FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- -------------------------- Commission file number 0-9624 --------------------------------------------------------- International Thoroughbred Breeders, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-2332039 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 211 Benigno Boulevard Suite 210 , Bellmawr, New Jersey 08031 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (856)931-8163 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes X No ------ ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes No X ------ ------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date. Class Outstanding at November 15, 2003 - ------------------------------ -------------------------------- Common Stock, $ 2.00 par value 8,252,135 Shares INTERNATIONAL THOROUGHBRED BREEDERS, INC. FORM 10-Q QUARTERLY REPORT for the Three Months ended September 30, 2003 (Unaudited) TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 2003 and June 30, 2003...........1-2 Consolidated Statements of Operations for the Three Months ended September 30, 2003 and 2002..........................3 Consolidated Statement of Stockholders' Equity for the Three Months ended September 30, 2003........4 Consolidated Statements of Cash Flows for the Three Months ended September 30, 2003 and 2002..........................5 Notes to Consolidated Financial Statements....................6-22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......23-26 Item 4. Controls and Procedures..............................27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................28 SIGNATURES.............................................................29 CERTIFICATIONS.........................................................30 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 AND JUNE 30, 2003 ASSETS September 30, 2003 June 30, (UNAUDITED) 2003 ------------- ------------ CURRENT ASSETS: Cash and Cash Equivalents $ 5,638,592 $ 6,123,641 Restricted Cash 1,294,050 0 Accounts Receivable 198,829 193,689 Prepaid Expenses 809,752 488,414 Spare Parts Inventory 1,115,477 1,078,740 Other Current Assets 379,851 390,458 Net Assets of Discontinued Operations - Current 96,150 98,588 ------------- ------------ TOTAL CURRENT ASSETS 9,532,701 8,373,530 ------------- ------------ EQUIPMENT: Leasehold Improvements - Port of Palm Beach 954,471 953,110 Equipment 1,456,134 1,278,175 ------------- ------------ 2,410,605 2,231,285 LESS: Accumulated Depreciation and Amortization 440,526 306,494 ------------- ------------ TOTAL EQUIPMENT, NET 1,970,079 1,924,791 ------------- ------------ OTHER ASSETS: Notes Receivable 33,000,000 33,000,000 Deposit on Purchase of Palm Beach Princess Mortgage 4,000,000 4,000,000 Deposits and Other Assets - Non-Related Parties 334,975 535,239 Deposits and Other Assets - Related Parties 5,440,232 5,702,249 ---------------------------- TOTAL OTHER ASSETS 42,775,207 43,237,488 ------------- ------------ TOTAL ASSETS $ 54,277,987 $ 53,535,809 ============= ============ See Notes to Consolidated Financial Statements. 1 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 AND JUNE 30, 2003 LIABILITIES AND STOCKHOLDERS' EQUITY September 30, 2003 June 30, (UNAUDITED) 2003 ------------ ------------ CURRENT LIABILITIES: Accounts Payable $ 2,391,625 $ 2,264,499 Accrued Expenses 2,271,207 2,341,209 Short-Term Debt 2,759,073 2,934,330 Short-Term Debt - Related Parties 183,164 183,164 ------------ ------------ TOTAL CURRENT LIABILITIES 7,605,069 7,723,202 ------------ ------------ DEFERRED INCOME 8,226,540 8,226,540 ------------ ------------ COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY: Series A Preferred Stock, $100 Par Value, Authorized 500,000 Shares, 362,489 Issued and Outstanding 36,248,875 36,248,875 Common Stock, $2 Par Value, Authorized 25,000,000 Shares, Issued, 11,480,279 and 11,480,278, respectively and Outstanding, 8,252,134 and 8,252,133, respectively 22,960,557 22,960,555 Capital in Excess of Par 20,191,982 20,191,984 (Deficit) (subsequent to June 30, 1993, date of quasi-reorganization) (39,330,547) (40,189,608) ------------ ------------ 40,070,867 39,211,806 LESS: Treasury Stock, 3,228,145 Shares, at Cost (1,614,073) (1,614,073) Deferred Compensation, Net (10,416) (11,666) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 38,446,378 37,586,067 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,277,987 $ 53,535,809 ============ ============ See Notes to Consolidated Financial Statements. 2 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) September 30, ---------------------------- 2003 2002 ---------------------------- REVENUE: Revenue from Operations $ 7,618,664 $ 6,319,402 Interest Income Related Parties 3,254 0 Interest Income 68,694 99,773 ------------- ------------ TOTAL REVENUES 7,690,612 6,419,175 ------------- ------------ EXPENSES: Cost of Revenues: Operating Expenses 4,887,244 4,289,340 Depreciation & Amortization 135,283 76,220 General & Administrative Expenses - Palm Beach Princess 720,374 716,245 General & Administrative Expenses - Parent 286,682 489,354 ITG Vegas Bankruptcy Costs 258,562 0 Development Costs 25,355 90,896 Interest and Financing Expenses 500,452 317,005 ------------- ------------ TOTAL EXPENSES 6,813,952 5,979,060 ------------- ------------ INCOME BEFORE TAX PROVISION 876,660 440,115 State Income Tax Expense 17,600 27,000 ------------- ------------ NET INCOME $ 859,060 $ 413,115 ============= ============ NET BASIC AND DILUTED INCOME PER COMMON SHARE $ 0.10 $ 0.04 ============= ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic 8,252,133 11,480,272 ============================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Diluted 8,998,145 11,480,272 ============================ See Notes to Consolidated Financial Statements. 3 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 Preferred Common ----------------------- ------------------------ Number of Number of Shares Amount Shares Amount --------- ------------ ------------ ---------- BALANCE - JUNE 30, 2003 362,489 $ 36,248,875 11,480,278 $ 22,960,555 Shares Issued for Fractional Exchanges With Respect to the One-for-twenty Reverse Stock Split effected on March 13, 1992 --- --- 1 2 Amortization of Deferred Compensation Costs --- --- --- --- Net Income for the Three Months Ended September 30, 2003 --- --- --- --- --------- ------------ ------------ ---------- BALANCE - SEPTEMBER 30, 2003 362,489 $ 36,248,875 11,480,279 $ 22,960,557 ========= ============ ============ ========== Capital Treasury Deferred in Excess Stock Compen- of Par (Deficit) At Cost sation Total ------------ ------------- -------------- ----------- -------------- BALANCE - JUNE 30, 2003 $ 20,191,984 $ (40,189,608) $ (1,614,073) $ (11,666) $ 37,586,067 Shares Issued for Fractional Exchanges With Respect to the One-for-twenty Reverse Stock Split effected on March 13, 1992 (2) --- --- --- --- Amortization of Deferred Compensation Costs --- --- --- 1,250 1,250 Net Income for the Three Months Ended September 30, 2003 --- 859,061 --- --- 859,061 ------------ ------------- -------------- ----------- -------------- BALANCE - SEPTEMBER 30, 2003 $ 20,191,982 $ (39,330,547) $ (1,614,073) $ (10,416) $ 38,446,378 ============ ============= ============== =========== ============== See Notes to Consolidated Financial Statements. 4 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) September 30, ---------------------------- 2003 2002 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: $ 859,060 $ 413,115 ------------ ------------ Adjustments to reconcile income to net cash provided by operating activities: Depreciation and Amortization 135,283 77,470 Changes in Operating Assets and Liabilities - (Increase) in Restricted Cash & Investments (1,294,048) 0 (Increase) in Accounts Receivable (5,138) (25,746) (Increase) in Other Assets (26,130) (26,761) (Increase) Decrease in Prepaid Expenses (321,337) 19,483 Increase (Decrease) in Accounts Payable and Accrued Expenses 57,120 (8,468) ------------ ------------ CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES BEFORE DISCONTINUED OPERATIONS (595,190) 449,093 CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 2,400 0 ------------ ------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (592,790) 449,093 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Deposits on Purchase of Palm Beach Princess Mortgage 0 (500,000) Capital Expenditures (179,320) (26,407) Decrease (Increase) in Other Investment Activity 428,858 (91,510) ------------ ------------ CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES BEFORE DISCONTINUED INVESTING ACTIVITIES 249,538 (617,917) CASH PROVIDED BY DISCONTINUED INVESTING ACTIVITIES 0 0 ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 249,538 (617,917) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal Payments on Short Term Notes (141,834) (776) Decrease in Balances Due to/From Subsidiaries 2,438 216 ------------ ------------ CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES BEFORE DISCONTINUED FINANCING ACTIVITIES (139,396) (560) CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES (2,438) (216) ------------ ------------ NET CASH (USED IN) FINANCING ACTIVITIES (141,834) (776) ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (485,086) (169,600) LESS CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS 37 216 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 6,123,641 796,610 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 5,638,592 $ 627,226 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 303,415 $ 0 Income Taxes $ 0 $ 0 See Notes to Consolidated Financial Statements. 