June 16, 2004, the Company sold the Las Vegas Note to Cherry Hill at El
Rancho LP (the "Buyer"), a limited partnership which is affiliated with the
maker of the Las Vegas Note.
In exchange for the Las Vegas Note, the Company received cash payments from
the Buyer of $2.8 million, a non-recourse loan from Turnberry Development, LLC,
an affiliate of the Buyer, in the amount of $5 million and a promissory note
issued by Soffer/Cherry Hill Partners, L.P. ("Cherry Hill Partners"), another
affiliate of the Buyer, in the principal amount of $35,842,027 (the "Second
Cherry Hill Note"). The principal amount of the Second Cherry Hill Note equals
the difference between the unpaid principal plus all accrued and unpaid interest
(at 22%) under the Las Vegas Note, less the $2.8 million in purchase price
payments and $5 million non-recourse loan paid to the Company. As further
consideration, the Company received the right to use aircraft owned or leased by
the Buyer or its affiliates, for up to 64 hours in total, which the Company
valued at approximately $224,000.
The Company is not liable for repayment of the principal of the $5 million
loan included in the foregoing consideration. However, the Company is obligated
to pay interest and fees on such loan aggregating $600,000 per year ($50,000 per
month) for five (5) years.
The Second Cherry Hill Note received by the Company matures in 2015 and is
similar to the Las Vegas Note which was sold, in that it generally is payable
prior to maturity only from distributable cash of the maker. The maker under the
Second Cherry Hill Note is one of the principal partners in the entity which
purchased the Garden State Park real property from a Company subsidiary in
November of 2000, and such obligor will only have funds with which to pay the
Second Cherry Hill Note out of its profits from the development of Garden State
Park. The development of Garden State Park, located in Cherry Hill, New Jersey,
was delayed as a result of community opposition to certain elements of the
development plan, and, while the Company believes that the development plan is
now moving forward, the timing and amount of profits there also remain
uncertain. The Company already holds a promissory note in the face amount of $10
million, received from the purchaser of Garden State Park in connection with the
sale of such real property, which the Company expects will be fully paid in
time. While the Company expects that note to be fully paid, it is not optimistic
that this Second Cherry Hill Note will be fully paid, and accordingly, the
Company has written down the Second Cherry Hill Note (defined above) on its
books. The interest portion of the Las Vegas Note amounting to approximately
$20,866,000 has never been included as income on the Company's books, therefore
the interest capitalized under the Second Cherry Hill Note is not subject to a
write down. The remaining portion of the Second Cherry Hill Note has been
written down to $4,578,651 which resulted in an impairment charge of the new
note of $12,786,589, recorded in the 4th quarter of the Company's June 30, 2004
fiscal year and additional impairment charges of $200,000 and $150,000,
respectively, recorded during the first and second quarters of
13
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fiscal 2005. The Company had previously recorded deferred income of $2,786,589
on the original sale of the El Rancho property in May, 2000, which amount was
used to reduce the impairment charge to $10,000,000 at June 30, 2004. In its
assessment of the fair value of the Second Cherry Hill Note, the Company
estimated that its share of proceeds from the sale of the El Rancho property
prior to July 31, 2005 would generate approximately $500,000. As of December 31,
2004 the Company has recorded an impairment loss on this note of $350,000 and if
a sale does not occur prior to July 31, 2005 it is anticipated that the Company
will take an additional impairment write down against the Cherry Hill Note of
approximately $150,000 in this fiscal year ending June 30, 2005.
The Second Cherry Hill Note is secured by a pledge of stock owned by
Raymond Parello, an affiliate of the Buyer, in the Palm Beach Empress, Inc.,
representing fifty percent (50%) of the stock in that company. Palm Beach
Empress, Inc. is the entity formed to acquire the Big Easy, the second vessel
which is chartered to a subsidiary of the Company, and which the Company expects
to operate as a casino cruise ship, similar to the operation of the casino
"cruise to nowhere" business conducted by a subsidiary of the Company since
April of 2001. The other fifty percent (50%) of the stock in Palm Beach Empress,
Inc. is owned by PBMC, a corporation owned by Francis W. Murray, the Company's
Chief Executive Officer. PBMC presently owns and charters to a subsidiary of the
Company the Palm Beach Princess vessel, the operation of which is the Company's
primary operating business.
Mr. Parello will have the right to acquire the Second Cherry Hill Note from
the Company in exchange for his stock in Palm Beach Empress, Inc. Such "put"
option held by Mr. Parello (giving him the right to put his stock in Palm Beach
Empress, Inc. to the Company in exchange for the Cherry Hill Note) will
effectively limit the value to the Company of the Second Cherry Hill Note to the
value of Mr. Parello's one-half interest in Palm Beach Empress, Inc. Mr.
Parello's put right will be exercisable upon the later to occur of (1) payment
by or for the account of Cherry Hill Partners of $483,205.48 under the Second
Cherry Hill Note, and (2) payment of the entire principal balance of the
non-recourse loan received by our Orion subsidiary in the principal amount of $5
million, referred to above (upon which repayment the Company's obligation to pay
interest and fees of $600,000 per year on such loan would end). Such put option
is set forth in the Shareholders' Agreement among Palm Beach Empress, Inc.,
Raymond Parello and PBMC, to which our Orion subsidiary has joined solely for
the purpose of confirming its agreement to the put option.
In the event Mr. Parello receives any dividends or other distributions on,
or proceeds from, any sale of his shares in Palm Beach Empress, Inc., the same
will be applied as a mandatory prepayment of the Second Cherry Hill Note.
In addition, if, before July 31, 2005, there is a sale or other disposition
of the El Rancho Property, or a sale or other disposition of the entire direct
or indirect interest of the owner of such property, then fifty percent (50%) of
any profit in excess of $10 million realized on such sale also shall be paid to
us as a mandatory prepayment of the Second Cherry Hill Note. The July 31, 2005
deadline by which a sale of the El Rancho Property would have to occur in order
to trigger a possible prepayment to the Company will be extended to January 31,
2006 if a portion, but less than all, of the El Rancho Property or of the
Owner's direct or indirect ownership interest is sold before July 31, 2005.
(B) Original Cherry Hill Note
A portion of the proceeds from the sale on November 30, 2000 of our Garden
State Park property in Cherry Hill, New Jersey, to Realen-Turnberry/Cherry Hill,
LLC ("Realen") was paid in the form of a promissory note in the face amount of
$10 million (the "Note.") Under the Note, the interest rate will be adjusted
from time to time since the interest actually payable will be dependent upon,
and payable solely out of, the buyer's net cash flow available for distribution
to its equity owners ("Distributable Cash"). After the buyer's equity investors
have received aggregate distributions equal to their capital contributions plus
an agreed upon return on their invested capital, the next $10 million of
Distributable Cash will be paid to us. We will thereafter receive payments under
the Note equal to 33 1/3% of all Distributable Cash until the maturity date,
which occurs on the 15th anniversary of the issuance of the Note. We may convert
the promissory note, at our option, into a 33 1/3% equity interest in Realen
during the six month period prior to the 15th anniversary of the issuance of the
Note. If not then converted, the Note will be payable at maturity on said 15th
anniversary in an amount equal to (i) the difference, if any, between $10
million and total payments previously made to us under the Note and (ii) 33 1/3%
of any excess of the fair market value of Realen's assets over the sum of its
liabilities (other than the Note) and any unreturned equity investment of its
owners. Fair value and the
14
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
collectability of this note was determined by a real estate appraisal completed
in March, 2002 for a bank in anticipation of financing for Turnberry.