5 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Nature of Operations - 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 sun decks. The casino occupies 15,000 square feet aboard the ship and is equipped with approximately 400 slot machines, all major table games (blackjack, dice, roulette and poker), and a sports wagering book. (B) Principles of Consolidation - The accounts of all subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. (C) Classifications - Certain prior years' amounts have been reclassified to conform with the current years' presentation. (D) Spare Parts Inventory - Spare parts inventory consists of operating supplies, maintenance materials and spare parts. It is necessary that these parts be readily available so that the daily cruise operations are not cancelled due to mechanical failures. The inventories are carried at cost. (E) Depreciation and Amortization - Depreciation of property and equipment were computed by the straight-line method at rates adequate to allocate their cost or adjusted fair value in accordance with U. S. generally accepted accounting principles over the estimated remaining useful lives of the respective assets. Amortization expense consists of the write off of major vessel repairs and maintenance work normally completed at dry dock in the fall of each year. These expenses are written off during a twenty four month period following the dry dock period. For the three months ended September 30, 2003, there were no amortized expenses associated with a dry dock period. For the three months ended September 30, 2002, the amortized expense was $41,737. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 establishes accounting standards to account for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets and certain identifiable intangibles to be disposed of. The Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable based on undiscounted estimated future operating cash flows. (F) Net Assets of Discontinued Operations - At September 30, 2003 and 2002, the remaining net assets and liabilities of Garden State Park and Freehold Raceway were classified as "Net Assets of Discontinued Operations." (G) Revenue Recognition - The Company recognizes the revenues associated with the casino operation on the Palm Beach Princess as they are earned. (H) Cash and Cash Equivalents - The Company considers all highly liquid investments with an 6 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) original maturity of three months or less to be cash equivalents. As of September 30, 2003, funds classified as cash and cash equivalents, which are primarily those of the Palm Beach Princess operations under debtor-in-possession, are only available under bankruptcy court approval guidelines. (I) 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. (J) 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. (K) Net Income per Common Share - Income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding. On December 13, 2002, the Company purchased 3,228,145 shares of its Common Stock from the Trustee and have accounted for the transaction on the cost method of accounting for treasury stock. For the three months ended September 30, 2003, options to purchase 2,075,000 shares of Common Stock at $.269 per share were used in the computation of diluted income per share because the exercise price of those options were above average market price, however, the number of shares that would have been issued from the exercise of stock options has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of the Company's stock. The additional shares that would have been issued did not decrease the stated earnings per share for the three month period. Options and warrants to purchase 4,046,500 shares of Common Stock at various prices per share, for the three months ended September 30, 2002 were not included in the computation of income per share because the exercise price of those options and warrants were above market value. (2) ITG VEGAS, INC. CHAPTER 11 PLAN OF REORGANIZATION On January 3, 2003, ITG Vegas, Inc.("ITGV"), our subsidiary operating the Palm Beach Princess, and MJQ Corporation ("MJQ"), which owns the Palm Beach Princess vessel, an entity owned by Francis W. Murray, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Florida, Palm Beach Division (the "Bankruptcy Court"), In re: ITG Vegas, Inc., Case No. 03-30038. The petition did not cover the parent company, ITB, nor any other of ITB's subsidiaries. The Palm Beach Princess continued to operate as "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As described in Note 12 below we had previously entered into a Master Settlement Agreement to purchase from the Chapter 11 Trustee for the Bankruptcy Estate of Robert E. Brennan (the "Trustee") the promissory note of MJQ Corporation for $13.75 million. We did not have funds necessary to complete that purchase by January 6, 2003, the date required for payment of the balance of such purchase price. Therefore, on January 3, 2003, in order to protect our invested deposits and operation of the vessel, ITGV (together with MJQ Corporation) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. 7 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On September 12, 2003, the Bankruptcy Court issued an order confirming the Amended Joint Chapter 11 Plan of Reorganization (the "Plan") in the Chapter 11 Cases of ITG Vegas, Inc. and MJQ Corporation (ITG Vegas, Inc. and MJQ Corporation being hereinafter called the "Debtors"). The Plan is a plan of reorganization under Chapter 11 of the Bankruptcy Code which was jointly proposed by the Debtors. As of October 15, 2003, the effective date of the Plan (the "Effective Date"), all claims, debts, liens, security interests and encumbrances of and against the Debtors and against all property of their respective bankruptcy estates, which arose before confirmation, were discharged, except as otherwise provided in the Plan or confirmation order. Post-confirmation, each of the Debtors will continue as reorganized debtors. The Plan includes the following principal features: 1. On the Effective Date, all Allowed Administrative Expense Claims and all Allowed Priority Tax Claims and Allowed Priority Non-Tax Claims will be paid in full (to the extent not already paid). 2. All pre-petition non-insider (non-affiliate), non-insured unsecured debt of the Debtors will be paid in two installments, one-half on the Effective Date and one-half (with interest thereon at 8% per year from the Effective Date) on the six month anniversary of the Effective Date. The holders of such unsecured pre-petition debt will receive security interests in the cash bank maintained on board the Vessel (approximately $700,000) and in all of the shore side furniture and equipment to secure the Plan payments to them. In addition, an amount equal to $70,000 will be paid monthly into escrow as further collateral for the holders of such debt. Through November 14, 2003, $1,286,051 has been placed in escrow towards the payments required for distribution. 3. All non-insider claims covered by insurance will be entitled to payment in accordance with the insurance coverages. There are no policy limits on the Debtors' liability coverages and the holders of these claims will be required to pursue the insurance proceeds for payment, except with respect to the deductible, for which the Debtors shall remain obligated. 4. The Debtor's principal creditor, Donald F. Conway as Chapter 11 Trustee for the Bankruptcy Estate of Robert E. Brennan (the "Brennan Trustee"), will receive payment in full of all obligations over a period not to exceed three years. Significantly, the Debtors' obligations to the Brennan Trustee have been combined with the Company's indebtedness to the Brennan Trustee, for all of which the Debtors and the Company will be jointly and severally liable. All of the obligations to the Brennan Trustee will be secured by a first priority ship mortgage against the Vessel and, with certain exceptions, first priority security interests in all of the other assets of the Debtors, subject to the security interests being granted in favor of the pre-petition unsecured creditors as described in paragraph 2 above. 5. The payment obligations to the Brennan Trustee will consist of the following: (a) The balance of the purchase price that had been payable by ITG Vegas for the 8 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) purchase of the ship mortgage against the Vessel, in the amount of $9,750,000; (b) The balance of the Company's indebtedness to the Brennan Trustee in respect of the purchase of stock in the Company, in the principal amount of $1,511,035.70, plus interest thereon from December 13, 2002 to January 23, 2003 at 9% per annum and thereafter at 11% per annum until the Effective Date; (c) A new obligation of the Company for the purchase of an additional 450,000 shares of the Company's stock from the Brennan Trustee, at $0.50 per share, or $225,000; The amounts described in subparagraphs (a), (b) and (c) are collectively called the "Payment Obligations". A forbearance fee of $350,000 also shall accrue to the Brennan Trustee on the Effective Date, of which $100,000 will be payable on the Effective Date and the balance of $250,000 will be due on the earliest to occur of the date the Payment Obligation is paid in full, the third anniversary of the Effective Date, or any date on which ITG Vegas shall have monitized its receivable from OC Realty, LLC, an affiliate of the Company's Chairman and CEO. The Payment Obligation shall accrue interest at 12% per annum. Monthly payments of $400,000 will be required to be made to the Brennan Trustee, to be applied first to interest accrued and then to principal. In addition, the Brennan Trustee shall be entitled to payment of a Stay Bonus in the amount of $200,000 if the Payment Obligation shall not have been paid in full within 12 months after the Effective Date, and an additional $100,000 if the Payment Obligation shall not have been paid in full within 24 months after the Effective Date. Beginning with ITG Vegas' 2004 internal accounting year (commencing December 29, 2003) and annually thereafter, 75% of ITG Vegas' Free Cash Flow (as defined in the Plan) for the period shall be paid to the Brennan Trustee as a Sweep Payment, to be applied first to accrued and unpaid interest, then to principal on the Payment Obligation, and thereafter to any unpaid Forbearance Fee and Stay Bonuses. 