(6) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES
The following items are classified as deposits and other assets -
non-related parties:
December 31, 2004 June 30, 2004
------------------- -----------------
Long-Term Prepaid Loan Costs $ 958,605 $ 0
Port Lease Rights 250,000 250,000
Other Misc. Assets 84,975 84,975
------------------- -----------------
Total $ 1,293,580 $ 334,975
=================== =================
(7) DEPOSITS AND OTHER ASSETS - RELATED PARTIES - NET
The following items are classified as Deposits and Other Assets - Related
Party Transactions (See Note 14):
December 31, June 30,
2004 2004
---------- ---------
Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,034,405 $ 2,034,405
Loan Transferred from Golf Course Project to
OC Realty, LLC 735,584 735,584
Accrued Interest on Loans to the
Ft. Lauderdale Project(OC Realty, LLC) 1,328,105 911,350
Purchase Option Deposits on Vessels 3,845,117 0
Goodwill on Purchase of GMO Travel 193,946 193,946
Advances to PBMC 0 616,534
Note Receivable from Francis W. Murray 0 2,600,749
Deposits on new lease for M/V Palm Beach
Princess and the Big Easy with. Palm Beach
Maritime Corp.("PBMC")(formerly MJQ Corp.) 0 880,783
Accounts Receivable from Francis W. Murray 0 32,751
Loans to Francis W. Murray 0 93,000
Accrued Interest Transferred from Golf Course
Project to OC Realty, LLC 0 287,327
Accounts Receivable from Frank Leo 0 24,512
---------- ----------
Total Deposits and Other Assets - Related Parties $ 8,137,157 $ 8,410,941
========== ==========
15
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) NOTES AND MORTGAGES PAYABLE
Notes and Mortgages Payable are summarized below:
December 31, 2004 June 30, 2004
Interest % ---------------------- -------------------------
Per Annum Current Long-Term Current Long-Term
---------- --------- ---------- ----------- -----------
International Thoroughbred Breeders,
Inc.:
- ------------------------------------
Chapter 11 Trustee (the "Brennan
Trustee") for the Bankruptcy Estate of
Robert E. Brennan (A) 12% $ -0- $ -0- $ 4,038,838 $ 4,024,142
Francis X. Murray (B) 8% 159,164 -0- 159,164 -0-
William H. Warner (B) 12% 24,000 -0- 24,000 -0-
Other Various 33,207 -0- 25,000 -0-
ITG Vegas, Inc.:
- ------------------------------------
International Game Technology (C) 8% 122,489 10,459 122,174 71,685
Other Various 23,200 -0- -0- -0-
Garden State Park:
- ------------------------------------
Service America Corporation (D) 6% 160,000 -0- 160,000 -0-
-------- --------- ----------- -----------
Totals $ 522,060 $ 10,459 $ 4,529,176 $ 4,095,827
Net Liabilities of Discontinued
Operations - Long Term (160,000) -0- (160,000) -0-
Related Party Notes (183,164) -0- (183,164) -0-
-------- --------- ----------- -----------
Totals $ 178,896 $ 10,459 $ 4,186,012 $ 4,095,827
======== ========= =========== ===========
The effective Prime Rate at June 30, 2004 was 4%.
(A) In connection with the PDS transactions, on July 7, 2004 the
outstanding principal balance was paid by PBMC directly to the Brennan Trustee
to satisfy this obligation. (See Note 2)
(B) On March 1, 2003, we issued a promissory note for a line of credit up
to $225,000 bearing interest at 8% to Francis X. Murray. The outstanding balance
on the line of credit note at December 31, 2004 was $159,164 and accrued
interest was $22,650. In fiscal 2003, we issued promissory notes for $24,000
bearing interest at 12% to William H. Warner, Secretary of the Company. Interest
is paid monthly on the note to Mr. Warner. The proceeds from Mr. Murray's and
Mr. Warner's notes were used as working capital.
(C) On December 22, 2003, ITG Vegas, Inc. issued a twenty-four month
promissory note in the amount of $231,716 bearing interest at 8.5% to
International Game Technology for the purchase of gaming equipment. A payment of
$30,000 was paid on delivery of the equipment and 24 consecutive monthly
installments of $10,532.85 are to be paid on the balance. At December 31, 2004,
the principal balance on the International Game Technology note was $132,948.
(D) In connection with the January 28, 1999 lease transactions for the
Garden State Park facility, the Company purchased a liquor license located at
Garden State Park owned by an unaffiliated third party, Service America
Corporation (the "Holder"), for $500,000 financed by a five (5) year promissory
note at a 6% interest rate. Yearly principal payments of $80,000 plus interest
were due on December 28, 2002 and December 28, 2003. On February 1, 2005, the
Company negotiated a new promissory note with Service America in the amount of
the outstanding principal balance of $160,000 plus unpaid interest accrued from
May 14, 2002 at 6% in the amount of $26,000. The new promissory note in the
amount of $186,000 at a 6% interest rate will be paid in monthly installments of
$10,000 which will continue until all outstanding principal
16
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and accrued interest is paid in full. It is estimated that this note will be
paid in full in August 2006. The Company is continuing to negotiate new terms
under this note and if successful the creditor may seek to enforce payment of
the note. In additional to the principal amount due of $160,000 the accrued but
unpaid interest is approximately $25,000 as of December 31, 2004.
(9) COMMITMENTS AND CONTINGENCIES
See Note 2 for additional commitments and contingencies with respect to the
PDS Transaction.
See Note 14 for additional commitments and contingencies of the Company and
transactions with related parties.
In connection with the January 28, 1999 sale and lease transactions for the
Garden State Park facility, we purchased a liquor license owned by an
unaffiliated third party, Service America Corporation, for $500,000 financed by
a five (5) year promissory note at a 6% interest rate. At December 31, 2002, the
unpaid principal balance was $160,000. Yearly principal payments of $80,000 plus
interest were due on December 28, 2002 and December 28, 2003 and have not been
paid. The Company entered into a sale and lease agreement for the lease of our
premises from Jan. 28, 1999 to May 29, 2001 and the sale of a 10 acre portion to
be used as an OTB facility. Under the terms of our sale and lease agreement the
lessee/buyer purchased the liquor license for $100,000 and was obligated to
return it to us in exchange for a repayment of the $100,000 price if, at the
expiration of the lease, June 27, 2002, it did not have a use for the liquor
license at the OTB facility. During the three year period Jan. 28, 1999 to Jan.
28, 2002 no OTB facility was built and the lessee/buyer did not have a use for
the liquor license at that property. By the terms of the contract the Company
has the right to re-acquire the liquor license for $100,000 and has exercised
such right, however the lessee/buyer has refused to perform. The Company
believes it will need to take legal action to enforce its right to the liquor
license.
Through ITG Vegas, we have negotiated with the Port of Palm Beach District
a new operating agreement and lease of space in a new office complex constructed
at the Port of Palm Beach adjacent to a new cruise terminal effective, as
modified, May 5, 2003. The term of the initial lease is five years at $183,200
per year payable monthly. Additionally, we have the right to renew the lease for
two (2) additional terms of 5 years each. We are also required to make tenant
improvements to the new space in a minimum amount of $333,000, however that the
actual cost to make the improvements was approximately $950,000. We will have
the right to a credit of up to the minimum amount of improvements required of
$333,000 of construction costs against the initial term of our five year lease.
Through our subsidiary, Royal Star Entertainment LLC, we have negotiated
with the Port of Palm Beach District a second Operating Agreement dated December
18, 2003, as subsequently amended. This Operating Agreement will permit us to
operate the Empress II (subsequently renamed the "Big Easy") in passenger
service from the Cruise Terminal at the Port, with certain berthing and
scheduling priorities. The initial term of this Operating Agreement is five
years from the date of commencement of sailings by the Big Easy from the Port,
with subsequent renewal options of four and three years.
On August 6, 2004 we amended the Lease and Operating Agreement with the
Port of Palm Beach in order to permit our construction of a passenger gangway
system and destination signage on Port property and our refurbishment and
upgrading of the passenger cruise terminal facilities, which measures, we
believe, will enhance our ability to promote and market our cruise services. We
will receive a wharfage credit from the Port of Palm Beach in the amount of
$75,000 with respect to our construction of the gangway. In addition, we agreed
to pay the Port of Palm Beach $.50 per vehicle parked in the passenger parking
lot at the Port, for a minimum period of six months beyond the commencement of
cruise services at the Port of Palm Beach by the Big Easy.
On March 1, 2004 we entered into a Dockage Space Agreement between the
Company and the City of Riviera Beach for approximately 160 feet of concrete
dock space at the City Marina. The term is for one year for a fee of $11,000 per
month. The lease is renewable subject to the approval of the City. This
Agreement is intended only for the purpose of making available the assigned
space for vessels other than a day-cruise gaming ship. Further, the Company
understands that in the event it wishes to dock a day-cruise gaming ship that it
will be required to enter into a new agreement with the City.
17
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The PDS Transaction involved, among other things, our chartering a second
vessel, the Big Easy. In addition to those costs recorded as of December 31,
2005 we have committed approximately $6,300,000 towards costs of refurbishing
and retrofitting the Big Easy vessel to date. Costs associated with refurbishing
and retrofitting the Big Easy vessel and placing it in service (including
marketing expenses and other soft costs), are expected to amount to
approximately $12 million, $6 million of which has been provided for by means of
an escrow of our $2,880,652 payment and proceeds of the PDS Transactions.
Additional amounts necessary to begin operation of the Big Easy vessel are
expected to be provided from working capital of our ITG Vegas subsidiary and a
portion of the financing for $2.85 million received from PDS on January 17,
2005. ITG Vegas' ability to generate sufficient working capital with which to
pay such costs may be adversely affected by delays or cost overruns in
connection with refurbishing and refitting the Big Easy and by weather related
and other uncertainties affecting its operations. As indicated by the table
below, our debt service requirements have increased significantly with the PDS
financing due to the increase in amounts of debt and rates involved. The
increase in the amount is attributed in part to the arrangement for procurement
and refurbishment for a second vessel, the Big Easy. We are dependent upon the
expected additional revenue from the operations of the second vessel to cover
the increased financing costs.
During the period that our subsidiary, ITG Vegas, Inc. ("ITGV") was in
bankruptcy (January 3, 2003 to October 15, 2004) and thereafter, the 8 employees
previously paid by the holding company, International Thoroughbred Breeders,
Inc. ("ITB"), were paid by MJQ, Inc. ("MJQ"),a company owned by Francis W.
Murray, our CEO. The wage expense was recorded by ITB and an accounts payable
was recorded to MJQ. MJQ was subsequently fully reimbursed by ITB for the wages.
This arrangement was the result of the restrictions placed on the flow of cash
to ITB from ITGV by the bankruptcy court. As a result, employer contributions
and employee deferrals to the ITB 401-K plan were suspended. The Company has not
yet decided which action, if any, should be taken with respect to the retirement
benefits.
The following summarizes commitments on non-cancelable contracts and leases as
of December 31, 2004:
Twelve Months Ended December 31,
---------------------------------------------------------------- There-
2005 2006 2007 2008 2009 after Total
---------- ---------- ---------- --------- --------- ------- ----------
Capital Lease - PBP $ 4,168,315 $ 5,661,156 $ 5,661,156 $5,661,156 $3,302,341 $ -0- $ 24,454,124
Lease - Big Easy 2,997,378 3,620,430 3,620,430 3,620,430 2,111,918 -0- 15,970,586
Notes and Mortgages:
Principal 656,709 -0- -0- -0- -0- -0- 656,709
Interest 26,184 -0- -0- -0- -0- -0- 26,184
Deferred Interest Payments 300,000 600,000 600,000 600,000 450,000 -0- 2,550,000
Employee Contracts 688,477 -0- -0- -0- -0- -0- 688,477
Operating Leases:
Casino Equipment 1,281,134 1,362,146 1,248,634 -0- -0- 3,891,914
Administrative & Office 1,557,792 223,911 144,401 45,046 -0- -0- 1,971,150
Purchase Obligations-Big Easy 4,947,000 -0- -0- -0- -0- -0- 4,947,000
Purchase Obligations-Other 125,280 61,006 61,006 61,006 61,006 238,936 608,240
Other Long-Term Debt -0- 218,242 -0- -0- -0- -0- 218,242
---------- ---------- ---------- --------- --------- ------- ----------
Total $16,748,269 $11,746,891 $11,335,627 $9,987,638 $5,925,265 $238,936 $ 55,982,626
========== ========== ========== ========= ========= ======= ==========
(10) LEGAL PROCEEDINGS
We are a defendant in various lawsuits incidental to the ordinary course of
business. It is not possible to determine with any precision the probable
outcome or the amount of liability, if any, under these lawsuits; however, in
the opinion of the Company and its counsel, the disposition of these lawsuits
will not have a material adverse effect on our financial position, results of
operations, or cash flows.
18
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2004, in assessing the fair value of financial
instruments, the Company has used a variety of methods and assumptions, which
were based on estimates of market conditions and loan risks existing at that
time. For certain instruments, including cash and cash equivalents, investments,
non- trade accounts receivable and loans, and short-term debt, it was estimated
that the carrying amount approximated fair value for the majority of these
instruments because of their short-term maturity. The carrying amounts of long
term debt approximate fair value since the Company's interest rates approximate
current interest rates. On our original Cherry Hill note receivable in the
amount of $10 million, we have elected to defer the gain on the sale and the
interest to be accrued until such time that collectability can be determined. On
our second Cherry Hill note receivable we have recorded impairment losses of
$200,000 and 150,000, respectively, during the first and second quarters of
Fiscal 2005 to reflect the estimated current market value of this note. In its
assessment of the fair value of the Second Cherry Hill Note, the Company
estimated that its share of proceeds from a sale of the El Rancho property prior
to July 31, 2005 would generate approximately $500,000. If a sale does not occur
prior to July 31, 2005 it is anticipated that the Company will take an
additional impairment write down against the Cherry Hill Note of approximately
$150,000 in this fiscal year ending June 30, 2005. (See Note 5)
(12) EXTRAORDINARY ITEM
The Master Settlement Agreement with the Chapter 11 Trustee for the
Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee") included a final
settlement by the Brennan Trustee with numerous parties. Among those parties
were Leo Equity Group, Inc., Michael J. Quigley, III and Palm Beach Maritime
Corp. ("PBMC") (formerly MJQ Corp.). During the quarter ended March 31, 2002 the
Company charged Leo Equity Group $3 million and PBMC $1 million for their
portion of expenses incurred by us and a success fee for the efforts of
International Thoroughbred Breeders, Inc. in connection with the final
settlement with the Brennan Trustee. Prior to our acquisition of Leo Equity
Group, Inc., Leo Equity Group, Inc. assigned to us certain receivables in the
approximate amount of $3 million, including the receivables of approximately
$2.6 million due it from Michael J. Quigley III, in payment of this obligation.
We had deferred all income from these transactions until such time as payment
was received. During the first quarter of Fiscal 2005 we received payment for
the previously deferred income in the amount of $4,000,000.
(13) TREASURY SHARES
On December 13, 2002, the Company issued a promissory note in the amount of
$1,648,403 to purchase 3,228,146 shares of its Common Stock under the control of
the Chapter 11 Trustee for the bankruptcy estate of Robert E. Brennan. In
connection with our Chapter 11 Plan of Reorganization, effective October 15,
2003, we purchased an additional 450,000 shares for $225,000, 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 was payable
over the next three years together with interest at 12% per annum. On July 7,
2004 the Company paid in full the amount due with respect to the purchase of all
such shares. (See Note 2).
On July 28, 2004 Mr. Francis W. Murray exercised his option to purchase 2
million shares of our Common Stock at an exercise price of $0.26875 per share.
The Company issued 2 million shares of Treasury stock it held in exchange for
proceeds of $537,500. Also on July 28, 2004 the Company issued 689,730 Treasury
shares to Mr. Murray in payment of the deferred salary of $344,865 we owed to
him for the period from January 3, 2003 until November 18, 2003. The issuance of
shares for deferred salary was approved by the Board of Directors at a time when
the market value was $.50 per share.
On August 31, 2004 the Company issued 73,339 Treasury shares to Robert
Quigley in payment of the deferred salary of $36,670 we owed to him for the
period from January 3, 2003 until November 18, 2003. The issuance of shares for
deferred salary was approved by the Board of Directors at a time when the market
value was $.50 per share.
(14) RELATED PARTY TRANSACTIONS
See Footnote 2 for related party transactions regarding the PDS
Transaction.
19
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effective December 1, 2000, we entered into a five-year employment contract
with Francis W. Murray, our Chief Executive Officer. The contract provides for
annual compensation of $395,000, a $1,500 monthly automobile expense allowance,
a country club annual dues allowance and travel and entertainment reimbursements
for business expenses reasonably incurred by him in addition to participation in
various other benefits provided to our employees. As part of his employment
contract, Mr. Murray was awarded an option to purchase 2,000,000 shares of our
Common Stock. On January 4, 2003, we began deferring payments of compensation
due to Mr. Murray due to a lack of funds resulting from the institution of
proceedings by our subsidiary ITG Vegas, under Chapter 11 of the bankruptcy
code. In November, 2003 the Company's Board of Directors approved issuance of
the Company's Common Stock, valued at $0.50 per share, in exchange for the
deferred salary of Mr. Murray. In July, 2004, Mr. Murray elected to receive his
salary of $344,865 accrued from January 3, 2003 until November 18, 2003, which
had been deferred, in the form of 689,730 shares of the Company's Common Stock.
On July 28, 2004 Mr. Francis W. Murray exercised his 2 million options at an
exercise price of $0.26875 per share. The Company issued 2 million shares of
Treasury stock it held in exchange for proceeds of $537,500. Also on July 28,
2004 the Company issued 689,730 Treasury shares to Mr. Murray in exchange for
the deferred salary of $344,865 which occurred from January 3, 2003 until
November 18, 2003.