6. Restrictions are imposed under the Plan on ITG Vegas making payments to affiliated entities, including the parent company. Payment of indebtedness to affiliated entities of ITG Vegas generally will be subordinated and intercompany advances and transfers from ITG to affiliated entities generally will be prohibited, except that, if no default exists in the obligations to the Brennan Trustee, (i) $50,000 per month may be paid by ITG Vegas to MJQ Corporation in respect of the bareboat charter fee for use of the Vessel and (ii) $100,000 per month will be permitted to be paid by ITG Vegas to the Company under the Tax Sharing Agreement between them. The Company will enter into a Tax Sharing Agreement with ITG Vegas effective on the Effective Date, pursuant to which ITG Vegas will compensate the Company for the tax savings realized as a result of ITG Vegas's inclusion in the Company's consolidated group of companies for federal income tax purposes, in the amount of $100,000 per month, provided that no such payments are permitted to be made if any default exists in respect of the obligations to the Brennan Trustee. The maximum amount of funds permitted to be upstreamed by ITG Vegas to the Company is $100,000 per month under the Tax Sharing Agreement (and, beginning in 2005, 25% of ITG's annual Free Cash Flow, as defined). The Company has no other source of funds presently 9 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) available. For these reasons, and since the $100,000 per month tax sharing payment will be suspended at any time when the Debtors are not current in payment of their obligations to the Brennan Trustee, no assurance can be given that the Company will be able to function as a going concern and pay its debts as they become due. The foregoing summary of the Plan, the Payment Obligations to the Brennan Trustee and the terms thereof are not intended to be complete. For further information about the Payment Obligations and collateral therefor, the covenants of the Company and the Debtors, events of default and other terms agreed to in principle among the Debtors, the Company and the Brennan Trustee, reference is made to the Term Sheet for Plan of Reorganization which is attached as Exhibit A to the Plan and filed with the Securities and Exchange Commission on the Company's Form 8-K filed on September 22, 2003. ITG Vegas and the Company negotiated a document, executed on November 10, 2003 (See Note 12), entitled Amendment to Master Settlement Agreement with the Brennan Trustee, which incorporated the above-described terms and other modifications to the Master Settlement Agreement previously entered into by the Brennan Trustee, the Company, Palm Beach Princess, Inc. (predecessor of ITG Vegas, Inc.), MJQ Corporation and others. 7. All of the outstanding shares of stock in ITG Vegas are owned by International Thoroughbred Gaming Development Corporation ("ITGD"), which is a wholly owned subsidiary of the Company. While ITGD will pledge all of its shares of stock in ITG Vegas as additional collateral to the Brennan Trustee, in all other respects the Company's indirect stock ownership of ITG Vegas is not affected by the Plan. By reaching the foregoing consensual plan of reorganization by agreement with the Brennan Trustee, the Debtors have avoided the costs and delays of a contested confirmation hearing with their largest creditor and developed a Plan believed to be feasible. (3) NOTES RECEIVABLE A portion of the proceeds from the sale of the non-operating former El Rancho Hotel and Casino in Las Vegas to Turnberry/Las Vegas Boulevard, LLC ("Turnberry") on May 22, 2000 was used by us to purchase a promissory note in the face amount of $23,000,000. The interest rate under such note will be adjusted from time to time since the interest actually payable will be dependent upon, and payable solely out of, the buyer's net cash flow available for distribution to its equity owners ("Distributable Cash"). After the equity investors in the buyer have received total distributions equal to their capital contributions plus an agreed upon return on their invested capital, the next $23 million of Distributable Cash will be paid to us. We will thereafter receive payments under the note equal to 33 1/3% of all Distributable Cash until the maturity date, which occurs on the 30th anniversary of our purchase of the note. We may convert the promissory note, at our option, into a 33 1/3% equity interest in the buyer during a six month period beginning at the 15th anniversary of the issuance of the note. If not then converted, the note will convert into a 33 1/3% equity interest in the buyer at the 30th anniversary of its issuance. 10 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A portion of the proceeds from the sale on November 30, 2000 of our Garden State Park property in Cherry Hill, New Jersey, to Realen-Turnberry/Cherry Hill, LLC ("Realen") was paid in the form of a promissory note in the face amount of $10 million (the "Note.") Under the Note, the interest rate will be adjusted from time to time since the interest actually payable will be dependent upon, and payable solely out of, the buyer's net cash flow available for distribution to its equity owners ("Distributable Cash"). After the buyer's equity investors have received aggregate distributions equal to their capital contributions plus an agreed upon return on their invested capital, the next $10 million of Distributable Cash will be paid to us. We will thereafter receive payments under the Note equal to 33 1/3% of all Distributable Cash until the maturity date, which occurs on the 15th anniversary of the issuance of the Note. We may convert the promissory note, at our option, into a 33 1/3% equity interest in Realen during the six month period prior to the 15th anniversary of the issuance of the Note. If not then converted, the Note will be payable at maturity on said 15th anniversary in an amount equal to (i) the difference, if any, between $10 million and total payments previously made to us under the Note and (ii) 33 1/3% of any excess of the fair market value of Realen's assets over the sum of its liabilities (other than the Note) and any unreturned equity investment of its owners. In addition, we sold two large bronze sculptures located at the Garden State Park property to Realen, in exchange for Realen's promissory note due November 30, 2002, in the principal amount of $700,000. The Chapter 11 Trustee for the Bankruptcy Estate of Robert E. Brennan claimed ownership of those sculptures, and we settled the resulting litigation over the sculptures by agreeing that the first $350,000 in principal payments made by Realen under such note would be remitted to the Brennan Bankruptcy Trustee (together with one-half of the interest paid by Realen under such note). The remaining $350,000 of the $700,000 note is classified in other current assets on our balance sheet as of June 30, 2003. As part of the settlement of the sculpture litigation, the party who sold us the sculptures, agreed to reduce the amount of our obligation for payment of the balance of the sculpture price (described in Note 10(A) below) by the same principal amount, $350,000, given up by us to the Trustee. As of November 14, 2003, Realen had not made the payment due to ITB in the amount of $350,000 which was due on November 30, 2002. On January 30, 2003, the Trustee instituted litigation against Realen and the Company demanding payment of the first $350,000. On August 18, 2003 the judge granted a summary judgement against Realen-Turnberry/ Cherry Hill, LLC in the sculpture litigation and dismissed a cross claim that Realen- Turnberry/Cherry Hill, LLC had brought against ITB. (4) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES The following items are classified as deposits and other assets - non-related parties: September 30, June 30, 2003 2003 ------------- --------- Port Lease Rights $ 250,000 $ 250,000 Deposit on Ship Purchase (See Note 6-D) -0- 200,000 Other Misc. Assets 84,975 85,239 ------------- --------- Total $ 334,975 $ 535,239 ============= ========= 11 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (5) DEPOSITS AND OTHER ASSETS - RELATED PARTIES - NET The following items are classified as deposits and other assets (See Note 10 - Related Party Transactions): September 30, 2003 June 30, 2003 ------------------------- ------------------------------- Loans to the Ft Lauderdale Project (OC Realty, LLC) $ 2,034,405 $ 2,034,405 Loan Transferred from Golf Course Project to OC Realty, LLC 735,584 735,584 Note Receivable from Francis W. Murray * 2,600,749 2,600,749 