During the third quarter of Fiscal 2001, we invested in two projects in
which our Chairman, President and Chief Executive Officer, Francis W. Murray,
also has a pecuniary interest. In connection with one such project, the Board of
Directors approved advances, as loans, of up to $1.5 million to a limited
partnership in which Francis W. Murray owned, at that time, an 80% equity
interest and owned the general partner, the proceeds of which were to be used to
pay costs and expenses for development of a golf course in Southern California.
In Fiscal 2003, the limited partnership's indebtedness to us, including
principal and accrued interest, in the amount of $929,541 was assumed by OC
Realty, LLC, a Florida limited liability company which is owned by Francis W.
Murray and which owns the second real estate project (Ocean Club) described
below. Such indebtedness became due December 31, 2004 and bears an interest rate
of 6% and is now scheduled to be paid upon the completion of the Ocean Club
project.
In the second project, Mr. Murray is participating in the development of an
oceanfront parcel of land, located in Fort Lauderdale, Florida, which has
received all governmental entitlements from the City of Fort Lauderdale and the
state of Florida to develop a 14-story building to include a 5-story parking
garage, approximately 6,000 square feet of commercial space and a residential
9-story tower. The property had been owned by MJQ Development, LLC, which was
owned by Michael J. Quigley, III until December 26, 2002 when the property was
acquired by OC Realty, LLC, the entity owned by Mr. Murray. Mr. Quigley has no
relationship to Robert J. Quigley, one of our directors. OC Realty is developing
a condominium hotel resort on the property as discussed above. As of December
31, 2004, we had lent $2,034,405 in total to MJQ Development and we have accrued
interest in the amount of $1,360,143 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 (which had been expected to be up to $6.5 million) plus a 15% per annum
return thereon. At the time the loans to MJQ Development were approved, Mr.
Murray stood to receive a substantial contingent benefit from MJQ Development
for his participation in the project. Fair value and collectability of the
original investment of $2,034,405 and accrued interest was determined by the
joint venture through projections evidencing our collection upon build out and
sale of the project.
In order to raise the capital with which to proceed in the development of
the Ft. Lauderdale property, OC Realty has placed the Ft. Lauderdale property in
a joint venture in connection with which the other joint venture partner was to
fund up to $6.5 million for development and receive a 50% equity interest. Our
loan and participation interest will be payable out of OC Realty's 50% share of
distributions after repayment of debt and the new investor's capital investment
and 15% annual return thereon. However, the joint venture partner has
discontinued its funding for the project. OC Realty has loaned funds to the
joint venture to meet its current requirements at a 20% annual interest rate. In
addition, OC Realty is in discussions with third parties to replace its joint
venture partner and is considering entering into a development agreement with a
recognized developer to aid the marketability of the project, however, such
20
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
arrangements will vary from the arrangements cited above with its prior 50%
joint venture. The Company has assessed the collectability of the advances made
to OC Reality based on comparable sales of like units in the marketplace which
suggest demand is strong and prospective sales of the project's inventory or
units will be more than adequate to meet its obligations including our
outstanding notes payable.
At a meeting of the Board of Directors of the Company held on June 29, 2004
the board authorized reimbursement to Francis W. Murray for tax consequences he
would incur as a result of the PDS Transaction. The amount and form of such
reimbursement will be determined by the full board of directors when data as to
such tax consequences becomes available.
On July 7, 2004, the Company entered into a five-year charter of two
vessels, the Palm Beach Princess and the Empress II (subsequently renamed the
Big Easy) , under the terms described in footnote 2 above. The vessels are
chartered to us by PBMC and Palm Beach Empress, Inc. Mr. Murray is sole owner of
PBMC and a 50% owner of Palm Beach Empress, Inc. (See Note 2.)
During the first quarter of fiscal 2005, the Company re-entered the equine
business for which the Company was originally established and purchased several
horses of different ages. The Company has purchased several horses, the majority
being one and two year olds, from Francis W. Murray at prices to be determined
by a current appraisal of their values. Payment for such horses will only be
made out of profits realized from the horses purchased from Mr. Murray, if any.
It is our plan to bring these horses into racing if we consider them competitive
following the training period to take advantage of the projected increase in
purses as a result of the introduction of slot machines in several state
jurisdictions.
(15) SUBSEQUENT EVENTS
(A) On January 5, 2005, Royal Star Entertainment, LLC ("RSE"), a
wholly-owned indirect subsidiary of the Company, executed and delivered a
promissory note, amended as of January 17, 2005 in the original principal amount
of $2,850,000 (the "Note"), representing a loan funded on January 17, 2005 (the
"Loan") in such principal amount. Also on January 5, 2005, the Company entered
into a Guaranty Agreement dated as of January 6, 2005, guarantying payment of
all sums due and to become due by RSE under the Note. The Note is also secured
by RSE's Preferred Mortgage dated as of January 17, 2005, encumbering the vessel
owned by RSE and known as the "Royal Star." The lender and holder of the Note
and Mortgage is Cruise Holdings IV, LLC, an affiliate of PDS Gaming Corporation.
The Loan evidenced by the Note will be repayable on January 17, 2006.
Interest on the Loan will be payable monthly at a rate of 10% per annum. At
closing, RSE paid a closing fee to the lender in an amount equal to $78,375, or
2.75% of the principal amount of the Note. The sole member of RSE is ITG Vegas,
Inc., an indirect wholly owned subsidiary of the Company, and the proceeds of
the Loan are to be used to make leasehold improvements under the Maritime Office
Complex Lease and Operating Agreement between ITG Vegas and the Port of Palm
Beach District, or to make improvements to the vessel Royal Star or to the
vessel Big Easy (formally known as Empress II), a vessel which another
subsidiary of ITG Vegas charters under a capital lease and charter. The Company
and ITG Vegas continue to explore venues for use of the vessel Royal Star in a
casino cruise operation. If RSE prepays the Note in connection with a sale of
the vessel Royal Star, it will be required to pay a 5% prepayment premium to the
lender.
On January 5, 2005, RSE entered into a Master Lease Agreement and Lease
Schedule No. 1, each dated as of January 6, 2005 (collectively, the "Lease")
with PDS Gaming Corporation providing for the lease by RSE of slot machines to
be located on the vessel Royal Star. Also on January 5, 2005, the Company
entered into a Guaranty Agreement dated as of January 6, 2005, agreeing to
guaranty payment by RSE of all sums becoming due under the Lease. The term of
the Lease is three years, with rental payments of $11,879 per month for the
first four months and $95,351.73 for the next thirty-two months. RSE will also
pay a closing fee of $57,020.74, and a security deposit in the amount of
$95,351.73.
The foregoing is a summary of the principal terms of RSE's loan and lease
transactions. The summary does not purport to be a complete summary and is
qualified in its entirety by reference to the documents which are filed as
exhibits to the Company's Form 8-K dated January 6, 2005.
21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Forward-Looking Statements
We have made forward-looking statements in this Form 10-Q, including the
information concerning possible or assumed future results of our operations and
those preceded by, followed by or that include words such as "anticipates,"
"believes," "expects," "intends," or similar expressions. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. You should
understand that the following important factors, in addition to those discussed
under "Risk Factors" in the Company's Annual Report on Form 10-K, filed for the
year ended June 30, 2004, could affect our future results and could cause those
results to differ materially from those expressed in our forward-looking
statements:
o general economic and business conditions affecting the tourism
business in Florida;
o competition;
o execution of our new business strategy;
o changes in laws regulating the gaming industry;
o the outcome of a pending vote on March 8, 2005 in Miami-Dade and
Broward Counties in Florida that would allow slot machines at three
(3) race tracks and one Jai-alai in Broward County and two (2)
racetracks and one Jai-alai in Dade County. Broward County is
contiguous to Palm Beach County and Miami-Dade County is contiguous to
Broward County.
o fluctuations in quarterly operating results as a result of seasonal
and weather considerations;
o events directly or indirectly relating to our business causing our
stock price to be volatile; and
o delays or cost-overruns in connection with refurbishing and refitting
the vessels, the Big Easy and the Royal Star, which we plan to place
in service.