Accounts Receivable from Francis W. Murray 35,099 35,099 Loans to Francis W. Murray 93,000 93,000 Loan from Francis W. Murray (250,000) (250,000) Accrued Wages due and Advances from Francis W. Murray (617,974) (404,204) Advances (from) MJQ Corporation (FWM ownership) (450,301) (330,813) Advances to OC Realty, LLC 76,458 77,162 ---------- --------------- Total Loans to OC Realty, LLC/Francis W. Murray $ 4,257,020 $ 4,590,982 Accrued Interest on Loans to the Ft. Lauderdale Project (OC Realty, LLC) 678,498 606,553 Accrued Interest Transferred from Golf Course Project to OC Realty, LLC $ 287,327 $ 287,327 ---------- --------------- Total Accrued Interest on Loans to OC Realty, LLC 965,825 893,880 Accounts Receivable from Frank Leo 23,441 23,441 Goodwill on Purchase of GMO Travel 193,946 193,946 ----------- ----------- Total Deposits and Other Assets $ 5,440,232 $ 5,702,249 =========== =========== * The note receivable from Francis W. Murray is non-recourse except to his stock in MJQ Corporation which stock was previously owned Michael J. Quigley and now owned by our CEO, Francis W. Murray, subject to our lien. 12 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (6) NOTES AND MORTGAGES PAYABLE Notes and Mortgages Payable are summarized below: September 30, 2003 June 30, 2003 Interest % ---------------------- ----------------------- Per Annum Current Long-Term Current Long-Term --------------- ------------ --------- ------------ --------- International Thoroughbred Breeders, Inc.: - ------------------------------------ MCJEM, INC. (A) 15% $ 132,000 $ -0- $ 132,000 $ -0- Chapter 11 Trustee (the "Trustee") for the Bankruptcy Estate of Robert E. Brennan (B) 11% 1,511,036 -0- 1,511,036 -0- Michael J. Quigley, III (C) 10% 900,000 -0- 900,000 -0- Florida Bank, N.A. (D) Prime + .25% -0- -0- 200,000 -0- First Insurance Funding Corp.(E) 6.95% 86,283 -0- 28,117 -0- Francis X. Murray (F) 8% 159,164 -0- 159,164 -0- William H. Warner(F) 12% 24,000 -0- 24,000 -0- Other Various 25,000 -0- 25,000 -0- ITG Vegas, Inc.: - ---------------- International Game Technology (G) 8% 10,279 -0- 16,709 -0- Corporate Interiors (H) Prime + 2% 94,475 -0- 121,468 -0- Garden State Park: - ------------------ Service America Corporation (I) 6% 160,000 -0- 160,000 -0- ----------- ------ ----------- -------- Totals $ 2,942,237 $ -0- $ 3,277,494 $ -0- Net Assets of Discontinued Operations - Long Term -0- -0- -0- -0- Net Liabilities of Discontinued Operations - Long Term (160,000) -0- (160,000) -0- Related Party Notes (183,164) -0- (183,164) -0- ----------- ------ ----------- -------- Totals $ 2,759,073 $ -0- $ 2,934,330 $ -0- =========== ====== =========== ======== The effective Prime Rate at September 30, 2003 and June 30, 2003 was 4%. (A) On February 24, 2000, the Company sold several pieces of artwork to Robert E. Brennan Jr., son of the Company's former Chairman and Chief Executive Officer. The $218,000 sales price of the artwork was in excess of the original cost of $186,600. The Company recorded a $31,400 gain on the sale in Fiscal 2000. In addition, the Company purchased two large bronze sculptures located on the Garden State Park 13 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) property that were previously on loan to the Company from Mr. Brennan Jr. The purchase price of the sculptures was $700,000. In connection with the transaction, the Company signed a $482,000 promissory note with Mr. Brennan Jr. which represented the purchase price of the sculptures less the sales price of the artwork sold to Mr. Brennan Jr. On July 27, 2000 the Company received a notice from the Chapter 11 Trustee for the bankruptcy estate of Robert E. Brennan (the "Chapter 11 Trustee") asserting certain ownership rights in a number of items on loan to the Company, including the sculptures mentioned above. After the Chapter 11 Trustee claimed ownership of the sculptures, an arrangement was agreed to between the Company and the Chapter 11 Trustee pursuant to which the Company was permitted to resell the sculptures to Realen in May 2001, free and clear of any claim by the Chapter 11 Trustee, in exchange for a $700,000 promissory note of Realen due November 30, 2002 (the "Realen Sculpture Note"). Pursuant to the agreement between the Company and the Chapter 11 Trustee, payments by Realen under the Realen Sculpture Note were to be held in escrow pending determination of the Chapter 11 Trustee's claims. On December 29, 2000, the Chapter 11 Trustee instituted suit against the Company seeking the right to all payments and proceeds of the Realen Sculpture Note. After the end of the fiscal year, in September 2001, a settlement agreement was entered into among the Company, Robert E. Brennan, Jr., the Chapter 11 Trustee and others pursuant to which, among other things, the litigation by the Chapter 11 Trustee against the Company was dismissed with prejudice and the first $350,000 of principal plus one-half of the interest received under the $700,000 Realen Sculpture Note will be paid to the Chapter 11 Trustee. The balance (up to $350,000 in principal plus one-half of the interest) will be paid to the Company. As a result of this settlement, the Company and Mr. Brennan Jr. agreed that (i) all claims of the Company against Mr. Brennan Jr. arising out of his sale of the sculptures to the Company will be released and (ii) the promissory note issued by the Company to Mr. Brennan Jr. will be amended (x) to reduce the principal amount of such promissory note from $482,000 to $132,000, with interest on that sum at the rate of 15% annum to accrue from November 30, 2001 only if the principal of such note is not paid in full by December 10, 2001, (y) to make such promissory note due and payable on November 30, 2002, and (z) to permit the Company to defer payment of the promissory note to such later date as the Company shall have received payment in full of the Realen Sculpture Note. The effect of the aforesaid settlement is therefore that the Company's loss of the amount to be paid under the settlement agreement to the Chapter 11 Trustee will be borne by Brennan Jr. by reduction to the Company's promissory note payable to him. (B) On December 13, 2002, we issued a twelve month promissory note in the amount of $1,648,403 including interest of $34,330 (the "Stock Purchase Note") bearing interest at 9% (increases to 11% after default) to Donald F. Conway, the Chapter 11 Trustee (the "Trustee") for the Bankruptcy Estate of Robert E. Brennan for the purchase of 3,228,146 shares of our common stock held or claimed by the Trustee. The first principal payment of $137,367 was also paid on that date. At June 30, 2003, the principal balance on the note was $1,511,036. The Stock Purchase Note is secured by a security interest in proceeds and payments receivable under the $10 million Realen Note. A principal payment of $137,367 was made in December 2002. In connection with the Chapter 11 Plan of Reorganization, the Trustee has accepted a revised schedule of payments which will satisfy this note. (See Notes 2-5 (b) & (c) and 7) (C) On January 26, 2001, we borrowed $1,000,000 from Michael J. Quigley, III at an annual interest rate of 10%. Principal and interest on the note was due on or about April 25, 2001. On May 14, 2001, the loan was modified to be due on demand. The loan is secured by a pledge of the $10 million Realen Note, which is subordinate to the security interest of the Trustee which secures the Stock Purchase Note and by a pledge of the $23 million Turnberry Note. As of November 15, 2003, the remaining balance of $900,000 of the loan is due on demand. 14 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (D) On March 19, 2003, we issued a two month promissory note in the amount of $200,000 bearing interest at prime plus .25% to Florida Bank, N.A. The proceeds of such note were used to fund a escrow deposit in connection with a charter/purchase of an offshore gaming vessel. The escrow deposit was returned to us on May 7, 2003 following the expiration of the negotiation period, and we have satisfied the note to Florida Bank, N.A. (E) Our directors and officers liability policy was financed by First Insurance Funding Corp. for a $128,388 one year promissory note at a 7.99% interest rate. At September 30, 2003, the principal balance on the note was $86,283. (F) On March 1, 2003, we issued a promissory note for a line of credit up to $225,000 bearing interest at 8% to Francis X. Murray. The outstanding balance on the line of credit note at September 30, 2003 was $159,164. On February 3, 2003, we issued a promissory note for $20,000 bearing interest at 12% to William H. Warner, Secretary of the Company. On June 30, 2003, Mr. Warner advanced to the Company an additional $4,000. The proceeds from the all the related party loans were used as working capital. (G) On December 6, 2002, Palm Beach Princess, Inc. issued a twenty four month promissory note in the amount of $21,000 bearing interest at 8% to International Game Technology for the purchase of gaming equipment. A payment of $2,100 was paid on delivery of the equipment and 23 consecutive monthly installments of $854.80 were to be paid on the balance. As a result of the institution of proceedings by our subsidiary, ITGV, under Chapter 11 of the bankruptcy code, payments have been delayed until the effective date of the Plan of Reorganization (See Note 2). At September 30, 2003, the principal balance on the note was $10,279. (H) On April 30 2003, ITG Vegas, Inc. issued a one year promissory note in the amount of $161,958 bearing interest at prime plus 2% to Corporate Interiors for the purchase of office furniture. Monthly payments of $13,496.46 are being paid on the note. At September 30, 2003, the principal balance on the note was $94,475. (I) In connection with the January 28, 1999 lease transactions for the Garden State Park facility, the Company purchased equipment located at Garden State Park and a liquor license owned by an unaffiliated third party, Service America Corporation (the "Holder"), for $500,000 financed by a five (5) year promissory note at a 6% interest rate. Yearly principal payments of $80,000 plus interest were due on December 28, 2002 and on December 28, 2003. The payment due on December 28, 2002 has not been made as of November 15, 2003. (7) COMMITMENTS AND CONTINGENCIES See Note 2 for additional commitments and contingencies with respect to the Chapter 11 Bankruptcy filing. See Note 10 for additional commitments and contingencies of the Company and transactions with related parties. Effective December 1, 2000, we entered into a five-year employment contract with Francis W. Murray, our Chief Executive Officer. The contract provides for annual compensation of $395,000, a 15 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) $1,500 monthly automobile expense allowance, a country club annual dues allowance and travel and entertainment reimbursements for business expenses reasonably incurred by him in addition to participation in various other benefits provided to our employees. As part of his employment contract, Mr. Murray was awarded options to purchase 2,000,000 shares of our Common Stock. On January 4, 2003, we began deferring payments of compensation due to Mr. Murray due to a lack of funds resulting from the institution of proceedings by our subsidiary, ITGV, under Chapter 11 of the bankruptcy code. The related liability as of September 30, 2003 totaled $462,874. We are responsible for remediation costs associated with an environmental site on the Freehold Raceway property. We have accrued what we believe to be the total cost of remediation. At September 30, 2003, the remaining balance of such accrual was $130,398 for remediation costs. The remediation work has been delayed due to a lack of funds resulting from the institution of proceedings by our subsidiary, ITGV, under Chapter 11 of the bankruptcy code. At this time, we are unable to predict the effects that such delays may cause. In connection with the January 28, 1999 lease transactions for the Garden State Park facility, we purchased a liquor license owned by an unaffiliated third party, Service America Corporation, for $500,000 financed by a five (5) year promissory note at a 6% interest rate. At December 31, 2002, the unpaid principal balance was $160,000. Yearly principal payments of $80,000 plus interest are due on December 28, 2002 and December 28, 2003. The payment due on December 28, 2002 has not been made as of November 15, 2003. Effective February 20, 2002, we entered into a Master Settlement Agreement with the Chapter 11 Trustee (the "Trustee") for the Bankruptcy Estate of Robert E. Brennan and a related Stock Purchase Agreement, and, through our Palm Beach Princess, Inc. subsidiary, a Purchase and Sale Agreement, described below. These agreements followed many months of negotiation with the Trustee of the details of the transactions outlined in the letter of intent that had been signed by the parties effective April 30, 2001. It was on the basis of the letter of intent, initially, and then the Master Settlement Agreement that we have been operating the vessel M/V Palm Beach Princess and conducting a casino cruise business since April 30, 2001. As permitted by the Master Settlement Agreement with the Trustee, we have entered into a bareboat charter with MJQ Corporation, pursuant to which we have chartered the vessel M/V Palm Beach Princess for the purpose of operating a casino cruise business from the Port of Palm Beach, Florida. Under the bareboat charter agreement, we are obligated to pay $50,000 per month as a charter hire fee to the vessel's owner, MJQ Corporation. Other parties to the Master Settlement Agreement include MJQ Corporation, Leo Equity Group, Inc. and Francis W. Murray, our Chairman, who is also a director and officer of MJQ Corporation and a director of Leo Equity Group, Inc. In October 2002, Mr. Murray purchased the stock of MJQ Corporation and effective October 27, 2002 we purchased the stock of Leo Equity Group, Inc.. In accordance with the Master Settlement Agreement, through our Palm Beach Princess, Inc. subsidiary (which has been merged into ITGV) we entered into a Purchase and Sale Agreement which provides for our purchase from the Trustee of the promissory note of MJQ Corporation, having an original balance of principal and interest of approximately $15.7 million and secured by a ship mortgage against the M/V Palm Beach Princess (the "Ship Mortgage Obligation"). The purchase price payable by us for the Ship Mortgage Obligation is $13.75 million. We began making payments on account of such purchase 16 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) price effective April 30, 2001, in monthly installments of $250,000. Such monthly installments continued under the terms of the Purchase and Sale Agreement through July 31, 2002, at which time a $9.75 million balloon payment was to be due. However, before July 31, 2002, we exercised our right to extend the time for payment of the balance of the purchase price for up to three (3) additional months, to October 31,2002, by paying fees of $70,000 for the first one month extension, an additional $80,000 for the second month extension and an additional $100,000 for the third month extension. On October 30, 2002, the Master Settlement Agreement was amended to provide for a further extension of the due date for payment of the $9.75 million balance under the Purchase and Sale Agreement until January 6, 2003, in consideration of our payment of $220,000 as an extension fee. On January 3, 2003, we did not have the funds to complete the purchase by January 6, 2003 and the Trustee denied our request for a further extension of the January 6, 2003 due date. Therefore, on January 3, 2003, in order to protect our invested deposits and operation of the vessel, ITGV, successor by merger to our subsidiary the Palm Beach Princess, Inc., filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. MJQ Corporation, the entity which owns the vessel, also filed for relief under Chapter 11 of the Bankruptcy Code. The Trustee is the largest creditor in the MJQ/ITGV cases, and his position is secured by a mortgage against the vessel. In order to re- organize under a Chapter 11 plan on a basis under which we would continue to operate the vessel, we will need to pay or provide for payment of a minimum of $9.75 million payable to the Trustee plus approximately $1.3 million of debt to unsecured creditors of ITGV (excluding debt to related parties). Through November 15, 2003, $1,286,051 has been placed in escrow towards payments required to be distributed to creditors. The Bankruptcy Court has required and approved ITGV to pay interest on said $9.75 million monthly to the Trustee at an interest rate of 12% per year. Interest of $679,562 has been paid through September 30, 2003. The second agreement which we entered into with the Trustee pursuant to the Master Settlement Agreement is a Stock Purchase Agreement. Under this Agreement, which superseded all prior agreements and understandings between us and the Trustee for the purchase of our common stock held or claimed by the Trustee, we agreed to purchase up to approximately 2,235,000 shares of our common stock at a purchase price of $0.50 per share on July 11, 2002. We desired to purchase these shares in order to preserve our net operating loss carryforwards which otherwise may be lost if the shares are transferred. As collateral security for our payment of the purchase price for these shares, we granted to the Trustee a security interest in all proceeds of (including all payments that might be made in the future under) the $10 million Realen Note, described in Note 2 above. We were unable to pay the purchase price under the Stock Purchase Agreement on July 11, 2002 (which price, at that date, was $892,500 for 1,785,000 shares). On October 30, 2002, the Stock Purchase Agreement was amended to provide for an extension of the due date on the purchase of the shares until December 13, 2002 at which time the Trustee agreed to accept payment of the purchase price for 3,228,145 shares (including additional shares over which the Trustee obtained control) in the form of a twelve month promissory note bearing interest at 9%(increasing to 11% after default) in the amount of $1,648,402 including interest of $34,330. (See Note 6 (B).) Should the Trustee obtain control over an additional 450,000 shares, we are further obligated to purchase those shares at $0.50 per share. A principal payment of $137,367 was made in December 2002. In connection with the Chapter 11 Plan of Reorganization, the Trustee has accepted a revised schedule of payments which will satisfy this note. (See Notes 2-5 (b) & (c)) Through ITGV, we have negotiated with the Port of Palm Beach District a new operating agreement and lease of space in a new office complex constructed at the Port of Palm Beach adjacent to a new cruise terminal effective, as modified, May 5, 2003. The term of the initial lease is five years at $183,200 per year payable monthly. We are also required to make tenant improvements to the new space 17 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. The