Background
The Company, through its wholly owned subsidiary, operates an offshore
gaming vessel, the M/V Palm Beach Princess which we sub charter. This vessel
sails twice daily from the Port of Palm Beach, Florida and, once beyond the
state territorial water's limits, engages in a casino gaming business. The
business of operating the cruise vessel includes a variety of shipboard
activities, including dining, music and other entertainment as well as casino
gaming. We are expanding that line of business, for which on July 7, 2004 we
entered into a sub bareboat charter for a second vessel, the Empress II
(subsequently renamed the "Big Easy") . After refurbishing and retrofitting that
vessel, we expect to place the Big Easy in service, during our 3rd fiscal
quarter which ends on March 31, 2005. The Big Easy will be berthed and operated
from the Port of Palm Beach.
On July 7, 2004 the Company and several of our subsidiaries entered into a
sublease and sub bareboat charter and equipment lease transaction for the
purpose of operating and acquiring the vessels Palm Beach Princess and the Big
Easy. The Palm Beach Princess sub charter is being accounted for as a capital
lease. The accounting treatment for the Big Easy sub charter will be determined
after completion of improvements and appraisal of the vessel. Through these
transactions, payments were made on our behalf to prepay in full all
indebtedness to the Brennan Trustee. (This transaction is more fully disclosed
in footnote 2 of the financial statements). We intend to expand our gaming
operations by placing the Big Easy in operations during our third fiscal quarter
and we continue to explore other gaming opportunities both domestically and
internationally. During our last fiscal year we purchased a third vessel, M/V
Royal Star, however, this ship will need extensive improvements and outfitting
before being placed in service. We are currently exploring possible locations
from which to operate the vessel and possible financing sources to permit us to
make the necessary improvements.
During the first quarter of fiscal 2005, we re-entered the equine business
for which the Company was originally established. We currently own several
horses of different ages. Some are currently racing and a few are held as
broodmares but the majority are yearlings and two year olds in training. It is
our plan to bring these horses into racing if we consider them competitive after
completion of training to take advantage of the projected increase in purses as
a result of the introduction of slot machines in several state jurisdictions. We
are stabling and training the majority of these horses in New Jersey and in
Brazil.
On January 6, 2003 our subsidiary which operates the Palm Beach Princess
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code
because it did not have the funds to complete
22
the purchase of the Ship Mortgage on the Palm Beach Princess. On October 15,
2003 a Plan of Reorganization under Chapter 11 was approved and on July 17, 2004
the court issued a final decree closing the Chapter 11 case.
Liquidity and Capital Resources
The Company's cash flow from operations is primarily dependent upon the
cash flows from our wholly owned subsidiary ITG Vegas ("ITGV")which operates the
vessel, M/V Palm Beach Princess.
ITGV's cash flow from operations of the vessel is seasonal. The period July
1 to December 31 is a seasonably slow period for vessel operations. The period
from January 1 to June 30 has been a period of increased activity and profits
for the Palm Beach Casino Line operation. Certain of ITGV's operating costs,
including leasing and charter fees, fuel costs and wages, are fixed and cannot
be reduced when passageer loads decrease.
During the first quarter and early in our second quarter of Fiscal 2005 our
operating business was adversely affected by four hurricanes passing over or
near Florida. We suffered materially from the direct effects of hurricanes
"Frances" and "Jeanne" that left the area without power, resulting in curfews
and limited food, water and life resources. These two storms caused the
evacuation of the population in our area, and the four storms further affected
tourism in the area, severely reducing our pool of potential passengers, both
local residents and tourists. Twenty-nine (29) of our daily cruises during the
first quarter and four (4) of our daily cruises during the second quarter were
cancelled during the period of time that the hurricanes threatened the area and
for short periods thereafter. As a result of the seasonably slow period and the
hurricanes our revenues and cash flows from operations for the six months ended
December 31, 2004 were materially impacted. Our operating revenue was sufficient
to cover operating expenses of the vessel, however, the operating revenues were
not sufficient to cover expenses of the Parent Company, other subsidiaries, the
capital lease payments on the Palm Beach Princess and the interest portion of
the lease payments and the charter fees on the Big Easy which were capitalized
to the cost of the vessel.
We were able to utilize a portion of the cash received from the sale of the
Las Vegas Note which transaction closed in June, 2004, to meet the remainder of
our cash needs during the first six months of fiscal 2005.
On July 7, 2004 we closed on new financing with PDS Corporation, Palm Beach
Maritime Corporation and Palm Beach Empress, Inc., as more fully described in
Footnote 2 of this Report and payments were made on our behalf to pay in full
all indebtedness to the Brennan Trustee.
The PDS Transaction involved, among other things, our chartering a second
vessel, the Big Easy. In addition to the costs recorded as of December 31, 2004,
we have committed approximatley $6,300,000 to date towards costs of refurbishing
and retrofitting the Big Easy vessel. Costs associated with refurbishing and
retrofitting the Big Easy vessel and placing it in service (including marketing
expenses and other soft costs) are expected to amount to approximately $12
million, $6 million of which has been provided for by means of an escrow of
$2,880,652 of our funds and proceeds of the PDS Transactions. Additional amounts
necessary to begin operations of the Big Easy vessel are expected to be provided
from working capital of our ITGV subsidiary and a portion of the financing for
$2.85 million received from PDS on January 17, 2005. ITGV's ability to generate
sufficient working capital with which to pay such costs may be adversely
affected by delays or cost overruns in connection with refurbishing and
refitting the Big Easy and by weather related and other uncertainties affecting
its operations. The costs associated with refurbishing and retrofitting the Big
Easy for placing it in service have increased from our original projection due
to various upgrades to the vessel, and expansion of our Mardi Gras theme build
out, and improvments required by the Coast Guard. Any delays in commencing the
Big Easy operations will adversely affect our cash flow because of the
continuing costs of carrying the vessel. As indicated by the table below, our
debt service requirements have increased significantly with the PDS financing
due to the increase in amounts of debt and rates involved. The increase in the
amount is attributable in part to the arrangement for procurement and
refurbishment for a second vessel, the Big Easy. We are dependent upon the
expected additional revenue from the operations of the second vessel to cover
the increased financing costs.
In our last fiscal year, the Company purchased the vessel Royal Star. We
anticipate that the vessel will need extensive improvements and outfitting
costing between $5 and $6 million before being placed in service as a gaming
vessel. Until the amounts due to the Brennan Trustee were paid in full on July
7, 2004, expenditures for improvements were restricted by the Brennan Trustee
and we were required to make simultaneous dollar pre-payments to the Brennan
Trustee for each dollar spent on improvements. On January 17, 2005 we borrowed
$2,850,000 from PDS Gaming Corporation. A portion of these funds may be
available for improvements to be made to the Royal Star, however, the funds may
also be used for Maritime Office Improvements or improvements on the Big Easy,
thus the portion available for the Royal Star is unknown at this time. We are
currently negotiating with a financial institution to obtain the balance
23
of the funds necessary to make the required improvements and lease or otherwise
acquire the gaming equipment to place the ship in service. No assurances can be
given that we will be successful in obtaining the necessary additional funds.
Delays in commencing the Royal Star operations have and will continue to
adversely affect our cash flows because of the continuing costs of carrying the
vessel.
The following summarizes commitments on non-cancelable contracts and leases as
of December 31, 2004:
Twelve Months Ended December 31,
----------------------------------------------------------------------- There-
2005 2006 2007 2008 2009 after Total
---------- ---------- ---------- --------- --------- ------- ----------
Capital Lease - PBP $ 4,168,315 $ 5,661,156 $ 5,661,156 $ 5,661,156 $ 3,302,341 $ -0- $ 24,454,124
Lease - Big Easy 2,997,378 3,620,430 3,620,430 3,620,430 2,111,918 -0- 15,970,586
Notes and Mortgages:
Principal 656,709 -0- -0- -0- -0- -0- 656,709
Interest 26,184 -0- -0- -0- -0- -0- 26,184
Deferred Interest Payments 300,000 600,000 600,000 600,000 450,000 -0- 2,550,000
Employee Contracts 688,477 -0- -0- -0- -0- -0- 688,477
Operating Leases:
Casino Equipment 1,281,134 1,362,146 1,248,634 -0- -0- -0- 3,891,914
Administrative & Office 1,557,792 223,911 144,401 45,046 -0- -0- 1,971,150
Purchase Obligations-Big Easy 4,947,000 -0- -0- -0- -0- -0- 4,947,000
Purchase Obligations-Other 125,280 61,006 61,006 61,006 61,006 238,936 608,240
Other Long-Term Debt -0- 218,242 -0- -0- -0- -0- 218,242
---------- ---------- ---------- --------- --------- ------- ----------
Total $ 16,748,269 $ 11,746,891 $ 11,335,627 $ 9,987,638 $ 5,925,265 $ 238,936 $ 55,982,626
========== ========== ========== ========= ========= ======= ==========
Upstream payments by ITGV to the Company are limited under the Princess
Sub-Charter and th Big Easy Sub-Charter. If the "YTD Result" (defined as 10/12's
of annualized EBITDAR from operation of the two vessels) is greater than $8
million at the end of any of the first three fiscal quarters or EBITDAR from
operations of the two vessels is greater than $8 million at the end of any
fiscal year, and if ITG Vegas and ITG Palm Beach have made all payments due
under the Princess Sub-Charter and the Big Easy Sub-Charter, ITG Vegas may make
(i) tax sharing payments to the Company (payments equal to the federal income
tax savings to ITG Vegas resulting from its inclusion in the Company's
consolidated group for federal income tax purposes) including any tax sharing
payments previously deferred as a result of limitation under the Princess
Sub-Charter or the Big Easy Sub-Charter, and (ii) other payments to the Company
in an amount which, together with charter hire payments in excess of $100,000
per month to PBMC and PBE for the two vessels, shall not exceed $200,000 per
month (a "Restricted Payment"). If ITG Vegas is prohibited from making any
Restricted Payment for any month, once such payments are again allowed, such
Restricted Payment may be made to the Company; provided that the total amount of
Restricted Payments (i.e. payments other than the tax sharing payments and
$100,000 per month in bareboat charter fees) paid by ITG Vegas to the Company,
PBMC and PBE in any twelve-month period may not exceed $2,400,000.