following summarizes commitments on non-cancelable contracts and leases, including the amounts due to the Brennan Trustee as a result of the amended Master Settlement Agreement executed in November 2003: Twelve Months Ended September 30, -------------------------------------------------------------- There- 2004 2005 2006 2007 2008 after Total ------------ ----------- ----------- ------------ -------- ------ ------------- Minimum Amounts due to Brennan Trustee $ 4,150,000 $ 5,060,000 $ 4,960,000 $ 1,060,000 $ -0- $ -0- $ 15,230,000 Employee Contracts (excluding severance agreements) 956,750 755,884 77,500 -0- -0- -0- 1,790,134 Boat Charter Fees 550,000 600,000 600,000 100,000 -0- -0- 1,800,000 Operating Leases 307,875 209,891 174,618 116,603 68,018 -0- 877,005 Casino Contracts 15,715 -0- -0- -0- -0- -0- 15,715 ------------ ----------- ----------- ------------ -------- ------ ------------- Total $ 5,980,340 $ 6,625,775 $ 5,812,118 $ 1,276,603 $ 68,018 $ -0- $ 19,712,854 ============ =========== =========== ============ ======== ====== ============= LEGAL PROCEEDINGS We are a defendant in various lawsuits incidental to the ordinary course of business. It is not possible to determine with any precision the probable outcome or the amount of liability, if any, under these lawsuits; however, in the opinion of the Company and its counsel, the disposition of these lawsuits will not have a material adverse effect on our financial position, results of operations, or cash flows. Our subsidiary, ITG Vegas, Inc., successor by merger to Palm Beach Princess, Inc., initiated proceedings under Chapter 11 of the Bankruptcy Code on January 3, 2003. (See Note 2.) (8) FAIR VALUE OF FINANCIAL INSTRUMENTS As of September 30, 2003, 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 $33 million notes receivable, we have elected to defer the gain on the sale and the interest to be accrued until such time that collectability can be determined (See Note 3). 18 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (9) STOCK OPTIONS AND WARRANTS At a meeting of the Board of Directors of the Company held September 11, 2003, the Board unanimously authorized future grants of stock options for up to 385,000 shares of common stock, at an exercise price of $0.50 per share, to ITG Vegas, Inc.'s management team, which included 180,000 shares earmarked for Francis X. Murray, son of the Company's Chairman, subject, however, to confirmation of ITG Vegas' Plan of Reorganization and subject to the prior payment of all obligations of the Company to the Bankruptcy Trustee. Accordingly, no such options will be issued or granted until the Bankruptcy Trustee shall have been paid in full, at which time the Company will be authorized (but not obligated) to grant such options provided that the grantee is still employed by the Company at that time. Also at the September 11, 2003 meeting of the Company's Board of Director, the Board unanimously authorized the future grant of options to purchase an additional 20,000 shares of common stock to Mr. Francis X. Murray, at $0.50 per share, subject to confirmation of ITG Vegas' Plan of Reorganization and the prior payment of all obligations of the Company to the Bankruptcy Trustee. No such options shall be granted or issued until the Bankruptcy Trustee shall have been paid in full, at which time the Company will be authorized (but not obligated) to grant such options provided that Mr. F.X. Murray is still employed by the Company at that time. Such action was taken in order to compensate Mr. F.X. Murray for his having personally guaranteed a loan of $300,000 for the Company and for his providing to the Bankruptcy Trustee a personal guaranty for portions of the Company's obligations to the Bankruptcy Trustee. At a meeting of the Board of Directors of the Company held on November 18, 2003, the Board authorized the future grant of options to purchase 25,000 shares of common stock to each non-employee director, Mr. James Murray and Mr. Walter ReDavid, at $0.50 per share, as compensation for their services as directors, subject, however, to the prior payment of all obligations of the Company to the Bankruptcy Trustee. Accordingly, no such options will be issued or granted until the Bankruptcy Trustee shall have been paid in full, at which time the Company will be authorized (but not obligated) to grant such options provided that the grantee is still serving as a director of the Company at that time. Also at the November 18, 2003 meeting of the Board, the Board authorized the future grant of shares of common stock to each of Mr. Francis W. Murray and Mr. Robert J. Quigley as compensation in lieu of their respective salaries, which have been deferred since January 3, 2003, and in payment of the unpaid principal of a $24,000 loan to the Company by Mr. William H. Warner, the Company's Secretary. The Company will be authorized to pay the accrued salaries to Messrs. Murray and Quigley and the unpaid loan principal to Mr. Warner in shares of common stock, valued for such purpose at $0.50 per share, subject to the prior payment of all obligations of the Company to the Bankruptcy Trustee. No such shares will be granted and none of the accrued compensation will be paid until the Bankruptcy Trustee shall have been paid in full, at which time the Company will be authorized (but not obligated) to grant such shares provided that the grantee (Mr. Murray, Quigley or Warner, as applicable) agrees to accept such shares (valued at $0.50 per share) in payment of a portion, specified by the grantee, of the Company's obligation to him and that he is still employed by the Company at the time. 19 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At September 30, 2003, total employee options outstanding were 3,111,500 and total non-employee options outstanding were 425,000. At September 30, 2003 all of the employee and non-employee options were exercisable. At September 30, 2003, total warrants outstanding were 710,000. All warrants were exercisable at September 30, 2003. (10) RELATED PARTY TRANSACTIONS During the third quarter of Fiscal 2001, we invested in two projects in which our Chairman, President and Chief Executive Officer, Francis W. Murray, also has a pecuniary interest. In connection with one such project, the Board of Directors approved advances, as loans, of up to $1.5 million to a limited partnership in which Francis W. Murray owned, at that time, an 80% equity interest and owned the general partner, the proceeds of which were to be used to pay costs and expenses for development of a golf course in Southern California. Mr. Murray's equity interest in the limited partnership, indirectly through his ownership of the general partner, as of December 26, 2002, was 64%. At December 26, 2002, loans of $735,584 were outstanding on such project and we had accrued $155,945 of interest due on the loans. On December 26, 2002, the limited partnership's indebtedness to us was assumed by OC Realty, LLC, a Florida limited liability company which is owned by Francis W. Murray and which owns the second real estate project described below. Such indebtedness is due December 31, 2004 and bears an interest rate of 6%. In the second project, Mr. Murray is participating in the development of an oceanfront parcel of land, located in Fort Lauderdale, Florida, which has received all governmental entitlements from the City of Fort Lauderdale and the state of Florida to develop a 14-story building to include a 5-story parking garage, approximately 6,000 square feet of commercial space and a residential 9-story tower. The property had been owned by MJQ Development, LLC, which was owned by Michael J. Quigley, III until December 26, 2002 when the property was acquired by OC Realty, LLC, the entity owned by Mr. Murray. Mr. Quigley has no relationship to Robert J. Quigley, one of our directors. OC Realty is developing a condominium hotel resort on the property as discussed above. As of September 30, 2003, we had lent $2,034,405 in total to MJQ Development and we have accrued interest in the amount of $678,498 on the loan. Upon the acquisition of the property, OC Realty assumed MJQ Development's indebtedness to us. These loans bear interest at 12% and will be repayable out of the first proceeds, after payment of bank debts, generated by the sale of the condominiums. We will also have the right to receive, as participation interest, from available cash flow of OC Realty if the project is successful, a priority return of our investment and a priority profits interest for up to three times our investment. Repayment of these loans and our participation interest will be subject to repayment of, first, bank debt of approximately $5.5 million (at present) incurred in the purchase of the real property and, second, construction financing expected to amount to $25 to $30 million and third, capital invested by a joint venture partner (expected to be up to $6.1 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. In order to raise the capital which with to proceed in the development of the Ft. Lauderdale property, OC Realty has placed the Ft. Lauderdale property in a joint venture in connection with which the other joint venture partner will fund up to $6.5 million for development and receive a 50% equity interest. Our loan and participation interest will be payable out of OC Realty distributions from the joint venture. 