The Company anticipates $2.5 million of capital expenditures for Port
improvements the timing of which is subject to financing. The Company expects to
defer making the improvements until financing is in place.
Outlook:
Based on our historical level of operations for the Palm Beach Princess and
additional revenues anticipated from the operations of the Big Easy, we believe
that cash generated from operations will be adequate to meet our anticipated
lease/purchase and loan payment requirements and working capital needs. No
assurances can be given, however, that our business will generate sufficient
cash flow from operations or that future borrowings will be available to enable
us to service our lease/purchase and loan payments or to make anticipated
capital expenditures. Our future operating performance and our ability to make
payments under our leases and other debts will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
24
On July 7, 2004 we paid off the Brennan Trustee and entered into long-term
sub charters in connection with capital lease transactions for two vessels and
equipment. As a result of these transactions, capital lease payments made to PDS
are at a higher rate of interest (15.3% to 16.54%) than the interest that was
being paid to the Brennan Trustee (12%). The debt outstanding has also increased
significantly. Additionally, we must make charter hire payments for the Palm
Beach Princess of $50,000 per month plus 1% of its gross revenues and charter
payments for the Big Easy of $100,000 per month plus 1% of its gross revenues.
Also, on January 17, 2005 , we borrowed an additional $2.85 million at 10% per
annum, adding an additional $95,352 of payments per month, after a four month
period of interest only payments, to our debt service requirements per month.
Therefore our annual combined charter payments predicated on capital lease
interest payments plus charter hire fees plus loan payments will be
significantly higher than the debt service payments were for the year ended June
30, 2004.
Effective July 7, 2004 we began leasing a second vessel, the Empress II,
(renamed the Big Easy). The ship will need to be refurbished and refitted for
use as an ocean going casino cruise ship and is expected to be placed in service
in February or March 2005 in time to begin operations during our peak season. We
will continue to incur costs for the vessel while it is being refitted. We
anticipate operating the vessel from the same port as the Palm Beach Princess.
It is possible that competition from each vessel will have an adverse effect on
the operations of the other vessel.
We will continue to incur costs on the vessel, Royal Star, while it is
being refurbished. The Company will need additional financing to make the
improvements and we will incur additional fees and interest costs on such
financing. We are currently exploring locations from which to operate the vessel
when it is ready to be placed in service.
During the first quarter of this fiscal year, we re-entered the equine
business for which the Company was originally established. We currently own
several horses, or shares of horses, of different ages. Some are currently
racing, and a few are held as broodmares but the majority are yearlings and two
year olds in training. It is our plan to bring those horses into racing if we
consider them competitive after training is completed. Our horse operation has
not produced any revenue during the period. Training and operational expenses
are approximately $30,000 per month and we do not expect to have any significant
revenues from the horse operation during our 2005 fiscal year. These costs could
increase substantially in the near future if additional horses are purchased.
Our working capital as of December 31, 2004 was a negative $(2,764,588) as
compared to $556,675 at June 30, 2004. The decrease in working capital of
$3,321,263 during the past six months was primarily due to the net effect of
cash used by operating activities of $546,514 and disbursements of approximately
$7,800,000 for improvements made to the Big Easy and Royal Star and for
purchasing horse livestock and equipment, offset by the payoff of the Brennan
Trustee on our behalf, which amount of approximately $4,000,000 was classified
as a current liability as of June 30, 2004 and current liabilities recorded as a
result of our leasing arrangements with PDS of approximately $900,000.
Results of Operations for the Three Months Ended December 31, 2004 and 2003
Overall
Revenue for for the three months ended December 31, 2004 increased $413,383
from $7,101,610 in Fiscal 2004 to $7,514,993 in Fiscal 2005 primarily as a
result of increase in revenues generated by the Palm Beach Princess operations
during the comparable periods. Operating expenses increased $967,506 from
$6,396,311 in the three month period in Fiscal 2004 to $7,363,817 in Fiscal 2005
primarily as the result of 1) recording start up costs for the Big Easy of
$597,622 and for the Royal Star of $39,573 wherein last year no start up costs
were recorded because we did not own the Big Easy and the Royal Star had just
recently been purchased, 2) an increase in other development costs of $199,013
as a result of our continued search both domestically and internationally for
additional gaming opportunities and our entry into the equine business, 3) an
increase in Depreciation and Amortization of $432,381 as a result of
depreciation being recorded on the Palm Beach Princess as a result of capital
leasing arrangements effective in July, 2004. Such increases in operating
expenses were offset by a decrease in the operating expenses of the Palm Beach
Princess of approximately $300,000 as detailed in the "vessel" section below and
a decrease in the bankruptcy costs of $173,186 due to the bankruptcy being
finalized in July 2004.
Operating income for the three months ended December 31, 2004 was $151,176
as compared to $705,299 for the comparative period of last year. Operating
Income before depreciation for the current period was $717,398 as compared to
$839,140 for the comparative period of last year.
25
Other expense increased by $ 394,276 as a result of (1) an increase in the
interest and financing due to the higher debt level on the vessel leases than
that amount previously owed to the Brennan Trustee and an increase in the rates
of interest and (2) during the second quarter of Fiscal 2005, the Company
recorded an impairment loss in the amount of $150,000 on the Second Cherry Hill
Note Receivable.
Net (Loss) for the three months ended December 31, 2004 was $(506,363) or
$(.06) per diluted share as compared to income of $363,035 or $.04 per diluted
share for the three months ended December 31, 2003.
For the three months earnings before interest, taxes, depreciation and
amortization and our unusual items of extraordinary income and vessel start up
costs (Adjusted EBITDA) was $1,354,564 as compared to $929,367 for the
comparable period last year.
Reconciliation of Non-GAAP Measures to GAAP
Adjusted EBITDA or earnings before interest, taxes, depreciation and
amortization and unusual items is not a measure of performance or liquidity
calculated in accordance with generally accepted accounting principles. EBITDA
information is presented as a supplemental disclosure because management
believes that it is a widely used measure of such performance in the gaming
industry. In addition, management uses Adjusted EBITDA as the primary measure of
the operating performance of its operations, including the evaluation of
operating personnel. Adjusted EBITDA should not be construed as an alternative
to operating income, as an indicator of the Company's operating performance, or
as an alternative to cash flows from operating activities, as a measure of
liquidity, or as any other measure of performance determined in accordance with
generally accepted accounting principles. The Company has significant uses of
cash flows, including capital expenditures, interest payments, taxes, lease and
debt principal repayments, which are not reflected in Adjusted EBITDA. It should
also be noted that other gaming companies that report EBITDA information may
calculate EBITDA in a different manner than the Company. A reconciliation of the
Company's Adjusted EBITDA and unusual items to net income (GAAP), is shown
below.
Reconciliation of Adjusted EBITDA to Net Income (GAAP)
Three Months Ended December 31, Six Months Ended December 31,
------------------------------ -----------------------------
2004 2003 2004 2003
-------------- ---------- ------------ -----------
Total Adjusted EBDITA $ 1,354,564 $ 929,367 $ 1,121,645 $ 2,310,409
Depreciation & Amortization (566,222) (133,841) (965,101) (309,719)
Interest & Financing Expenses (630,111) (501,271) (1,797,702) (1,001,723)
Interest Income 73,601 98,780 151,918 170,729
Tax Benefit (Expense) on Income 49,000 (30,000) 91,000 (47,600)
Net Income (Loss) before Unusual Items 280,832 363,035 (1,398,240) 1,122,096
Extraordinary Item 0 0 3,560,000 0
Start Up Costs for Vessels (637,195) 0 (735,482) 0
Impairment Loss (150,000) 0 (350,000) 0
-------------- ---------- ------------ -----------
Net Income (Loss) $ (506,363) $ 363,035 $ 1,076,278 $ 1,122,096
============== ========== ============ ===========
Vessel Operations
During the three months ended December 31, 2004, total net revenue from
vessel operations was $7,424,736 as compared to $7,000,011 for the three months
ended December 31, 2003. The increase in revenue of $424,725 during the
comparable quarters was the result of a 6.5% increase in the number of
passengers during the comparable period last year, (despite completing 4 fewer
cruises in fiscal 2005 vs. fiscal 2004,) which resulted in an increase in gaming
and on board revenue of 6%. Revenue per passenger during the quarter fell
slightly when compared to the comparable quarter of last year. During our
quarter ending December 31, 2004 revenue per passenger was $122.43 as compared
to $122.97 during the quarter ending December 31, 2003. More significantly, the
revenue per passenger during our latest quarter of
26
$122.43 reversed a downward trend in revenue per passenger which began in the
quarter ending June 30, 2004. Casino operating expenses which also includes
food, beverage and entertainment increased $3,190 from $2,079,088, or 35% of
casino revenue in fiscal 2004 to $2,082,278, or 33% of casino revenue in fiscal
2005 primarily the result of dividing costs, many of which are fixed by their
nature, over increased revenues.
During the most recent quarter a portion of the employee costs normally
incurred by the Palm Beach Princess for operational and administrative salary
expenses were allocated to the Big Easy start up operation. These allocations
were made to more accurately reflect the cost of preparing the Big Easy for use
as a casino gaming vessel. Approximately $620,000 of salaries allocated to the
Big Easy were expensed as developmental costs and approximately $100,000 of
salary costs were capitalized as part of the vessel costs. These capitalized
costs reflect the value of vessel improvements completed by company employees.
This allocation should be taken into consideration when comparing operating
results from year to year for the Palm Beach Princess.
Sales, marketing and advertising expenses increased $50,839 from $852,933
in fiscal 2004 to $903,772 in fiscal 2005. The increase was the result of
additional advertising and promotions to attract customers after the
cancellation of cruises due to the hurricanes, inclement weather and curfews
following the hurricanes in the quarter ending September 30, 2004 and the first
week in the current quarter. Maritime and legal expenses decreased $120,604 or
8% primarily as a result of the allocation of salaries to the Big Easy as stated
above. Finance expenses increased $873,966 from $3,078 in fiscal 2004 to
$877,044 in fiscal 2005 as a result of the interest paid on the capital lease
and the charter hire payments for the Palm Beach Princess which was effective
July 7, 2004. Depreciation and amortization increased $348,230 from $170,346 in
fiscal 2004 to $518,576 in fiscal 2005. As a result of the capital lease
arrangement for the Palm Beach Princess the Company is recording depreciation on
the vessel as compared to last year when the Company did not record depreciation
on the vessel because it operated the vessel under an operating lease.
Administration expense decreased $414,824 or 10% from $977,955 in fiscal 2004 to
$563,131 in fiscal 2005 due to a decrease in bonus accrual during the current
quarter as compared to the comparable quarter of last year, steps taken to
reduce expenses during this quarter and the allocation of salaries to the Big
Easy as stated above. Income before income tax expense for the second quarter of
operation in fiscal 2005 was $840,171 as compared to income before Income Tax of
$1,165,577 in the comparable quarter of fiscal 2004.
The Palm Beach Princess performs fourteen cruises weekly, that is, a
daytime and an evening cruise each day. Each cruise is of five to six hours
duration. During each cruise, the Palm Beach Princess offers a range of
amenities and services to her passengers, including a full casino, sit-down
buffet dining, live musical shows, discotheque, bars and lounges, swimming pool
and sundecks. The casino occupies 15,000 square feet aboard the ship and is
equipped with approximately 400 slot machines, all major table games (blackjack,
dice, roulette and poker), and a sports wagering book. During the second quarter
of Fiscal 2004 the ship completed 172 cruises compared to 176 cruises during the
same period last year. During the current quarter 8 cruises were cancelled due
to hurricanes and inclement weather.
27
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the three months ended December 31, 2004 and 2003:
Three Months Ended
December 31,
---------------------------
Description 2004 2003 Change
- --- --------------------------------- ----------- ----------- ---------
Passenger Count 60,646 56,922 3,724
Number of Cruises 172 176 (4)
Revenue:
Gaming $ 6,317,979 $ 5,948,208 $ 369,771
Fare 1,697,175 1,916,722 (219,547)
On Board 993,730 930,832 62,898
Less: Promotional Allowances
Fare (1,069,558) (1,290,525) 220,967
On Board (514,590) (505,226) (9,364)
----------- ----------- ---------
Total Revenue 7,424,736 7,000,011 424,725
----------- ----------- ---------
Expenses:
Casino Operating Expenses 2,082,278 2,079,088 3,190
Hotel and Gift Shop Expenses 240,690 231,356 9,334
Sales, Marketing and
Advertising Expenses 903,772 852,933 50,839
Maritime and Legal Expenses 1,399,074 1,519,678 (120,604)
Finance Expenses - Net 877,044 3,078 873,966
Depreciation and Amortization 518,576 170,346 348,230
Administrative 563,131 977,955 (414,824)
----------- ----------- ---------
Total Expenses 6,584,565 5,834,434 750,131
----------- ----------- ---------
Income (Loss) Before Income
Tax Expense $ 840,171 $ 1,165,577 $ (325,406)
=========== =========== =========
Results of Operations for the Six Months Ended December 31, 2004 and 2003
Overall
Revenue from for the six months ended December 31, 2004 decreased $826,363
from $14,719,678 in Fiscal 2004 to $13,893,315 in Fiscal 2005 primarily as a
result of decrease in revenues generated by the Palm Beach Princess operations
during the comparable periods. Operating expenses increased $1,734,315from
$12,738,149 in the six month period in Fiscal 2004 to $14,472,464 in Fiscal 2005
primarily the result of 1) recording start up costs for the Big Easy of $629,064
and for the Royal Star of $106,418 wherein last year no start up costs were
recorded because we did not own the Big Easy and the Royal Star had just
recently been purchased, 2) an increase in other development costs of $576,462
as a result of our continued search both domestically and internationally for
additional gaming opportunities and our entry into the equine business, 3) an
increase in Depreciation and Amortization of $655,382 as a result of
depreciation being recorded on the Palm Beach Princess as a result of leasing
arrangements effective in July, 2004. The increase in operating expenses was
offset in part by a decrease in the bankruptcy costs of $368,681 due to the
bankruptcy being finalized in July 2004.
The Operating (loss) for the six months ended December 31, 2004 was
$(579,149) as compared to income of $1,981,569 for the comparative period of
last year. Operating Income before depreciation for the current period was
$385,952 as compared to $2,291,248 for the comparative period of last year.
Other expenses increased by $1,183,739 as a result of (1) an increase in
the interest and financing due to the higher debt level on the vessel leases
than that amount previously owed to the Brennan Trustee and an increase in the
rates of interest and (2) during the first half of Fiscal 2005 the Company
recorded an impairment loss in the amount of $350,000 on the Second Cherry Hill
Note Receivable.
For the six months ended December 31, 2004 the loss before an extraordinary
item was $(2,483,722) as compared to income of $1,122,096 for the six months
ended December 31, 2003. During the first quarter
28
of the current fiscal year the Company recorded extraordinary income, net of
tax, of $3,560,000. This was the result of the collection of success fees
charged to Leo Equity Group, Inc. and Palm Beach Maritime Corporation (formerly
MJQ) for our efforts in connection with the final settlement with the Chapter 11
Trustee for the Bankruptcy Estate of Robert E. Brennan. We had deferred all
income from these transactions until such time as payment was received.
Net Income for the six months ended December 31, 2004 was $1,076,278 or
$.13 per diluted share as compared to $1,122,096 or $.11 per diluted share for
the six months ended December 31, 2003.