20 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On January 26, 2001, we borrowed $1,000,000 from Michael J. Quigley, III at an annual interest rate of 10%. Principal and interest on the note was due on or about April 25, 2001. On May 14, 2001, the loan was modified to be due on demand. The principal balance on the note at September 30, 2003 is $900,000 and we have accrued interest through that date in the amount of $253,699. As collateral for the loan, we pledged the $10 million Realen Note and the $23 million Turnberry Note. On February 20, 2002 Mr. Quigley released his security interest in the Realen Note in connection with the Master Settlement Agreement. As of November 15, 2003, the loan is due on demand. (See Note 6.) Effective April 30, 2001, we entered into a bareboat charter with MJQ Corporation, pursuant to which we are chartering the vessel M/V Palm Beach Princess for the purpose of operating an entertainment casino cruise business from the Port of Palm Beach, Florida. Michael J. Quigley, III was a principal of MJQ Corporation. In October 2002, Francis W. Murray, our Chairman, President and Chief Executive Officer purchased the stock of MJQ Corporation and has been an officer and director of MJQ Corporation. Francis X. Murray, the son of Francis W. Murray, is President and a director of MJQ Corporation and President of our subsidiary, ITG Vegas, Inc., which operates the vessel. Under the bareboat charter agreement, we are obligated to pay $50,000 per month as the charter hire fee to MJQ Corporation. All costs of operating the vessel incurred by MJQ Corporation on our behalf are to be reimbursed by us to MJQ Corporation. In addition, as described in Note 6 above, we have entered into an amended Master Settlement Agreement with the Chapter 11 Trustee of the Bankruptcy Estate of Robert E. Brennan, MJQ Corporation and others to purchase from the Trustee the Ship Mortgage Obligation of MJQ Corporation, having an original balance of principal and interest outstanding of approximately $15.7 million for a purchase price of $13.75 million. Pursuant to the Master Settlement Agreement, MJQ Corporation and its officers and directors (including Francis W. Murray) exchanged mutual releases with the Trustee and others having claims to the Ship Mortgage Obligation. The Master Settlement Agreement with the Chapter 11 Trustee for the Bankruptcy Estate of Robert E. Brennan included a final settlement by the Trustee with numerous parties. Among those parties were Frank A. Leo, Leo Equity Group, Inc., Michael J. Quigley III and MJQ Corporation. During the quarter ended March 31, 2002 we charged Leo Equity Group $3,000,000 and MJQ Corporation $1,000,000 for their portion of expenses incurred by us and a success fee for the efforts of International Thoroughbred Breeders, Inc. in connection with the final settlement with the Trustee. 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. That $2.6 million debt from Mr. Quigley was assumed by Francis W. Murray when he purchased the MJQ Corporation shares and is a non-recourse obligation which is payable solely from pledged shares of his stock in MJQ Corporation. Mr. Murray purchased the MJQ Corporation stock subject to our lien securing payment of that debt. We have deferred all income from these transactions until such time as payment is received. On July 12, 2002, we borrowed $300,000 from Francis W. Murray at an annual interest rate of 6%. The note is due on demand and interest is payable monthly. As of September 30, 2003, the balance of the note was $250,000 and is classified as Deposits and Other Assets - Related Parties on the balance sheet as an offset to previous advances to Mr. Murray. On November 13, 2002, the Company and MJQ Corporation signed an agreement and bill of sale 21 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) which transferred maintenance materials and spare parts inventory previously maintained by MJQ Corporation to Palm Beach Princess, Inc. The value of the parts inventory sold and assigned was $1,103,125. Payment for the inventory was made by way of offsets on amounts previously due to Palm Beach Princess, Inc. by MJQ Corporation. Francis X. Murray, President of our ITG Vegas, Inc. subsidiary and son of Francis W. Murray, our President, CFO and CEO has agreed to loan the company up to $225,000 in the form of a line of credit. As of September 30, 2003 and November 15, 2003, these loans totaled $159,164. (See Note 6) (11) TREASURY SHARES PURCHASED On December 13, 2002, the Company issued a promissory note in the amount of $1,648,403 to purchase 3,228,145 shares of its Common Stock from the Chapter 11 Trustee for the bankruptcy estate of Robert E. Brennan. (12) SUBSEQUENT EVENTS (A) On November 10, 2003, the conditions to the Plan of Reorganization were satisfied and the Plan became effective October 15, 2003. Payments of $1,254,000 were disbursed from an escrow account previously established for the benefit of our creditors. These funds were classified as restricted cash on the Balance Sheet as of September 30, 2003. 22 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Forward-Looking Statements We have made forward-looking statements in this Form 10-Q, including the information concerning possible or assumed future results of our operations and those preceded by, followed by or that include words such as "anticipates," "believes," "expects,""intends" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed under "Risk Factors" in our most recent Annual Report on Form 10-K, could affect our future results and could cause those results to differ materially from those expressed in our forward-looking statements: o termination of the bareboat charter under which we operate our gaming business; o lack of cash flow for the Parent Company to continue to operate and pay its debts as a result of the Chapter 11 proceedings of our operating subsidiary and agreed upon restrictions in connection with such subsidiary's indebtedness; o general economic and business conditions affecting the tourism business in Florida; o competition; o changes in laws regulating the gaming industry; o fluctuations in quarterly operating results as a result of seasonal and weather considerations; and o events directly or indirectly relating to our business causing our stock price to be volatile. Liquidity and Capital Resources Cash flow and liquidity during the three month period ended September 30, 2003 included approximately $1.1 million in cash generated by the Palm Beach Princess operations. Such cash flow was used to fund an escrow account for the first payments to the Chapter 11 creditors of $1,294,050. Until January 3, 2003, all of our cash flow during the current fiscal year had come from the Palm Beach Princess vessel. On January 3, 2003, ITG Vegas, Inc.("ITGV"), our subsidiary operating the Palm Beach Princess, and MJQ Corporation ("MJQ"), an entity owned by Francis W. Murray, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Florida, Palm Beach Division (the "Bankruptcy Court"), In re: ITG Vegas, Inc., Case No. 03-30038. The petition does not cover the parent company, ITB, nor any other of ITB's subsidiaries. The Parent Company has used all the available funds that we had prior to the bankruptcy filing to pay some of our expenses and needs to find immediate financing in order to pay remaining existing liabilities as well as future expenses. Since the bankruptcy filing, the only source of funds to the Parent Company has been limited to loans made by Company officers, collection of a loan previously made to a South American gaming project and refunds from vendors and tax agencies relating to our prior racetrack operations. The Bankruptcy filing has severely limited our ability to make timely payments by our parent to its creditors and corporate vendors which has affected our ability to retain the professional services and vendors who serve our company. The Palm Beach Princess continued to operate as "debtor-in-possession" under the jurisdiction 23 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 of the Bankruptcy Court until the Effective Date, October 15, 2003 and subsequently as reorganized debtors (See Note 12) in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. On September 12, 2003, the United States Bankruptcy Court for the Southern District of Florida (Palm Beach Division) issued an order confirming the Amended Joint Chapter 11 Plan of Reorganization (the "Plan") in the Chapter 11 cases of ITG Vegas, Inc., the Company's wholly owned subsidiary, and MJQ Corporation. On the effective date of the Plan (the "Effective Date"), all claims, debts, liens, security interests and encumbrances of and against the Debtors and against all property of their respective bankruptcy estates, which arose before confirmation, will be discharged, except as otherwise provided in the Plan or confirmation order. Post-confirmation, each of the Debtors will continue as reorganized debtors. See Note 2 to the financial statements for a summary of our obligations in connection with the Plan. Under the Plan, the maximum amount of funds permitted to be upstreamed by ITG Vegas to the Parent Company is $100,000 per month as a tax sharing payment (See Note 2 to the financial statements). The Parent Company has no other source of funds presently available without the consent of the Brennan Trustee. For these reasons, and since the $100,000 per month tax sharing payment will be suspended at any time when the Debtors are not current in payment of their obligations to the Brennan Trustee, no assurance can be given that the Company will be able to function as a going concern and pay its debts as they become due. ITGV's cash flow from operations of the vessel is seasonal. The period