For the six months ending December 31, 2004 earnings before interest,
taxes, depreciation and amortization and our unusual items of extraordinary
income and vessel start up costs (Adjusted EBITDA) was $1,121,645 as compared to
$2,310,409 for the corresponding period. The decrease in Adjusted EBITDA of
$1,188,764 was primarily due to the losses sustained in the first quarter
because of the hurricanes which is reflected in the six month operating results.
See the reconciliation of Adjusted EBITDA to net income in the three month
operating results paragraphs of this section.
Vessel Operations
Operations for the six months were materially impacted by hurricanes and
inclement weather which struck Florida and the Palm Beach area during our first
quarter of operations. The negative effect of those hurricanes on our operations
during the first quarter is also reflected in the financial results for the six
months ended December 31, 2004. During the six months ended December 31, 2004,
total net operating revenue from vessel operations was $13,706,236 as compared
to $14,575,168 for the six months ended December 31, 2003. The decrease in
revenue of $868,932 during the comparable six months was due to a decrease in
the number of cruises which resulted in a decrease in passenger counts.
Additionally, during the current six months our revenue per passenger fell 5.3%
from $123.09 per passenger in fiscal 2004 to $116.55 in fiscal 2005. The revenue
per passenger during the first quarter was $112.22 which negatively effected our
6 month performance. Revenue per passenger has recovered to $122.43 during the
second quarter of fiscal 2005. During the current six month period gaming
revenues decreased $795,409 from $12,442,895 in the first six months of fiscal
2004 to $11,647,486 in the first six months of fiscal 2005. Net fare and on
board income decreased $73,523, or 3.4%. Casino operating expenses which also
includes food, beverage and entertainment increased $37,662 from $4,158,704 or
33.4% of casino revenue in fiscal 2004 to $4,196,366 or 36% of casino revenue in
fiscal 2005 primarily the result of dividing costs, many of which are fixed by
their nature, over reduced revenues.
During the six month period ending December 31, 2004 a portion of the
employee costs normally incurred by the Palm Beach Princess for operational and
administrative salary expenses were allocated to the Big Easy start up
operation. These allocations were made to more accurately reflect the cost of
preparing the Big Easy for use as a casino gaming vessel. Approximately $620,000
of salaries allocated to the Big Easy were expensed as developmental costs and
approximately $100,000 of salary costs were capitalized as part of the vessel
costs. These capitalized costs reflect the value of vessel improvements
completed by company employees. This allocation should be taken into
consideration when comparing operating results from year to year for the Palm
Beach Princess.
Sales, marketing and advertising expenses increased $212,274 from
$1,566,687 in fiscal 2004 to $1,778,961 in fiscal 2005. The increase was the
result of additional advertising and promotions to attract customers after the
cancellation of cruises due to the hurricanes, inclement weather and curfews
following the hurricanes. Maritime and legal expenses decreased $402,094 or 12%
as a result of fewer cruises being performed during the current six month period
and the allocation of salary expenses as stated above. Finance expenses
increased $1,324,214 from $233,381 in fiscal 2004 to $1,557,595 in fiscal 2005
as a result of the interest paid on the capital lease and the charter hire
payments for the Palm Beach Princess which was effective July 7, 2004.
Depreciation and amortization increased $568,740 from $300,743 in fiscal 2004 to
$869,483 in fiscal 2005. As a result of the capital lease arrangement for the
Palm Beach Princess the Company is recording depreciation on the vessel as
compared to last year when the Company did not record depreciation because it
operated the vessel under an operating lease. Administrative expenses decreased
$537,396 from $2,103,174 in fiscal 2004 to $1,565,778 in fiscal 2005 due to
fewer days of operation, steps taken to reduce expenses during this quarter, and
the allocation of salary expenses as stated above. Income before income tax
expense for the first quarter of operation in fiscal 2005 was $419,395 as
compared to income before Income Tax of $2,516,933 in the comparable six month
period of fiscal 2004.
The Palm Beach Princess performs fourteen cruises weekly, that is, a
daytime and an evening cruise each day. Each cruise is of five to six hours
duration. During each cruise, the Palm Beach Princess offers a range of
amenities and services to her passengers, including a full casino, sit-down
buffet dining, live
29
musical shows, discotheque, bars and lounges, swimming pool and sundecks. The
casino occupies 15,000 square feet aboard the ship and is equipped with
approximately 400 slot machines, all major table games (blackjack, dice,
roulette and poker), and a sports wagering book. During the first quarter of
fiscal 2005 the ship completed 328 cruises and 33 cruises were missed due to
hurricanes and inclement weather. Whereas during the six months of fiscal 2004
the ship completed 343 cruises.
The following is a comparative summary of income and expenses of the Palm
Beach Princess operation for the six months ended December 31, 2004 and 2003:
Six Months Ended
December 31,
----------------------------
Description 2004 2003 Change
- --- ------------------------------- ------------ ----------- ----------
Passenger Count 117,603 118,409 (806)
Number of Cruises 328 343 (15)
Revenue:
Gaming $ 11,647,486 $ 12,442,895 $ (795,409)
Fare 3,177,007 4,052,914 (875,907)
On Board 1,861,213 1,848,188 13,025
Less: Promotional Allowances
Fare (2,008,725) (2,771,346) 762,621
On Board (970,745) (997,483) 26,738
------------ ----------- ----------
Total Revenue 13,706,236 14,575,168 (868,932)
------------ ----------- ----------
Expenses:
Casino Operating Expenses 4,196,366 4,158,704 37,662
Hotel and Gift Shop Expenses 451,803 426,597 25,206
Sales, Marketing and
Advertising Expenses 1,778,961 1,566,687 212,274
Maritime and Legal Expenses 2,866,855 3,268,949 (402,094)
Finance Expenses - Net 1,557,595 233,381 1,324,214
Depreciation and Amortization 869,483 300,743 568,740
Administrative 1,565,778 2,103,174 (537,396)
------------ ----------- ----------
Total Expenses 13,286,841 12,058,235 1,228,606
------------ ----------- ----------
Income (Loss) Before Income
Tax Expense $ 419,395 $ 2,516,933 $(2,097,538)
============ =========== ==========
Horse Operations
During the first quarter of this fiscal year, we re-entered the equine
business for which the Company was originally established. We currently own
several horses, or shares of horses, of different ages. Some are currently
racing, and a few are held as broodmares but the majority are yearlings and two
year olds in training. It is our plan to bring those horses into racing if we
consider them competitive after training is completed. We are stabling and
training the majority of these horses in New Jersey and in Brazil. Additionally,
the Company has purchased several horses, the majority being one and two year
olds, from Francis W. Murray at values to be determined by a current appraisal
of their values. Payment for such horses will only be made out of profits
realized from the horses purchased from Mr. Murray, if any. Our horse operation
did not produce any revenue during the period. Training and operational expenses
of $147,757 for the six month period are reported in Development Costs-Other. It
is our plan to bring these horses into racing to take advantage of the projected
increase in purses as a result of the introduction of slot machines in several
state jurisdictions.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to material interest rate risk, foreign currency
exchange rate risk, commodity price risk or other relevant market rate or price
risks.
30
ITEM 4. - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the filing of this report, we completed an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures were effective.
There have not been any significant changes that occurred during the fiscal
quarter ended December 31, 2004 in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
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INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our subsidiary, ITG Vegas, Inc., successor by merger to Palm Beach
Pricness, Inc., initiated proceedings under Chapter 11 of the Bankruptcy Code on
January 3, 2003. Such Chapter 11 case was closed on July 17, 2004. (See Note 4)
ITEM 6. EXHIBITS
Exhibit Description of Exhibit
31.1 CEO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
31.2 CFO Certification pursuant to rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934
32 CEO & CFO Certification pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL THOROUGHBRED BREEDERS, INC.
February 22, 2005 /s/Francis W. Murray
-----------------------------
Francis W. Murray, President,
Chief Executive Officer
and Chief Financial Officer
33
Exhibit 31.1
CEO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 22, 2005
/s/Francis W. Murray
---------------------------------
Chairman/Chief Executive Officer/
Chief Financial Officer
34
Exhibit 31.2
CFO CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Francis W. Murray, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International
Thoroughbred Breeders;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 22, 2005
/s/Francis W. Murray
---------------------------------
Chairman/Chief Executive Officer/
Chief Financial Officer
35
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of
International Thoroughbred Breeders, Inc. (the "Company") for the three and six
months ended December 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Francis W. Murray, Chief
Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Francis W. Murray
- ------------------------------
Name: Francis W. Murray
Title: Chief Financial Officer
February 22, 2005
36