July 1st to December 31st is a seasonably slow period for the vessel operation. The period from January 1st to June 30th has been a period of increased activity and profits for the vessel. Certain of ITGV's operating costs, including the charter fee payable to the vessel's owner, fuel costs and wages, are fixed and cannot be reduced when passenger loads decrease or when rising fuel or labor costs cannot be fully passed through to customers. Passenger and gaming revenues earned from the vessel must be high enough to cover such expenses. Unless and until ITGV successfully emerges from its Chapter 11 case and pays in full all the debts to the Brennan Trustee, our possible sources of cash (in addition to the $100,000 per month tax sharing payments as mentioned above) include the two promissory notes we received when we sold our Garden State Park real property in November, 2000 and our Las Vegas real property in May, 2000. One such Note is in the face amount of $10 million, issued by Realen-Turnberry/Cherry Hill, LLC, the purchaser of the Cherry Hill property (the "$10 Million Note"), and the other promissory note is in the face amount of $23 million, issued by Turnberry/Las Vegas Boulevard, LLC, purchaser of our Las Vegas real property (the "$23 Million Note"). Under both Notes, interest and principal payments will be dependent upon, and payable solely out of, the obligor's net cash flow available for distribution to its equity owners. After the obligor's equity investors have received aggregate distributions equal to their capital contributions plus an agreed upon return on their invested capital, the next $10 million of distributable cash in the case of the $10 Million Note, and the next $23 million of distributable cash in the case of the $23 Million Note, will be paid to us, and following our receipt of the face amount of the Note we will receive 33 1/3% of all distributable cash of the obligor until maturity of the Note. The probable timing and amounts of payments under these Notes cannot be predicted. Our working capital as of September 30, 2003 was $1,927,632 as compared to $650,328 at June 30, 2003. The increase in working capital during the past three months was primarily provided by an increase in cash from the operating activities, disbursement of which is restricted by ITGV's Plan of Reorganization. 24 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 Results of Operations for the Three Months Ended September 30, 2003 and 2002 ---------------------------------------------------------------------------- Overall ------- Revenue from for the three months ended September 30, 2003 increased $1,271,437 from $6,419,175 in Fiscal 2003 to $7,690,612 in Fiscal 2004 primarily as a result of revenues generated by the Palm Beach Princess operations during the comparable periods. Expenses increased $834,891 from $5,979,061 in the three month period in Fiscal 2003 to $6,813,952 in Fiscal 2004 primarily the result of an increase in Palm Beach Princess operating costs during the comparable quarters and a net increase in financing costs incurred primarily associated with interest payments of $294,904 paid to the Trustee during Fiscal 2004 as compared to extension fees of $150,000 paid under the Purchase and Sale Agreement for the Palm Beach Princess during Fiscal 2003, and costs associated with the bankruptcy filing of $258,562, partially offset by a decrease in corporate general and administrative expenses during the comparable periods and a decrease in development costs. For the first quarter of Fiscal 2004, our net income was $859,061 or $0.10 per share as compared to income for the comparable period in the prior fiscal year of $413,114 or $0.04 per share. Vessel Operations ----------------- During the three months ended September 30, 2003, total revenue from vessel operations was $7,575,158 as compared to $6,308,088 for the three months ended September 30, 2002. The increase in revenue of $1,267,070 during the comparable quarters primarily resulted from an increase in casino gaming revenue primarily the result of a slight increase in the passenger count and an approximate 17% increase in the average revenue per passenger during the comparable periods. Total expenses before income taxes for the comparable periods increased $944,077 from $5,279,724 for the three months ended September 30, 2002 to $6,223,801 for the three months ended September 30, 2003 primarily as a result of an increase in the number of passengers which increased operating costs, $286,774 in financing fees, costs associated with the bankruptcy filing of $258,562 and an increase in other operating expenses. Income before income tax expense for the first quarter of operation in Fiscal 2004 was $1,351,357 as compared to $1,028,364 in the comparable quarter of Fiscal 2003. The Palm Beach Princess performs fourteen cruises weekly, that is, a daytime and an evening cruise each day. Each cruise is of five to six hours duration. During each cruise, the Palm Beach Princess offers a range of amenities and services to her passengers, including a full casino, sit-down buffet dining, live musical shows, discotheque, bars and lounges, swimming pool and sundecks. The casino occupies 15,000 square feet aboard the ship and is equipped with approximately 400 slot machines, all major table games (blackjack, dice, roulette and poker), and a sports wagering book. During the first quarter of Fiscal 2004 the ship completed 167 cruises and eleven (11) cruises were missed due to scheduled wet dock maintenance. During the first quarter of Fiscal 2003 179 cruises were completed. 25 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 The following is a comparative summary of income and expenses of the Palm Beach Princess operation for the three months ended September 30, 2003 and 2002: Three Months Ended September 30, ----------------------------- Description 2003 2002 Change - --------------------------------------------- ------------- ----------- ----------- Passenger Count 61,487 60,385 1,102 Number of Cruises 167 179 (12) Revenue: Fare $ 655,371 $ 658,149 $ (2,778) On Board 425,100 454,204 (29,104) Casino 6,494,687 5,195,735 1,298,952 ------------- ----------- ----------- Total Revenue 7,575,158 6,308,088 1,267,070 ------------- ----------- ----------- Expenses: Casino Operating Expenses 2,079,618 1,944,693 134,925 Hotel and Gift Shop Expenses 195,241 195,221 20 Sales, Marketing and Advertising Expenses 713,754 720,188 (6,434) Maritime and Legal Expenses 1,749,269 1,417,924 331,345 Administrative and Finance Expenses 1,485,919 1,001,698 484,221 ------------- ----------- ----------- Total Expenses 6,223,801 5,279,724 944,077 ------------- ----------- ----------- Income Before Income Tax Expense $ 1,351,357 $ 1,028,364 $ 322,993 ============= =========== =========== Inflation - --------- To date, inflation has not had a material effect on the Company's operations. 26 Item 4. - CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company's management with the participation of our chief executive officer and chief financial officer is continuing to perform evaluations of the design and operation of the Company's entire system of internal controls and financial reporting over a period of time that will be adequate for it to determine, whether, as of the end of the Company's current fiscal year, the design and operation of our internal controls and procedures are effective. CHANGES IN INTERNAL CONTROLS There were no changes that occured during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonablely likely to materially affect, our internal controls over financial reporting. 27 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES Part II OTHER INFORMATION Item 6. During the quarter ended September 30, 2003, the registrant filed the following Current Reports on Form 8-K: Date Subject Matter - ------------------ --------------------------------------------------- September 12, 2003 Plan of Reorganization confirmed by the Bankruptcy Court related to the Chapter 11 filing of ITG Vegas, operator of the Palm Beach Princess vessel. 28 INTERNATIONAL THOROUGHBRED BREEDERS, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL THOROUGHBRED BREEDERS, INC. November 19, 2003 /s/Francis W. Murray ---------------------------------------------------- Francis W. Murray, President, Chief Executive Officer and Chief Financial Officer 29 CERTIFICATION PURSUANT TO RULE 13A-14 AND 15D-14 OF THE SECURITIES AND EXCHANGE ACT OF 1934 I, Francis W. Murray, certify that: 1. I have reviewed this quarterly report on Form 10-Q of International Thoroughbred Breeders; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2003 /s/Francis W. Murray --------------------------------- Chairman/Chief Executive Officer/ Chief Financial Officer 30 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Quarterly Report on Form 10-Q of International Thoroughbred Breeders, Inc. (the "Company") for the three months ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Francis W. Murray, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Francis W. Murray ----------------------- Name: Francis W. Murray Title: President and CEO November 19, 2003 31 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Quarterly Report on Form 10-Q of International Thoroughbred Breeders, Inc. (the "Company") for the three months ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Francis W. Murray, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Francis W. Murray --------------------- Name: Francis W. Murray Title: Chief Financial Officer November 19, 2003 32